FS Advice v15i03

Volume 15 Issue 03

IN SAFE HANDS

Hugh Robertson Centaur Financial Services

How banks are surviving COVID-19 Pzena Investment Management

Selling a practice Ăźmlaut

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Contents

www.fsadvice.com.au Volume 15 Issue 03 I 2020

1

COVER STORY

IN SAFE HANDS

Hugh Robertson, Centaur Financial Services

18 NEWS HIGHLIGHTS ADVISERS FILE CLASS ACTION AGAINST AMP

FEATURES 6

A class action has been filed against AMP by its own advisers in relation to the institution’s decision to slash Buyer of Last Resort valuations last year.

CALLS TO INVESTIGATE TREATMENT OF AMP ADVISERS

8

ASIC has come under pressure from a senator to look into AMP’s treatment of its financial advisers.

ASIC QUIETLY GRANTED NEW ACCESS TO PHONE TAPS

9

While other legislation and regulatory work was delayed as a result of COVID-19, ASIC was granted the power to receive intercepted information, such as tapped phone calls.

ASIC MAINLY CONCERNED WITH MEDIA RELEASES: LAWYER 10

Welcome note Christopher Page

05 Whitepaper FASEA requirements for aged care advice

26

For news updates like this follow us on social media

Hamilton Blackstone Lawyers managing director Cristean Yazbeck has argued that ASIC is mainly concerned with its own reputation and the media releases it can put out in relation to action on financial advisers.

FS Advice

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

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Contents

www.fsadvice.com.au Volume 15 Issue 03 I 2020

06 Published by a Rainmaker Information company.

A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Elizabeth McArthur elizabeth.mcarthur@financialstandard.com.au Production Manager Samantha Sherry samantha.sherry@financialstandard.com.au Graphic Designer Jessica Beaver jessica.beaver@financialstandard.com.au Technical Services

Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media and Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

FS Advice: The Australian Journal of Financial Planning ISSN 1833-1106 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Advice are not necessarily those of Financial Standard or Rainmaker Information.

Financial Standard is a Rainmaker Information company.

ABN 57 604 552 874

Subscriptions hotline:

1300 884 434 Ask about our PLUS DEALS.

ALMOST 2000 ADVISERS GONE IN SIX MONTHS FASEA CLARIFIES 2021 EXAMS

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08 09 10

Roger Marshman roger.marshman@rainmaker.com.au Advertising

News

11 12 14 15

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

News

FPA ACCUSES ASIC OF PRICE GOUGING AMP APPROVED PRODUCT LIST UNDER FIRE

News

AJOR ONEVUE SHAREHOLDER SAYS IRESS M BID TOO LOW ERS GAMBLED AWAY

News

ADVISERS IN ERS SCAMS FASEA DOESN’T KNOW WHY ADVISERS ARE QUITTING

News

DEALER GROUPS SLAM FPA POLICY BIGGEST COVID-19 QUERIES Opinion

FASEA’S BIG CONFLICT

Opinion

TOP CALLING PRODUCT S RECOMMENDATIONS ADVICE News

ENDIGO AND ADELAIDE BANK FACE FRESH B CLASS ACTION

FS Advice

Combining ethics and active management

AUSTRALIAN ETHICAL AUSTRALIAN SHARES PORTFOLIO

Access our award-winning Australian Equities expertise through an ethical SMA strategy. australianethical.com.au/sma

This information has been prepared by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949) without taking into account any client’s objectives, financial situation or needs. No person should act on the information without first considering whether it is appropriate to their own objectives, financial situation and needs. Past performance is not a reliable indicator of future performance. You should obtain and consider the relevant Financial Services Guide and Product Disclosure Statement relating to a product before making a decision about whether to acquire that product.

The rating issued 07/2020 is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. Š 2020 Lonsec. All rights reserved.

4

Contents

WHITE PAPERS

www.fsadvice.com.au Volume 15 Issue 03 I 2020

31

Applied financial planning

GLOBAL BANKS: RESILIENCE IN THE FACE OF CRISIS

By John J. Flynn, Pzena Investment Management

Today’s banks have greater support from strong capital buffers and onside governments to help counter the COVID-19 fallout.

38

44

Communications and marketing

SELLING A FINANCIAL PLANNING PRACTICE

By Scott Brewster, ümlaut

This paper provides guidance on enhancing a financial planning practice’s saleability.

Ethics and governance

FAIRNESS, VULNERABILITY AND FINTECHS

By Michele Levine, The Fold Legal

This paper discusses identifying and managing vulnerable clients, and examines why fintechs have fared well in this space.

50

Superannuation

LIMITS SMSF ADVISERS SHOULD BE AWARE OF

By Daniel Butler, DBA Lawyers

This paper considers the boundaries, traps, allowances and nuances regarding SMSF, taxation, financial product and legal advice to help SMSF advisers avoid crossing the line.

Retirement

IS YOUR CLIENT’S PRINCIPAL HOME STILL EXEMPT?

55

Investment

CTIONS NEEDED FOR INVESTMENT FUNDS TO MANAGE A LIQUIDITY RISKS

By Jon Ireland, Norton Rose Fulbright Australia

This paper highlights key considerations for responsible entities regarding investment fund

By Mansi Desai, Challenger

liquidity in light of ASIC’s concerns and expectations regarding management of liquidity

This paper looks at how to meet the exemption criteria, and highlights unforeseen factors that may affect a client’s homeowner status.

risks and marketing and distribution strategies.

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62

Compliance

ELECTRONIC SIGNING IN A PANDEMIC

By Luke Paterson, Jackson McDonald

This paper examines the interplay of state and emergency federal legislation regarding electronic signing in light of COVID-19.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

FS Advice

Welcome note

www.fsadvice.com.au Volume 15 Issue 03 I 2020

5

Christopher Page managing director Financial Standard

Strong in strange times o one could have imagined 2020 would N go this way. When we first started taking COVID-19 seriously in Australia and seeing case numbers creep up, there was chat amongst media commentators that the pandemic may come to an end in the middle of the year.

This conventional wisdom was borne out in the government’s policies, with the JobKeeper program originally planned to end in September.

Of course, no such end of the pandemic is in sight and JobKeeper has been extended to March 2021.

Rather than closing our eyes until the pandemic is over, we have all had to adapt to the strange times we find ourselves living in.

In preparing this issue of FS Advice, we have heard from financial advisers all over Australia and we know you are all adapting in your own ways.

Whether implementing video conferencing with clients, digital signatures or working out how to meet your continuous professional development requirements without in person events – COVID-19 has provided no shortage of professional hurdles.

The strong remain strong in strange times though.

In this issue, we highlight the work of Hugh Robertson at Centaur Financial Services. Robertson describes himself as old fashioned in some ways, he doesn’t have some never-before-heard-of offering and he isn’t chasing Generation Z clients.

He’s serving hardworking people who want to protect their families’ financial security and enjoy a comfortable retirement. And his dream for his business is that it stands the test of time. Robertson says he hopes his children will work in the family business one day.

In the same way, he plans for the business to be strong enough that his clients can trust it will be there to support the transfer of wealth through generations.

COVID-19 threw Robertson some challenges too, but he is less interested in discussing it than he is in sharing his plans for a bright future.

The swift end of this virus we once imagined may have been naive, but all things do come to an end eventually. Through this period, as through the disasters we have seen before, the strong will prevail. fs

Through this period, as through the disasters we have seen before, the strong will prevail.

Christopher Page managing director, Financial Standard

FS Advice

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

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News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Advisers file class action against AMP Jamie Williamson

A FASEA looks to 2021 Elizabeth McArthur

FASEA has confirmed the exam schedule for 2021, after the extension was passed.

The authority will run six exam sittings in 2021 at metropolitan and regional locations around Australia.

“We have seen a strong performance by most advisers sitting the exam, with 86% of candidates on average passing each exam on the first sitting,” FASEA chief executive Stephen Glenfield said.

“So nearly nine out of 10 of the existing advisers who have sat the exam have prepared well and demonstrated they have the skill to apply their knowledge of advice construction, ethics and legal requirements to the practical scenarios tested in the exam.”

