ASIC’s assessment of advice provided by financial services firms to investors about capital protected products found many advisers did not make adequate enquiries into their clients’ personal circumstances.
Report 377 Review of advice on retail structured products (REP 377) found that in approximately half of the files, there was insufficient evidence to show that advisers had met their obligations to investigate clients’ relevant circumstances, the subject matter of the advice and then to provide appropriate recommendations.
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This report is part of ASIC’s ongoing review of the provision of complex capital protected products to retail investors. A report in May 2013 found significant concerns around the marketing of such products (refer: 13-093MR).
ASIC reviewed five pieces of advice from each of ten firms providing these products to retail investors. The majority of advice reviewed was provided in 2012 and had to comply with section 945A of the Corporations Act 2001.
This was the part of the law that required an adviser to have a ‘reasonable basis’ for the advice. That section of the law has since been replaced by the Future of Financial Advice (FOFA) reforms, which include a requirement that advisers must act in the best interests of their clients.
ASIC deputy chairman Peter Kell said: "The findings were disappointing and with FOFA now raising the bar for advisers, our warning against inappropriate selling of complex products cannot be clearer. Capital protected products are complex and can be difficult for investors to understand. Advice about them needs to be appropriate and accurate. Where it isn’t, we will take action.
"Where our review identified concerns with the advice provided, we are analysing the cause of the problem and considering appropriate regulatory outcomes. In some cases, we are conducting further surveillance with a view to enforcement action where merited. We will also ensure that where we have significant concerns with the advice provided to individual clients, those clients have their position appropriately reviewed."
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By GlobalDataREP 377 found:
- advisers narrowing the scope of advice to a single structured product or focusing on one product, rather than considering a range of potentially suitable products
- a ‘one-size fits all’ approach, with inadequate consideration of the client’s needs and circumstances and alternative strategies/asset allocation, with a lack of diversification, and
- unsuitable gearing recommendations or a lack of evidence to support gearing recommendations – for example, to clients who may not have been able to afford the loan interest payments, or tax-driven advice where relevant risks were not highlighted.
REP 377 also details concerns with disclosure, including misrepresentation of the features of products recommended, including the degree of safety or capital protection.
