Because of compulsory superannuation Australia is a big financial services laboratory. The Future of Financial Advice (FOFA) legislation, which passed the House of Representatives, is yet another experiment in the lab. Australia is almost certainly the first country in the world to ban commissions on financial products, and to legislate for clients to ‘opt in’ to client contracts each other year. While other countries (the US and Canada) have considered legislating for a statutory best interests duty, only Australia has done it. It is also likely that Australia is the first to legislate for advisers to act in their client’s best interests and put their clients first, though as every good fiduciary knows, these are age old requirements of the general law. Why has Australia gone ahead of the pack in this way? To protect clients’ foregone income which has been saved as super, and to protect the interests of the Australian people in the huge tax breaks that also go into super accounts.

Much heat has been produced about the statutory ‘best interests’ duty, now in S961B of the FOFA Bill. Would it be fiduciary? What sort of interests (only financial?) would be covered? Did ‘best’ mean that an adviser would always have to provide whole of market advice that was the best going? When did it have to be ‘best’ advice – looking forwards, or backwards? Travelling quietly alongside S961B has been another section, now S961J, which has hardly excited any interest at all. Yet it is here the heavy lifting will be done in changing the quality of financial advice delivered to clients. S961J requires advisers to put their clients’ interests before their own, when there is a conflict of interest. In a highly concentrated and conglomerate context like the Australian financial sector, conflicts come up all the time. It is these features and remuneration arrangements such as commissions, which have produced the conflicts that distort financial advice. So, how will this statutory ‘client first’ duty make a difference?

It helps greatly that some of the worst conflicts will go with the ban on commissions. There are however plenty of potential conflicts left: for example unsuitable switching of assets to increase a pool from which the adviser gets a fee on the basis of asset value under management.  It also helps a lot that unlike the general law, a client cannot be required by the adviser to agree that S961J be excluded (same for S961B). The real kick is in the extent of the conflicts that demand client priority. This is extended to a number of parties who are associates of the adviser, and would include product manufacturers, platforms and their associates. In short S961J recognises as material quite a wide range of conflicts, and demands that the adviser put the client first in relation to them all. Disclosure of the conflict is beside the point (though it still should be done) because it cannot change the first priority that must be given to the client.  Finally the FOFA bill provides for civil penalties and actions for damages, for breach of S961J (and same for S961B).

While regulators have seen the light about client priority and conflicts, the heat around the best interests duty has partly obscured the fact it is a damp squib. The text of S961B is full of references to ‘reasonableness’ and being ‘objective’ – in short the language of negligence. It is much more like the prior requirement of a ‘reasonable basis’ for advice or suitability which was repealed by the new law. It is a far cry indeed, from the equitable ‘best interests’ duty of trust law, or even the requirement of family law to act in the ‘best interests’ of the child. Perhaps it is for the best that ‘best interests’ is a damp squib anyway. It was always going to be very tricky to work out how a requirement to invest a fund (as trustees must do) would apply to financial advising which involves giving advice and not always property.  It was always going to be very hard to work out in an advising context what ‘best’ required, and which interests it applied to. Section 961B was always going to be almost impossible to enforce. Maybe through interpretation, it will become instead a more sophisticated version of the prior suitability requirement.

Now in the Australian financial services laboratory we have a bundle of legal inventions which together should improve the quality of financial advice. There is much more work to do – eg in training and competence, in enforcement and in encouraging professionalization – but the FOFA Bill makes a good start. Getting clarity about whose interests should come first in advice giving, demonstrates a marriage of the practical and the ethical that should always be found in any successful experiment.