The exact locations of each FASEA exam in 2021 are yet to be confirmed but there will be sittings on 28 January to 2 February 2021, 25 March to 30 March 2021, 20 May to 25 May 2021, 15 July to 20 July 2021, 9 September to 14 September 2021 and 4 November to 9 November 2021.

“The 2021 exam schedule together with the three remaining exams scheduled for 2020 in August, October and November provide advisers who have yet to pass the exam the choice of a broad range of sitting dates,” Glenfield said. fs

The quote

A lot of our members are shattered.

class action has been filed against AMP by its own advisers in relation to the institution’s decision to slash Buyer of Last Resort valuations last year.

Almost one year on from the news BOLR valuations would be cut from 4x recurring revenue to a maximum of 2.5x, Corrs Chambers Westgarth filed an open class action against the wealth giant in the Federal Court of Australia on behalf of AMP Financial Planning advisers.

The action was initially expected to be filed late last year, but was delayed due to new regulation relating to how class actions are funded.

It comes as the Australian Small Business and Family Enterprise Ombudsman refers numerous BOLR-related cases for mediation on the back of more than 100 complaints, and calls for a review of AMP’s behaviour by Liberal Senator Deborah O’Neill.

It also follows recent comments by AMP chief executive Francesco De Ferrari that the prevalence of class actions in Australia is driving up the cost of public indemnity insurance and of doing business here. AMP is currently facing two other class actions.

Speaking to Financial Standard, The Advisers Association (TAA) chief executive Neil Macdonald said its AMPFP members are relieved the action has been filed.

“A lot of our members are just shattered, essentially. It’s taken a long time, they were hoping that the Small Business Ombudsman would be able to assist and that AMP would be reasonable,” he said.

“For many of them, it’s been both physically and emotionally exhausting.

“Unfortunately, the reality is any legal action takes time and that’s problematic for small business owners.”

He said, best case scenario, the class action will take 12-18 months. fs

Almost 2000 advisers gone in six months Elizabeth McArthur

The first half of 2020 has seen almost 2000 financial advisers leave the industry amid a time of flux for the sector.

In January, the ASIC Financial Adviser Register showed 23,682 active advisers, but by the start of July the register showed 21,913 advisers.

That’s a difference of 1769 advisers – and the true number of advisers who have left the industry may be even higher, as some new entrants were added to the ASIC FAR in the same period.

AMP Financial Planning lost the most advisers, with 153 leaving the licensee. AMP now has 1011 financial advisers remaining after starting the year with 1164.

Charter Financial Planning lost a further 77 advisers and Hillross Financial Services lost 40.

It lost even more advisers than ANZ which lost 134 of its 318 as the big bank exited wealth altogether.

IOOF, which acquired ANZ’s wealth business, added one adviser total over the six month period.

The data does not show how many advisers IOOF picked up from ANZ.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

Commonwealth Bank also shed 99 advisers and the SMSF Adviser Network lost 84.

National Australia Bank’s advisers went from 350 to 279, with 71 exiting in the last six months. Meanwhile, GWM lost 49 and Meritum lost 17.

Yellow Brick Road Wealth Management, which was sold to Sequoia at the start of the year, and Elders, which is being wound down shed virtually all their advisers.

PriceWaterhouseCoopers Securities went from having 56 advisers registered to two in the last six months.

Merit Wealth lost 45, while Ausure lost 42.

Consilium, the licensee which had picked up the Dover and Spectrum financial advisers, went from 74 financial advisers to 38 – losing almost half their advisers.

Substantially fewer licensees managed to pick up advisers during the period, and those who did gained smaller numbers.

Interprac and Sequoia both gained financial advisers due to acquisitions, picking up 38 and 20 respectively.

Lifespan also gained 36, Ord Minnett gained 26, Nextplan gained 23, Insight gained 20 and Fortnum added 18. fs

FS Advice

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8

News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Calls to investigate AMP over advisers

APLs under scrutiny The approved product lists AMP financial advisers are beholden to have come under fire from the House of Representatives Standing Committee on Economics.

Labor MP Andrew Leigh questioned AMP chief executive Francesco De Ferrari on how the institution has changed since the Royal Comission.

Leigh acknowledged that AMP was hit hard by the Royal Commission, saying: “You used to trade over $5, now you trade below $2.”

He then asked whether it was true that companies have to pay $22,000 a year to be on an AMP approved product list.

Leigh was not clear on his source for the $22,000 figure, and a spokesperson for AMP has since told Financial Standard there is no fee to be on an AMP approved product list.

“We roughly have a little more than 1000 products on our approved product list, 60% of those products are external. Our commandment is to provide clients the best products for what they require,” De Ferrari said.

He was then interrupted by Leigh who suggested Ferrari did not appear to be answering his question.

De Ferrari answered that clients pay a higher admin fee, of 13 basis points, to access non-AMP products on the MyNorth platform.

“So you need to pay more to avoid getting just in-house product?” Leigh asked.

“That is correct, and advisers would decide whether it is in the best interests of clients to have an extensive product range or a more limited product range,” De Ferrari said. fs

Elizabeth McArthur

A

The quote

I ask that you immediately commence an investigation into this matter.

SIC has come under pressure from a Senator to look into AMP’s treatment of financial advisers, including reducing the value of its Buyer of Last Resort (BOLR) agreements.

Labor senator for NSW Deborah O’Neill has written to ASIC chair James Shipton, urging him to investigate the AMP BOLR changes.

Last year AMP made changes to its BOLR agreements, which guarantee the value of AMP Financial Planning client books, reducing them from four times annual revenue to two and a half times annual revenue.

“This decision has drastically devalued the businesses of many financial advisers,” O’Neill said in the letter.

“This was also applied retroactively to many planners who had purchased client books in good faith with this guarantee.”

O’Neill also took issue with the fact that AMP cut grandfathered com-

missions in January 2020, 12 months ahead of the legislated ban on grandfathered commissions.

“Furthermore, AMPFP has issued notices of termination to an estimated 250 planners that were assessed as being of ‘lower profitability’ , forcing many to sell their businesses for less than one tenth of what they were worth before these changes,” she said.

The Senator added that the Australian Small Business and Family Enterprise Ombudsman has received over a hundred complaints from the financial advisers affiliated with AMP over these issues.

O’Neill asked Shipton to commence an ASIC investigation into AMP’s actions.

“I ask that you immediately commence an investigation into this matter, as I understand the AMP banking arm has funded the operation, and to prepare a full report” she said. fs

FPA accuses ASIC of price gauging Eliza Bavin

The Financial Planning Association of Australia has hit back at the corporate regulator accusing it of price gauging after increasing the industry funding levy for financial advisers by 38%.

The FPA has urged the corporate regulator to reconsider the 38% increase to the ASIC industry funding levy as the nation enters its first recession in 29 years.

The calls come after ASIC released for consultation its Cost Recovery Implementation Statement 2019-20 (CRIS), which was prepared based on its planned regulatory work and budgeted allocation of costs at the beginning of the 2019–20 year.

ASIC estimated the industry funding levy for 201920 will be $1571 per adviser, a 38% increase on the previous year.

The corporate watchdog is looking to recoup $40.17 million from 3051 AFS licensees with 22,652 advisers.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

While ASIC states that the indicative levies for 2019– 20 are an estimate, the FPA said a 38% cost increase per adviser is excessive and last financial year the final levy amount was even higher than the estimate.

FPA chief executive Dante De Gori described the increased levy as “fee gouging” and an unreasonable demand of financial advisers given the current economic environment.

“Financial planners were hit with a 22% increase in 2017-18. Now ASIC estimates the levy will increase by 38% for 2019-20,” De Gori said.

“No matter which way you look at this, it is excessive at a time when financial planning professionals are working hard to help their clients through extraordinary circumstances.”

De Gori said financial advisers are already under a great deal of pressure to meet new education requirements, await outcomes on the FASEA extension from an “unpredictable parliament” and overhaul their business models to meet regulatory requirements. fs

FS Advice

News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

ASIC granted new access to phone taps

ERS gambled away Data released by illion and AlphaBeta (part of Accenture) shows that there are vast differences in how early release of super payments are being spent between the genders.

