Diving deep into the personal advice debate and the new DDOs
The High Court recently handed down its decision in the long running Westpac dispute clarifying the distinction between general and personal advice. Partner Selina Nutley and consultant Jeunesse Meldrum discuss the implications of this case for licensees, and how it impacts the soon to commence design and distribution obligations (DDOs).
The proceedings stemmed from two telephone campaigns conducted by Westpac subsidiaries where they contacted customers, recommending they roll their existing superannuation funds into a Westpac-related superannuation account.
Staff were provided with a script for the calls. While the script began with a general advice disclaimer, it then required staff to ask customers about their personal financial circumstances, including the balance of their other super accounts and their personal objectives in relation to superannuation accounts – such as saving fees or improving manageability of superannuation by consolidating accounts.
Staff then employed 'social proofing' techniques to confirm the validity of those objectives, saying things such as saving on fees and manageability are 'the two main reasons our customers do like to bring their supers together' and consolidation 'does make a lot more sense from a management point of view'.
Click here for an article by Selina Nutley with more details about the background of this case.
ASIC alleged Westpac's campaign was the provision of personal financial product advice, and the bank had failed to act in customers' best interests in giving that advice.
Westpac, in alleging only general advice was provided, mounted several arguments (unsuccessfully), including:
- The customers' objectives identified in the calls were highly generic and obviously correct. For that reason, financial product advice that took those objectives into account did not give rise to an expectation the advice was based on one or more of the personal objectives, financial situation, or needs of any of the customers.
- The term 'considered' in s766B(3) of the Corporations Act as part of the determination on when personal advice is given refers to an active process of evaluation and reflection which its callers did not undertake.
In dismissing the appeal and finding Westpac provided personal advice, the Court criticised Westpac's arguments as impermissibly glossing over the language and protective nature of the Corporations Act. It said the fact a general advice disclaimer was given at the outset and the advice was free was not enough to characterise it as general advice where the broader circumstances may lead customers to think their personal circumstances had been taken into account.
The Court also said:
- Personal objectives do not cease to be personal objectives merely because they are generally applicable to all or most persons in the position of the customer, as well as to the particular customer.
- The techniques employed by Westpac served to confirm, by reference to the common experience of like-placed others, that consolidation of each customer's external superannuation accounts was appropriate to achieve that customer's personal objective of reducing fees and improving manageability.
- By then segueing into an offer to affect the roll-over, Westpac's callers implicitly recommended that each customer accept the offer there and then on the basis their interests were being served without any need for further consideration of their other objectives, financial situation, or needs.
- Each customer might reasonably have expected that, given the nature of Westpac's business and its experience and expertise in financial matters like superannuation, Westpac had taken the objectives it had elicited into account in recommending the rollover service. This is consistent with the recommendation being presented to each customer as a 'no brainer'.
- In the context of the consumer protection provisions in Chapter 7 of the Corporations Act, 'considered' in s766B(3) should be understood as meaning 'took account of'.
As the advice was characterised as personal advice, Westpac needed to demonstrate it had taken substantive steps to determine whether the rollover was in the customer's best interest. There was no evidence it had done so, and consequently the Court found Westpac had contravened the 'best interests' duty. The Court will now decide the size of the financial penalty Westpac must pay. Given the campaign saw its funds under management increase by over $650 million in a three-year period, the penalty may be sizeable.
Consequently, licensees and authorised representatives need to be very circumspect in assuming general advice disclaimers are sufficient protection if they then go on to discuss a customer's broader circumstances or objectives. Careful consideration of structural operations should be given to ensure licensees hold the appropriate authorisations for the type of advice they will provide.
What is the impact on the new DDOs?
From 5 October 2021, new DDOs apply to financial products offered to retail customers. The key requirements are that financial product providers must do the following:
- Design products consistent with the likely 'objectives, financial situation and needs' of the class of consumers for whom they are intended.
- Take 'reasonable steps' likely to result in financial products reaching customers in a defined target market.
- Monitor customer outcomes and review products to ensure customers are receiving products consistent with their likely objectives, financial situation and needs.
The phrase 'objectives, financial situation and needs' mirrors that used in the context of personal advice. At first blush, it seems there is tension between the Court's decision on the circumstances in which personal advice will be given, and providers' obligations to design products likely to be consistent with the likely objectives, financial situations and needs of customers.
The practical distinction lies in that Westpac had given advice to customers based on their actual goals, whereas the DDOs require consideration of the likely objectives of a hypothetical class of consumers.
In assessing the appropriateness of a product for a particular target market, ASIC says this is an objective assessment and does not require an issuer to have knowledge about individual customers. In contrast, personal advice involves considering an individual customer's objectives, financial situation and needs (ie the customer's personal circumstances).
Tension for distributors of financial products
The DDOs include a personal advice exemption where acts of asking for information solely to determine whether a person is in the target market for a financial product, and informing the person the result of that determination, do not constitute personal advice. The meaning of 'solely' in this context is likely to be fertile ground for disputes.
ASIC says the personal advice exemption will not apply if a product distributor sets up the interaction in a way that instead has the purpose of influencing customers in making a decision about a financial product. Whether the conduct of the distributor goes beyond the scope of the exemption needs to be considered in the circumstances of the particular interaction.
ASIC suggests distributors can reduce the likelihood their conduct will take them outside the exemption by avoiding conduct likely to influence the customer. For example, distributors could:
- avoid involving a relevant provider (ie an individual authorised to give personal advice to consumers on relevant financial products) in the distribution process, particularly when there is an existing relationship, or the customer is aware the relevant provider is authorised to provide personal advice
- ask specific questions of a customer (when required) in the later stages of the sales process after the customer has already made the decision to acquire the product.
Further, if a distributor relying on the exemption informs a customer they are in the target market for a financial product, the distributor must not suggest or imply it has considered the customer's personal objectives, financial situation and needs or the product is suitable for the consumer's individual circumstances. To do so may be misleading or deceptive and may cause the customer to reasonably expect their personal circumstances are considered. The consequence of this would be to stray into the provision of personal advice, and therefore fall outside of the exemption.
What happens next?
How these artificial/narrow distinctions will play out in practice (and potentially through the courts) is yet to be seen. We will keep you up to date with further developments and please contact us with your queries in the meantime.
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