Where are your priorities?

Originally published | 16th September 2016

Set out in s961J of the Corporations Act, is a rule that many advisers might gloss over. It is the conflicts priority rule.

This rule is similar in nature to the previous obligation to provide “appropriate advice”. The priority rule expressly requires an advice provider (Financial Adviser) to prioritise the interests of the client if the financial adviser knows, or reasonably ought to know; when they give the advice that there is a conflict between the interests of the client and the interests of:

  • The financial adviser; or
  • The financial adviser’s Australian Financial Services (AFS) licensee.

As set out in Regulatory Guide 175.381, the conflicts priority rule means that:

  • Financial advisers can recommend a product issued by a related party, they cannot do so to create extra revenue for themselves, their AFS licensee or the related party, where additional benefits for the client cannot be demonstrated;
  • Financial advisers can accept remuneration from a source other than the client (e.g. the product issuer), however Division 4 of Part 7.7A prohibits financial advisers from accepting certain types of remuneration which could reasonably influence the financial product advice they give or the financial products they recommend to clients (i.e. Commissions on investments and superannuation products);
  • Financial advisers must not recommend products on an approved product list that only has products issued by a related party, unless a reasonable financial adviser would be satisfied that it is in the client’s interests to recommend the related party product rather than another product with similar features and costs;
  • Financial advisers must provide an appropriate level of service for the client’s needs, and not over-service the client to generate more remuneration for themselves or one of their related parties; and
  • Non-financial product solutions relevant to the client’s situation should be recommended where appropriate, even if this means the client is less likely to need financial advice in the future.

So how does this rule work in practice?

Consider this, you are working for Marvel Financial Planning and today you are providing retirement advice to Steve Rogers. As an authorised representative of Marvel Financial Planning, you have an approved product list (APL) of retirement products, which are owned by the Investment subsidiary of Marvel Financial Planning, which you can recommend. These include the SHIELD retirement fund, Avengers Annuity and Xavier’s Superannuation Fund.

Whilst doing the research for the advice, you note that the Gotham Mutual Retirement Fund and Metropolis Annuity are similar to the products on your APL.  If you provide the advice on the related products to Steve but cannot justify that there are sufficient benefits in your recommendation that a reasonable adviser would see, it could be apparent that you have not met the conflicts priority rule as you have placed the priorities of yourself and the licensee above those of the client.

I can hear all the advisers out there now saying “Does this mean Licensees can’t use APLs?”, the answer is no, they can, you as the adviser just need to fully understand how the product you are recommending benefits the client and how it will leave the client in a better position.