While women who access their super early are more likely to spend on essential items like supermarket shopping and utility bills, men have gone on a gambling binge.

Men’s spending on gambling was 93% higher than women’s.

Men who accessed their super early spent an extra $290 a fortnight gambling, coming off a pre-COVID base of $56 a fortnight.

With access to pubs and clubs restricted as part of the measures to curb the spread of COVID-19, the online gambling industry has emerged as something of a winner.

There was a 110% increase in online gambling spending in the first week of June, compared to a normal week before the COVID-19 pandemic.

Food delivery spending increased by 248% and alcohol and tobacco spending went up 39%.

Across both genders, illion and AlphaBeta calculated that 15% of the super money was spent on debt repayment.

“The high levels of discretionary spending from people who accessed their superannuation early further demonstrates that this money was used to increase spending – as opposed to being the lifeline for which it was intended,” AlphaBeta director Andrew Charlton said.

“While this spending would have certainly helped the economy – in similar ways to JobKeeper and JobSeeker – there will be heftier prices to pay in retirement with the early withdrawal of super.” fs

FS Advice

9

Elizabeth McArthur

W The quote

ASIC was already able to receive and access (in prescribed circumstances) stored communications and telecommunications data, but could not access or receive intercepted communications.

hile other legislation and regulatory work was delayed as a result of COVID-19, ASIC was recently granted the power to receive intercepted information, such as tapped phone calls.

ASIC cannot tap phones itself or obtain an interception warrant, however, after an update to the Telecommunications (Interception and Access) Act in February this year the regulator can receive intercepted information for the purpose of its investigations.

Prior to this, ASIC could not receive any intercepted information for the purpose of aiding its investigations.

The intercepted material, which may include recorded phone calls, would be obtained by ASIC from agencies that have the power to intercept – the state and federal police, ASIO and anti-corruption bodies.

An ASIC spokesperson explained the regulator can now receive and use intercepted material for the purpose of an investigation by ASIC into a serious offence. “‘Serious offence’ is defined under the Telecommunications (Interception and Access) Act 1979 as including various types of criminal offending,

including Corporations Act criminal offence provisions prohibiting insider trading, market manipulation, and in the financial services context - false or misleading statements (s1041E), inducing persons to deal (s1041F), and dishonest conduct (1041G),” the spokesperson said.

In response to the passage of laws, law firm Ashurst provided an analysis in April. It clarified that ASIC can now be passed stored communications like voicemails, emails and text messages, metadata and intercepted phone calls.

“ASIC was already able to receive and access (in prescribed circumstances) stored communications and telecommunications data, but could not access or receive intercepted communications,” Ashurst said.

The law firm added that it expects the level of cooperation between ASIC and law enforcement agencies, like the federal police, that can intercept phone calls will increase.

ASIC has been working towards getting the power to receive intercepted materials for years, publishing an enforcement review position paper in 2017 which proposed the powers it has now been granted. fs

Major OneVue shareholder says the IRESS bid far too low Kanika Sood

Billionaire investor and OneVue shareholder Alex Waislitz says IRESS’s offer to acquire OVH, the company that owns Madison Financial Group, for 40 cents a share is a far cry from the company’s actual value.

Waislitz’s Thorney Opportunities and related companies started buying stock in the company in August last year at 44 cents a share and gradually built their position, including buying at as low as 11 cents a share in late March.

They now own 14.96% of the company.

Speaking in a video update for shareholders

of Thorney Opportunities (TOP), Waislitz said IRESS’s bid of 40 cents a share only takes OVH back to pre-COVID levels when the company is operationally strong. “..We are happy that they [IRESS] have recognised the opportunity but we don’t think that price reflects the true value and the strategic value of what Connie [Mckeage] has built,” he said.

“So, whilst we are happy to engage with them, we don’t think the price on the table is yet sufficient to reward either TOP or TEK [Thorney Technologies, another ASX- listed investment vehicle] shareholders for what we’ve identified. fs

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

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News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

ASIC only cares about media: Lawyer Elizabeth McArthur

H

Glenfield confused FASEA chief executive Stephen Glenfield said it is outside the authority’s remit to look into why financial advisers are exiting the industry in such large numbers.

Rainmaker analysis of the ASIC Financial Adviser Register indicates that almost 2000 advisers left the industry in the first half of 2020.

Since COVID-19 hit, in less than three months from 27 February 2020 to 21 May 2020, the number of registered advisers dropped by 916.

Speaking to Financial Standard, Glenfield admitted the number of new entrants to the industry was low.

However, he said they were stronger than last year. Just 54 people joined the industry all year in 2019.

“They are small numbers. I guess that’s reflective of change in the industry until this point,” Glenfield said.

“We want to see a strong advice community. I think the reduction in numbers can have any number of causes but a lot of it is coming from the restructuring of the businesses of some of the bigger players in the market.”

He added that decisions by the big players was driven by consumer demand, which in turn had been impacted by a lack of trust in the advice industry.

“Do we want to see adviser’s leaving the industry? Again, it’s a matter of looking at the causes for that. We make sure the exam is fair across the board, not favouring one group over another.

We sought to make education requirements that are fair.” fs

The quote

I’ve observed several instances of ASIC conducting its functions outside its powers.

amilton Blackstone Lawyers managing director Cristean Yazbeck has argued that ASIC is mainly concerned with its own reputation and the media releases it can put out in relation to action on financial advisers.

Yazbeck said in a paper that after ASIC came out of the Royal Commission worse for wear and he has observed the regulator “flexing their muscles” on the financial advice industry.

“I’ve observed several instances of ASIC conducting its functions outside its powers, and/or without proper process,” he said.

“It’s all about the media release.

And, yes, ASIC is on record (I have the emails!) where they have asked licensees to ‘choose’ or ‘negotiate’ their outcome, but on the condition that the outcome is one on which ASIC can issue a media release.”

ASIC’s media releases name financial advisers who are banned from the industry and AFSLs that are cancelled.

In some circumstances, those fighting an ASIC action can keep their name out of a media release pending appeal.

“ASIC needs to show the world how tough it is,” Yazbeck said.

He offered an example of a client who moved to voluntarily cancel their AFSL (for commercial reasons) but ASIC advised it wished to cancel the AFSL for alleged breaches.

Even though the AFSL was cancelled, the regulator allegedly said in an email that it wanted to cancel the AFSL because of the risk the licensee would breach its obligations in the future.

Yazbeck theorised that the true motive was for the regulator to be able to put out a media release naming the AFSL. “ASIC no longer wishes to work with licensees and planners. It has a vendetta against them,” he said.

“ASIC’s ‘shoot first, ask questions later’ approach has crippled the industry. One mistake, and you’re out! Recent experiences show that they’ll keep looking until they find something.”

Yazbeck’s paper argued that advisers were made sacrificial lambs by Australia’s largest institutions during the Future of Financial Advice (FOFA) reforms, and are still feeling the consequences. fs

Advisers involved in ERS scams: ASIC Elizabeth McArthur

ASIC superannuation senior executive leader Jane Eccleston has written an article pointing to financial advisers as part of the problem in scams targeting people’s super amid COVID-19.

Eccleston said: “ASIC is concerned that some advisers may use the current uncertainty from COVID-19 as part of their pitch to consumers to carry out broader superannuation activities, such as the possibility of early release of superannuation, searching for lost super and consolidating their accounts.”

The regulator has observed some ‘lost super search providers’ re-brand as ‘COVID-19 access providers’, however Eccleston did not clarify whether registered financial advisers were part of such schemes.

THE AUSTRALIAN JOURNAL OF FINANCIAL PLANNING•

“This is an area we will be monitoring closely for misconduct,” Eccleston said.

She encouraged super trustees to have proper oversight practices over third party use of SuperMatch2 authorisation.

“They should do this to curb advisers and other parties from engaging in the concerning behaviours we’ve identified,” she said.

Eccleston did not specify whether action has been taken against any registered financial advisers in relation to these matters.

“In the course of our work, and in cooperation with the ATO, we identified entities (financial advisers, trustees and fund promoters) who were marketing ‘free’ lost super and consolidation services’ searches, these schemes are far from free,” she said. fs

FS Advice

News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Calls for overhaul of AFSL system

COVID-19 queries BT head of financial literacy and advocacy Bryan Ashenden has observed a significant increase in calls for technical support from financial advisers during the COVID-19 pandemic.

“The level of queries and questions we were getting through from advisers was almost at the level we expect to receive postBudget,” Ashenden said.

As a result, the technical team at BT is producing fortnightly webinars to give advisers regulatory updates and answer some of their key questions Understanding what stimulus measures clients may be illegible for is not always straightforward and Ashenden said advisers understandably have a lot of questions in this area.

The most frequently asked questions were about the nonconcessional contribution cap and the proposed change from 1 July 2020, means testing and social security, transfer balance caps, the proposed change to the work test and the conditions to be eligible for early release of super.

Ashenden added that advisers are also grappling with how to meet FASEA requirements in isolation. Especially with the extension to the FASEA requirements not yet passed.

“There is a little hesitation about whether that extension will pass,” Ashenden said.

In weekly podcasts, Ashenden and his team are addressing the topic and trying to help advisers understand when the extension might pass.

“The only way advisers can do the exam is through remote proctoring. That’s something that is completely different for a lot of advisers,” Ashenden said.

“For a lot of advisers, they want to feel comfortable.” fs

FS Advice

11

Elizabeth McArthur

T The quote

While the AFSL system plays an important role in regulating financial products and services, recent reforms have focused the regulation of financial advice at the individual practitioner level.

he Financial Planning Association of Australia (FPA) wants a professional registration for individual advisers to replace the current system.

Currently, an Australian financial services licence (AFSL) is required to provide advice.

FPA chief executive Dante De Gori said the law should be changed to focus the AFSL system on the regulation of financial products, rather than requiring AFSLs to cover the provision of financial advice.

“While the AFSL system plays an important role in regulating financial products and services, recent reforms have focused the regulation of financial advice at the individual practitioner level,” De Gori said.

“This is an appropriate approach and acknowledges the relationship between a client and their financial planner is a personal relationship, not one between an AFSL and the client.

“Future reforms to the regulation of financial advice should occur through the professional standards framework and rely on individual registration of financial planners.”

The FPA believes the continued use of the AFSL system to oversee the

provision of financial advice duplicates regulation, creates significant additional regulatory cost and introduces potential conflicts between the views of the licensee and the professional judgement of the financial adviser.

Allowing AFSLs to focus on the regulatory oversight of financial products instead could mitigate this, the association believes.

As part of the Royal Commission reforms, a single disciplinary body is to be established that will require the registration of all planners. The FPA sees the responsibility for registration resting with the individual planner rather than their licensee or employer.

The FPA said registration of planners must include verification that they have complied with the professional standards set by FASEA, including passing the professional exam, meeting the education standard and ongoing compliance with the ethical standards.

“The regulation of financial advice is currently tied to the recommendation of a financial product, reflecting a history in which a product recommendation was the core component of most financial advice. In a professionalised financial planning sector, this is no longer the case,” De Gori said. fs

Dealer groups slam FPA policy proposal Fortnum, Centrepoint, Easton Wealth, CountPlus, Fitzpatricks and Paragem have all criticised the FPA’s latest policy proposal.

The FPA wants to see AFSLs only responsible for the oversight of product compliance, rather than being responsible for the regulatory compliance of individual financial advisers.

Instead, the FPA envisions a world where financial advisers are registered to a separate body (distinguished from the ASIC Financial Adviser Register) which monitors their compliance while AFSLs maintain oversight of product.

Fortnum managing director Neil Younger, Centrepoint chief executive Angus Benbow, Easton Wealth chief executive Grahame Evans, CountPlus

chief executive Matthew Rowe, Fitzpatricks chief executive Matt Fogarty and Paragem chief executive Nathan Jacobsen have all signed a statement disagreeing with the FPA. “To suggest that self-licensing would eliminate ‘unnecessary’ layers of cost is wrong and demonstrates a fundamental lack of understanding,” the letter said.

“Again, costs in relation to compliance with the Corporations Act are not discretionary. The scale, systems & processes, and risk management focus of the AFSL provides an efficient way to deal with the in-built cost of providing compliant financial advice.”

The dealer group leaders said the AFSL system has a crucial role to play. fs

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Opinion

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Simon Carrodus solicitor director The Fold Legal

FASEA’s big conflict always enjoyed irony, so the irony wasn’t Ithe’velostFASEA on me when I first read Standard 3 of Code of Ethics (Standard 3). It’s ironic because Standard 3 purported to eliminate conflicts, but at the same time it brought into existence a brand new one. I’m referring to the conflict between Standard 3 and established law and regulatory policy.

Let’s get the details out of the way. Standard 3 reads: “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” It’s drafted in a rather absolute, black-and-white manner, which understandably has given rise to a great deal of confusion among financial advisers who use managed accounts. However all is not lost.

Despite the confusion and fear that Standard 3 might signal the end of managed accounts as we know them, I firmly believe that managed accounts still have an important role to play as an investment solution for many clients.

Managed accounts Managed accounts have the potential to benefit both clients and advisers. The client benefits by having an investment account managed on a discretionary basis by a professional investment manager. The portfolio can be rebalanced without requiring a Statement of Advice or Record of Advice every time. Managed accounts also offer transparency and the ability to hold assets in the client’s own name, which means they can managed to create after-tax benefits.

Many, but certainly not all, managed accounts are considered in-house or related party products because they are branded and operated by an advice firm that recommends its own suite of managed accounts to clients.

In some way, shape or form, the advisers and principals of the advice firm will receive a fi-

nancial benefit when an adviser recommends a related party managed account to a client. This creates a conflict of interest.

To manage or avoid? That is the question AFS licensees already have an obligation under the Corporations Act to have adequate arrangements in place for the management of conflicts of interest. Conflicts can and do arise between the interests of financial services providers and their clients, and the law and regulatory guidance does not require financial services providers to avoid all such conflicts.

ASIC Regulatory Guide 181 Managing Conflicts of Interest states that adequate conflict management arrangements help to minimise the potential impact on clients.

This ASIC guidance states that there are three mechanisms for managing conflicts (depending on the circumstances) - controlling the conflict, disclosing the conflict and avoiding the conflict. It states that financial services providers will generally use all the three mechanisms, which clearly indicates that not all conflicts must be avoided.

In contrast, at first blush, Standard 3 appears to impose a blanket ban on servicing a client if a conflict exists. It fails to recognise that an adviser can adequately manage many conflicts that arise in the provision of their services. Standard 3 also seems to go beyond the recommendations of the Banking Royal Commission. In his final report, Commissioner Hayne posed the question: “Is there more that could be done to manage those conflicts better?”

A matter of semantics This is where things get interesting. My newly-formed contention is that the stake-

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holders may actually in broad agreement with one another without realising it.

In the consultation sessions held in December 2019, and the guidance released subsequent to those sessions, FASEA stressed that Standard 3 only prohibits advisers acting in the face of actual conflicts, as opposed to potential or perceived conflicts. The explanation was that by managing a potential conflict so that it does not influence your advice, you ensure that it does not become an actual conflict. The guidance also put forward a ‘disinterested person test’ - an adviser should consider whether a disinterested or unbiased person would reasonably conclude that the potential conflict could induce the adviser to act other than in their client’s best interests. An arrangement that passes this test should be permitted - irrespective of the specific form or features of the arrangement.

Lamentably, the Code itself contains no such language or explanation, hence the confusion remains.

It pays to stop for a second to think about what we mean by a conflict. At its core, a conflict is a divergence of interests between the adviser and their client. If a client pays a fee to an adviser and the adviser provides appropriate advice that this in the client’s best interests, is there really a conflict? Without attempting to speak for FASEA, I believe their position is that, in that situation, the answer is no.

These days, when I hear an adviser say “every time you charge a fee there’s a conflict” or “this will shut down the whole industry” I take pause, because I’m no longer convinced it’s true. While it’s not articulated in the Code, FAESA’s subsequent guidance and commentary has stressed importance of advisers managing any potential conflicts by ensuring that the advice is in the client’s best interests (thus avoiding an actual conflict). fs

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14

Opinion

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Jim Stackpool managing director Certainty Advice Group

Please stop calling product recommendations financial advice ould you regard a product W recommendation from a Toyota dealer or Apple store as advice?

Do you think bias makes a recommendation less valuable?

Do you think it matters?

Consider the advice members of Australia’s second-largest Superannuation Fund – QSuper – will now receive after the fund last week dumped their holistic advice offer.

Nearly 600,000 QSuper members will now only receive superannuation advice from their superannuation fund. They are welcome to obtain holistic advice elsewhere.

What’s wrong with that?

Nothing, according to QSuper chief executive Michael Pennisi. He says the decision was based on what they described as “member needs.”

As strange as it sounds, only 1% of QSuper’s clients have sought holistic advice. This might be because QSuper provides “non-holistic” advice for free while charging members for its holistic advice service.

So, a recommendation to use one of QSuper’s products is free (or more accurately, cross-subsidised) while holistic advice will cost up to $7000.

Unfortunately, this delusion has been common in an indus-

The quote

Would you regard a product recommendation from a Toyota dealer or Apple store as advice?

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try desperate for credibility. Before coming back to Toyota and Apple recommendations, there’s a related issue.

It may not just be so-called “members’ needs” influencing funds like QSuper and their new advice models.

The institutional trustees and boards must also be getting concerned about making the wrong headlines and featuring in future legal test cases of the industry’s currently untested code of ethics, regulations and practices designed to ensure member’s best interests. It’s going to be a lawyer’s picnic for many years to come.

Having won the long-running retail versus industry funds battle on fees and reputation, are the victors now retreating from advice? Does it matter?

QSuper is simply playing to their strengths and experience while preparing themselves for bigger challenges as we are now seeing in other industries hell-bent on building distribution.

We need to call this move to limited advice out for what it really is.

It is definitely not advice.

It is the same sort of product recommendation you’d get if you walk into a Toyota dealership looking for a car or an Apple store looking for a phone or computer. It might be valuable and of good intent, but it’s never going to be advice.

All Australians need good advice when faced with the uncertainty and complexity life throws in our path. We especially need advice when our deci-

sions have many options with many different consequences - especially when those choices also involve significant emotion.

So what do you say to QSuper members who have found their job threatened amid the economic turmoil of COVID-19 or may have recently lost earnings? Those that have had a health problem or lost a partner? Who struggle to pay their mortgage? Can’t manage their credit cards? Are wondering if now is the time to start something new?

What about those that need options post JobKeeper? And those thinking of moving and starting fresh?

What do you say to members who need help with aging parents or their kids? Who want to stop the money arguments around the dinner table?

What about those who need help planning a secure retirement?

I would say to them all: Please don’t confuse the product recommendation you will get from QSuper with financial advice.

For too long the product-based financial planning, investment and services industries have referred to their offerings as advice.

Regardless of how QSuper justifies their focus on limited advice, they cannot justify calling it advice. It is a product recommendation.

That doesn’t make it less valuable, it just makes it clearer for the 80% of Australians who thanks to this shift, still don’t have access to valuable advice.

What do you reckon? fs

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News

www.fsadvice.com.au Volume 15 Issue 03 I 2020

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Bendigo and Adelaide Bank to face fresh class action Elizabeth McArthur

E

nrolments in a fresh class action against Bendigo and Adelaide Bank on behalf of investors in the Great Southern managed investment scheme are being finalised.

EQ Legal director Sasha Ivantsoff told Financial Standard that 850 entities including self-managed super funds, trusts and individual investors had expressed interest in the class action.

With only 600 enrolments needed for the action to go ahead, Ivantsoff is quietly confident more than that will enrol.

“People have been destroyed by this and they are still feeling the effects of it 10 plus years later. Hopefully we can give them their lives back,” Ivantsoff said.

Great Southern was an agricultural managed investment scheme which sold loan packages marketed as Great Southern Finance. These loans were to purchase forestry and grape growing plots which were said to be able to produce investment returns.

Great Southern collapsed in 2009 and the loans were transferred to Bendigo and Adelaide Bank. The amounts that people owed remained the same.

A settlement was reached in 2014 in relation to a previous class action over the Great Southern investment scheme, with the court finding that Bendigo and Adelaide Bank had not clearly breached any obligations.

The EQ Legal class action alleges that from December 2014 Bendigo and Adelaide Bank demanded repayment of loans.

But, subsequent court decisions in various states have since found that loan documents may have been invalid and therefore borrowers were not obligated to pay.

The EQ Legal action alleges that demands for repayment that Bendigo and Adelaide Bank made to group members of the first class action were misleading or deceptive, and as a result

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EQ Legal argues that Great Southern borrowers may be able to recoup any payments on loans made after 11 December 2014.

Ivantsoff estimates this claim could be in the region of $300 million, though he said the actual value of Great Southern loans to Bendigo and Adelaide Bank is beyond that.

“Each loan was about $78,000 on average. As we understand it there were 5479 potentially eligible loans,” he said.

Each entity is paying $3300 to enrol in the class action, with Ivantsoff hopeful it could be in court before the end of the year.

One Great Southern investor who is part of the EQ Legal class action told Financial Standard they were advised into the scheme by former financial adviser Steve Navra.

The investor, who prefers not to be named, went to Navra for cashflow advice after being left unable to work due to a severe injury.

“He found out what you wanted to achieve and promised the world, said he could achieve exactly that for you.

Then you found out everyone in ended up in the same funds and they were funds he controlled,” they said.

“The plan helped him. It didn’t help you.”

The investor lost a house in Sydney due to the fallout of Navra’s advice and still owes Bendigo and Adelaide Bank approximately $1 million in interest alone on the Great Southern loans.

They received an insurance payout from IAG of $23,000 for their losses.

Navra went bankrupt in 2012 and has since reinvented himself as a property and gold investing guru.

SR Group, which is assisting EQ Legal on the Bendigo and Adelaide Bank class action, has used the losses incurred by Navra’s former clients to argue a compensation scheme of last resort is needed.

The quote

People have been destroyed by this and they are still feeling the effects of it 10 plus years later.

The news of this class action came the same week the big banks were also hit with a significant potential class action relating to financial advice.

The financial advice arms of AMP, Commonwealth Bank and Westpac are all facing the potential class action from law firm Piper Alderman.

The law firm is calling on any customers who have acquired, renewed or continue to hold a financial product on recommendation of an adviser from those institutions in the last six years to speak with them about a potential action.

From AMP, Piper Alderman is interested in clients from AMP Financial Planning, Charter Financial Planning and Hillross Financial Services.

From CBA, the firm is looking at Commonwealth Financial Planning, Count Financial and Financial Wisdom.

From Westpac, the firm is focused on Westpac Bank, Securitor Financial Group and Magnitude Group.

“Each of these institutions owed specific obligations to their customer designed to protect their customers’ interests, and our claims will allege consistent and ongoing breaches of these obligations,” Piper Alderman said.

“Importantly, these claims are different to other claims that have been brought against these institutions, and Piper Alderman is looking to recover money for you that no one else is.”

The firm said the claims will be fully-funded by global litigation funder, Woodsford Litigation Funding, on the basis that if there is no win, there is no fee. fs

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Featurette

www.fsadvice.com.au Volume 15 Issue 03 I 2020

Picture: Orlando Chiodo

Last man standing The Trio Capital collapse in 2009 saw about 6000 investors lose approximately $176 million in superannuation. It was the largest theft of super in Australian history.

Most were compensated but one group was left out in the cold. A decade later, the fight for justice continues. Elizabeth McArthur writes.

John Telford was riding his bicycle to university in 1985 when he was hit by a car. He had a broken neck and a broken back and spent eight months in hospital.

In 1998, 13 years after the accident, Telford was awarded $1.4 million in compensation in the Supreme Court.

After a long period in and out of hospital recuperating from his injuries, Telford had been left with recurring pain which impacted him every day. The accident was life changing and the compensation he received from the driver’s insurer reflected that.

Along with the favourable judgement, Telford was given clear instructions that this money was supposed to last him a lifetime.

“I was informed that I was required under law to place my money into superannuation and set the fund up so that I would be provided an ongoing disability pension,” Telford says.

“The money was to last me the rest of my life. Because of the compensation they introduced a preclusion period, which meant I could not go onto welfare until 2026.”

At the time of the settlement, Telford says he completely agreed the preclusion period which would stop him accessing Centrelink was

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fair. He says himself that he lives modestly - getting by on $1.4 million seemed perfectly reasonable to him.

In fact, he would have to make do with much less.

Telford lost about $600,000 of that compensation money in the collapse of Trio Capital.

Part of his money had been invested in Trio after he found a financial adviser to help him set up a self-managed super fund, as he had been advised to do after winning his compensation case.

He looked into a few financial advisers before settling on one who had good credentials to his name.

However, the financial adviser’s qualifications weren’t the only consideration of importance for Telford. He also chose the adviser because he was in a town nearby and the carpark was right outside his office door.

“Even 30 years since the accident, I still have considerable pain.

Everything I do, I have to consider whether I can sit down and what transport is available,” Telford explains.

“He had accreditation to his name. But one of the reasons I chose him was availability.”

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www.fsadvice.com.au Volume 15 Issue 03 I 2020

At first, when it became clear that the money was gone, Telford blamed this financial adviser. But now he says he knows better. In fact, he now believes the adviser was a victim of the fraud too.

“The nature of the fraud was that it was out of sight,” he says.

Financial advisers who put clients in Trio often had money in the scheme themselves, they often advised friends and family into it – and they had no way of knowing what was really going on, he says.

The advice from ASIC at the time of the Trio collapse was that those who lost money in SMSFs or as direct investors should seek legal advice and consider legal action against their financial adviser.

When Telford first heard this he thought about it in the terms of his car accident. But, he found out the process is actually “degrading” and destroys the livelihood of the financial adviser – often seeing them publicly named and shamed.

“I’m okay. I live very conservatively. I haven’t had a holiday since the day I was compensated,” Telford says.

“But that’s not the point. The point is that, whether someone has lost $600,000 or $5000, the issue at hand is still valid. I know people who lost $10,000 and that amount is enormous, life altering to them.”

Telford met other people who had lost money in the Trio collapse, he started following what ASIC and politicians had to say about it and he started doing his own research.

The Victims of Financial Fraud (VOFF) group was soon formed; meeting regularly in what was originally a fight for compensation. At first, it was a fight they seemed likely to win.

Trio Capital fell apart in earnest in 2009. It is considered one of the three big financial collapses in Australian history, the others being Westpoint and Storm Financial.

Over 6000 investors were affected by the collapse. The federal government compensated about 5000 investors who had been exposed to Trio Capital through APRA regulated super funds to the tune of about $55 million.

VOFF represents part of a group of the 1000 or so investors that were left uncompensated. A decade after the collapse, they’re still fighting.

Many others have given up.

Telford has become an investigative reporter in his quest for answers.

In 2018, he penned the Trio Fraud Manual. It is a 118 page long document detailing the political complexities that circle around the Trio collapse and the people involved.

Don Fox lost money from his SMSF in the Trio Capital collapse, though he no longer likes to say how much.

Fox was part of a group called the Association of ARP Unitholders (ARP), which worked alongside VOFF. None of the group had any success getting their money back, nor did they have much success getting answers on how the collapse happened under the regulator’s nose.

About three years ago, Fox saw the writing on the wall and accepted that compensation was likely never going to materialise for him or for other SMSF and direct investor victims of Trio.

“It just went on and on and on. We were led up garden paths. There were no return phone calls,” he says.

“But I take my hat off to John Telford. He’s still in there fighting and we wish him all the luck.”

The ARP group members were mostly based north of Sydney and were “business people, not mugs”, as Fox says. Some of the members lost such significant savings in the collapse that they ended up on Centrelink.

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Featurette

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The fight for Telford and VOFF has always been, and remains, not just about compensation but a fight for recognition.

The actions of ASIC and then Assistant Treasurer Bill Shorten were salt in the wound for those who lost their retirement savings in Trio Capital.

Shorten would become Minister for Financial Services and Superannuation and see the APRA-regulated super funds that lost money in Trio Capital compensated.

Meanwhile, those in SMSFs and direct investors were told by Shorten that they were “swimming outside the flags”.

This comment still stings for many of the victims – and it also doesn’t really make sense.

Telford points out that he was told to set up a super fund with his compensation money that could pay him a disability pension for the rest of his life – how then, he asks, could he have been swimming outside the flags?

Another VOFF member, who spoke to Financial Standard but preferred not to be named, had worked in banking her whole career and still found herself caught up in Trio Capital. She says there were no warning signs.

Tens of thousands were wiped from her SMSF. She describes the stress as crushing.

Yet, she too, empathises with the financial advisers who advised people into Trio. She highlights the story of Ross Tarrant as being the story of another victim – not, as it was portrayed by ASIC, that of a perpetrator.

Tarrant owns an accounting and financial advice business in Wollongong. The firm had more than $23 million of clients’ money in the Astarra Strategic Fund, promoted by Trio Capital. He was banned by ASIC for a period of seven years in 2011.

In 2015, an appeal by Tarrant to the Federal Court to overturn the ban was dismissed and he was ordered to pay ASIC’s legal costs.

Tarrant declined to speak to Financial Standard for this story, sharing that he had a negative experience of the media after ASIC’s press releases about him.

But Telford and other VOFF members say that Tarrant was unfairly thrown under the bus. Telford says Tarrant was one of 155 advisers in Trio and has suggested that perhaps he became a scapegoat because he had recommended Trio to the Australian Workers Union.

The VOFF members say they now harbour no ill-will to financial advisers, including Tarrant.

In the lead up to the Royal Commission, Telford set himself to researching (not that he ever stopped) so that he could make submissions. He made a Freedom of Information Request (FOI) in relation to the lawsuit brought against Tarrant by ASIC. One of those FOIs wasto try and find out whether ASIC knew about deaths of Trio Victims that Telford had heard about.. He thought if the regulator had knowledge that lives were lost as a result of financial fraud, surely they would have to do something.

The FOI, which Telford shared with Financial Standard, says the family of the victim who died shared that he felt betrayal, despair and shame after the Trio fraud.

Telford wanted to know whether the government or ASIC would acknowledge suicide deaths caused by financial frauds.

He got a reply saying that no documents were in the scope of his request.

“It’s swept under the carpet,” he says. fs

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Cover story

www.fsadvice.com.au Volume 15 Issue 03 I 2020

IN SAFE HANDS Hugh Robertson, Centaur Financial Services

Centaur Financial Services principal adviser Hugh Robertson doesn’t need shortcuts. His business is built on a philosophy of sticking to the fundamentals and staying the course.

Elizabeth McArthur writes.

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FS Advice

www.fsadvice.com.au Volume 15 Issue 03 I 2020

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Cover story

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Cover story

I

n 1960, a scandal sparked by vegetable oil rocked the US. The salad oil swindle, as it came to be known saw multiple companies’ share prices dive.

A tipster got in touch with American Express and told them that their largest customer, Allied Crude Vegetable Oil Refining Corporation, was committing fraud. Allied had obtained a contract with Food for Peace, a US government program that sold excess food produced in the US to poorer countries.

It turned out the tip-off was credible. Allied was filling up tanks with water and adding just a bit of oil, because the oil separated from the water and rose to the top, inspectors at the docks would think they were full of the salad oil Allied was supposed to be producing.

American Express had guaranteed millions of dollars’ worth of this Allied soybean oil, which turned out to be severely watered down. In the end, American Express lost approximately US$58 million (a lot for 1960) and its share price halved.

Warren Buffett invested in American Express in 1963, buying off the back of its salad oil scandal induced crash. But, he found himself in disagreement with other shareholders.

There were victims of the salad oil swindle who wanted compensation from American Express. The company didn’t have a firm legal obligation to pay them though, and shareholders wanted it to maximise profits by ignoring these claimants.

Buffett wanted American Express to recognise those that were defrauded and pay them. He thought the company was strong enough to still perform over the long term.

Of course, Buffett was right and the salad oil scandal is now a

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footnote both in the history of American Express and in the history of Buffett’s own investing career.

This is one of the stories about Buffett that captured Centaur Financial Services principal adviser Hugh Robertson’s imagination when he was at university.

“There was a lecturer you couldn’t really understand in corporate finance in my second year of uni and he kept talking about this Mr. Warren Buffett,” Robertson says.

The stories caught Robertson’s attention and he went looking for more information on this mysterious Buffett character.

Soon he found out about Benjamin Graham and ordered the 1934 edition of The Intelligent Investor.

“It’s about 500-odd pages, I remember reading it about four times and understanding about a quarter of the content. I just wanted to understand and read what Warren Buffett had read when he was my age,” Robertson says.

Buffett became a key part of Robertson’s interest in investing and finance. Once he realised what he wanted to do, Robertson started to absorb all the information he could find.

“Whatever I do I want to be the best at. That’s not necessarily a reflection of me being competitive; it’s just competitive within myself,” he says.

“I wanted to be in a career where I could be great. I didn’t want to go into a career and just be ordinary. And you have to find what the terms of reference are in the field that you choose.

“And you have to find out what greatness looks like. My lecturer had said that in investing Warren Buffett was it, so anything I could get on Warren Buffett I just absorbed.”

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To this day, Robertson admits he’s still a fan of the investing legend.

“Sometimes I’ll stay back after work and have a wine and YouTube Warren Buffett,” he says.

“The thing that I learned from him is that principles don’t change. You can apply that to any job you end up in. Don’t fall for the shiny toys. You can’t invent new antiques.”

It’s that notion that the fundamentals and the principles remain the same, while trends come and go, that has stuck with Robertson and that he has tried to be mindful of in his own business choices.

Robertson has set up Centaur Financial Services to be focussed on helping people first. He doesn’t want success to be measured by whether clients bring in funds under management or whether there’s a risk commission.

He says if you genuinely help a client, they’ll happily pay a bill for the adviser’s time. And, thinking about the long term picture, that client is more likely to refer you to their friends.

And, if you’ve meaningfully solved their financial problems then down the track they may have some money to invest and come back to the trustworthy financial adviser who helped them when they had less.

Most of Robertson’s clients are retirees or within five years of retirement. He refers to this as the “sweet spot” where financial advice can make a huge difference to people’s lives. But, the youth of Centaur’s advisers actually worked against the firm in attracting these clients for a time.

“People tend to gravitate to their own demographic,” Roberson says.

But, he hasn’t been put off working with people around retirement age – and he’s found a true passion in helping them to achieve their lifestyle dreams.

“We do wealth accumulating advice and what we do for clients in that area is very similar to what I do for myself,” Robertson says.

“But, what’s our sweet spot? What’s the area in the marketplace where we are really good? It’s those pre and post retirees.”

A lot of Robertson’s clients have the Aussie nomad dream – they just want to have the financial freedom to travel as they see fit.

“I think that’s similar to what I want to do, actually,” he says, thinking about it.

“The great thing about hearing your clients’ dreams is it kind of gives you inspiration for what you want to do.”

From his research Robertson knows that the three things people really value and need to be happy – in retirement or at any point in life – are health, wealth and relationships.

“You can’t delegate your health to someone else, you can’t delegate your relationships to someone else but you can delegate your wealth and the management of your portfolios,” he says.

The clearly defined vision for Centaur is something

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Robertson has developed through something of a spiritual journey in the financial advice world. He’s a part of the generation that has fought to shift advice away from a sales culture and towards true professionalism.

“At uni I didn’t really know what I wanted to do. I was trying to be conscious. I would sit in each subject and think, ‘could I do this as a career?’” Robertson says.

“Once I got into finance and started understanding the stock market it became a passion. There’s always uncertainty, it’s not black and white. That’s what I love about it.”

He would go to the university library every day and read the Australian Financial Review to absorb industry news.

But, at the time, Robertson did not know that financial advice existed as a profession – he was studying with the aim of one day working in funds management.

Eventually Robertson got a graduate role at Commonwealth Bank as a financial adviser, and he says this was his first real exposure to financial advice as a profession.

“In some ways that fast-tracked my career compared to other people who found employment at an accounting firm or even a financial planning firm and had to work their way up,” he says.

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The quote

Don’t fall for the shiny toys. You can’t invent new antiques.

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Cover story

“I changed what my passions would be. Unbeknownst to me at the time, it was financial advice.”

When Robertson started working at the bank, he was told there might be opportunities to transfer into funds management at Colonial First State.

However, that wasn’t the case. He says on the first professional development day the head of CFS told the graduates that there was a wall between funds management and financial advice.

“Probably for the first five or six years I still wanted to be an investment manager. I think academically that was where I wanted to be. But the more I sat in the role of financial adviser the more you see yourself helping people and helping to solve problems,” he says.

“You start to appreciate what you do and what the profession is. Doing the hard stuff, doing my masters in financial planning and the Certified Financial Planner course so that I could develop more knowledge was what really helped with that. That’s when I started really enjoying what I did.”

Along this journey Robertson also started to think more deeply about the things that make life fulfilling – it wasn’t all about career after all, he started to realise. The lifestyle he enjoyed living on the Gold Coast started to be something he appreciated on a new level.

Perhaps chasing some big corporate finance dream in Sydney wouldn’t be worth it, Robertson started to realise.

“I was with my wife one Saturday morning walking our dog at the dog beach and I realised, I can have this great life here – so why would I want to do anything else?” he says.

“Part of the maturing process for me was thinking about more than just my career, thinking about the whole lifestyle I want to have and who I want to spend my time with.”

“I think financial planning is the best job in the world.

You can get paid well, you can help people and you can have the lifestyle you want. The price of entry nowadays is you get your qualifications, meet the requirements and do the right thing by people.”

Robertson can say it’s the best job in the world now – but his start at the Commonwealth Bank didn’t exactly smell of roses.

“The big institution is just sales. You’re a spoke in a wheel. It wasn’t financial advice. I wouldn’t be critical of a financial adviser who works in that environment though - I understand how some of them are in a tough spot,” he says.

“You might have a family and have to do the right thing by your family. One thing that’s great about the Code of Ethics coming in is it confirms that even when you’re in that tough spot you have to do the right thing by your client.”

For Robertson, being a financial adviser during that time at one of the big institutions was not sparking joy – and perhaps never would.

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“For me, the right thing to do was remove myself from that situation,” he says.

“I don’t think sales targets are ever appropriate, you’re encouraging the wrong behaviour. That environment never sat well for me. I always want to be proud of what I do and when I was working [at Commonwealth Bank], as proud as I was to get the job, I wasn’t proud of what I was doing.”

When Robertson left he did get a job he could be proud of at Whittaker Macnaught, where there were no sales targets and no high-pressure sales culture.

For the first time, Robertson was fully immersed in a new type of financial advice – one that wasn’t about selling products but about achieving client goals.

“That was in my mind getting into the big leagues.

That was the best financial planning firm in my mind in Australia and I was tremendously honoured to be hired by them so early in my career,” he says.

“In some ways, Centaur is the evolved version of what a Whittaker Macnaught would be in 2020.”

But, during the fall out of the Global Financial Crisis the Commonwealth Bank purchased Whittaker Macnaught – forcing the firm’s advisers to operate under the Financial Wisdom licence.

“That was when I realised I need to control my own destiny,” Robertson says.

He was in his late 20s at the time, and realised he needed to set himself up to own his own business.

Robertson was on his way to walking a path he could pave himself. When he made the move to Centaur he had the specific vision that he wanted to own the business eventually.

“Advice has been evolving,” Robertson says.

“When I was at university it wasn’t even a profession.

I didn’t know what to aspire to. Although I look back on myself at university and this was the perfect career path for my interests and abilities.”

In some ways, he looks back on his own journey away from sales and the big institution to independence and client-centricity as the journey the whole industry is taking.

“I think in some ways the Royal Commission set us back, but in other ways it’s pushing us forward. Some of it was misunderstood and some of the consequences for advisers have been severe,” Robertson says.

“But, having said that, my perspective has been to get on with it and get it done.

“Now people are going to go to university with the dream of being a financial adviser. That puts us in a great position going forward as we want to become a profession. The more you help people, and the more you eliminate that sales culture, the closer we’ll get to becoming a genuine profession.”

Robertson says the industry is young – and when you’re young you make mistakes. But he knows from his clients the value that people get from financial advice.

And, he knows from his network in the industry that the future of financial advice is bright too. fs

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Applied Financial Planning:

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FASEA requirements for aged care advice

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By Assyat David, Aged Care Steps

Global banks’ resilience in the face of crisis

FS Private THE JOURNAL Wealth OF FAMILY OFFICE INVESTMENT•

By John J. Flynn and Eric M. Hagemann, Pzena Investment Management

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Financial advisers need to incorporate aged care considerations and discussions in their processes to satisfy FASEA’s Code of Ethics. If not, they risk noncompliance and failing to meet clients’ needs.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FASEA requirements for aged care advice

T Assyat David

he Financial Adviser Standards and Ethics Authority (FASEA) standards that came into effect from 1 January 2020 are compulsory for all financial advisers who provide financial services to retail clients. The FASEA Code of Ethics imposes ethical duties that exceed the legal requirements of the law and, as such, aims to embed higher standards of behaviour and professionalism in the financial services industry.

Without a doubt, these regulations represent a milestone in the financial services industry that will drive adviser behaviour, affect business and client servicing models, enhance compliance and operational processes, and increase the professionalism of the industry. These impacts have already been felt, and the changes will continue over the coming years.

The FASEA Code of Ethics is built on 12 standards that provide the conduct framework for engagement with clients, and the following five value pillars: • Trustworthiness • Competence • Honesty • Fairness • Diligence

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Much of the discussion to date has centred around the educational and exam requirements and the disruption it has created in the financial services industry. However, it is time to shift the focus to a more productive examination of the practicalities of implementation and what it means for advice processes.

This whitepaper discusses the likely implications of the FASEA standards for the financial services industry, with a focus on the increasing importance of aged care advice. The aim is to provide insights to guide advisers and licensees on the steps to take to be well positioned to meet the FASEA obligations, to protect their business from disruptions and enable advisers to be at the leading edge and positioned for growth. In particular it will discuss the impact on: • Advice behaviour, processes, delivery models and business structures • Delivery of client services • Operational processes Tip Financial advisers need to incorporate aged care considerations and discussions in their advice processes to satisfy the FASEA Code of Ethics. Ignoring aged care considerations puts advisers at risk of non-compliance with the Code of Ethics.

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The FASEA standards reinforce the need for advisers to consider the aged care implications for clients and implement an aged care advice solution to comply with the Code of Ethics.

dation in the near future would need to be factored into any financial advice you give the client.”

Tip

Aged care as part of the best interests duty

Advisers need to factor in planning ahead for the

FASEA Standard 2 requires that advisers “must act with integrity and in the best interests of each of your clients”.

The best interests duty has been a core obligation for advisers well before the FASEA regulations, but the FASEA standards add an obligation to consider the broader long-term needs of a client, which can extend to the implications for the family.

Further elaboration is contained in the FASEA’s FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance 2019 (Code of Ethics Guidance) paper which explains how to comply with this standard.

It states “you act in a client’s best interests if what you do—the advice you give, the products and services you recommend—are appropriate to meet the client’s objectives, financial situation and needs, taking into account the client’s broader, long-term interests and likely future circumstances” (italics and bolding added).

These requirements are reiterated in FASEA Standard 6, that instructs advisers to “take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances” (italics and bolding added).

Standard 5 (All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances) also elaborates on the “best interest of the client” duty, further emphasising the need for advice and recommendations to take into account the client’s broader, long-term interests and the client’s likely future circumstances (Code of Ethics Guidance).

With three out of the 12 standards specifically requiring consideration of the broader long-term interests, it cannot be clearer that advisers must consider the entirety of a client’s retirement. This now implicitly needs to take into account not only the early ‘active’ years but also the potential changes to the client’s health and ability over time and the third phase of retirement—the frailty years.

Aged care advice and helping clients and their families be prepared for the move into frailty is now shifting into mainstream advice rather than just a peripheral and situational-based advice process.

In its Helping you understand the FASEA Code of Ethics publication of June 2019, the Financial Planning Association of Australia clarifies Standard 6 as follows: “This standard expressly requires you to take into account the broader, long-term interests and likely circumstances of your client (reflecting section 961B of the [Corporations] Act). For example, any potential need for the client or one of the client’s family members to move into aged care accommo-

prepared before a crisis hits.

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frailty years to help clients and their families be Aged care should be a core component of retirement planning and client review meetings.

The Three Phases of Retirement TM identified by Aged Care Steps in its Planning for the third phase of retirement whitepaper of June 2019 are not defined by age, but rather by levels of independence and frailty. Each client’s experience is unique, but as a client transitions through the phases they may need to adjust their goals and objectives, lifestyle decisions, living arrangements, income needs and priorities. But whatever the phase, quality of life, control and access to choices are key ambitions. The decisions that are made in planning for retirement as well as throughout retirement can impact on how well-prepared clients are for the third phase of frailty.

The third phase (defined as the frailty years) represents on average 17–25% of retirement years. Failing to consider this period leaves clients exposed for a large portion of retirement, failing best interests duty. During this phase, clients may require higher levels of support on a day-to-day basis to maintain quality of life within the restrictions of the particular incapacity or frailty.

Tip Many advisers have ignored aged care as a service for clients and put it in the ‘too hard’ basket.

These advisers and licensees need to address aged care urgently and provide education, support and tools to help advisers adhere to the FASEA Code of Ethics. This does not require all advisers to become an aged care expert, but a business solution for how to provide the support within the set business model is important.

Aged care client conversations Advisers need skills, confidence and support tools to have effective aged care conversations with clients. This includes the ability to explore client circumstances more deeply to identify current and future implications.

The FASEA Code of Ethics Guidance clarifies in relation to Standard 2, that “to comply with the ethical duty, it will not be enough for you to limit your inquiries to the information provided by the client; you will need to inquire more widely into the client’s circumstances”. The

Assyat David, Aged Care Steps Assyat David, M App. Fin, B Comm, Dip FP, GDip App.Fin, is co-founder and director of Aged Care Steps, the leading business supporting professionals to give advice on aged care and related matters.

She has over 25 years’ financial services industry experience.

Previously, Assyat was executive general manager, financial services at Trust Company.

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guidance expands further that “you are not relieved of the ethical duty merely because the client does not provide enough information”.

Consequently, advisers are obliged to actively enquire about the client’s circumstances including asking about aged care needs for themselves or other family members, especially if they have responsibilities under powers of attorney or guardianship. Advisers need to work with clients to help work out their objectives, financial situation, needs, long-term interests and likely future circumstances.

Tip Advisers have a duty to actively enquire about the client’s circumstances and cannot be limited to just the information provided by clients.

Further, they need the tools to build confidence to actively

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person needing care (the beneficiary of the advice) who can become the focus of advice.

In these circumstances, there may be confusion and conflict as to who the ‘client’ is and to whom the duty of care is owed. The conflict may be heightened if the decision-maker acts in a way that may not be in the best interests of the person needing to access care.

While Standard 6 allows for the adviser to take into account the implications of advice on the client’s family, this does not shift the adviser’s best interests focus to those family members. The advice needs to consider the impact on family members, but should still focus on best interests of the client accessing care.

Tip Advisers must act in the best interests of the person accessing

commence conversations with clients about planning for future or

care as the ‘client’ to whom a duty of care is owed, even if

imminent frailty and aged care.

they never met or had a conversation with them. This requires interaction with the enduring power of attorney (EPOA) and

Planning ahead for aged care and incorporating aged care considerations into review meetings are important ways of meeting FASEA’s Standard 2, as well as Standard 5. Standard 5 necessitates that an adviser “must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied”.

Advisers often avoid aged care conversations and advice if they are not confident that they can adequately and simply explain their advice. The complexity is compounded and the need for clarity is heightened, particularly if the client does not seek advice until a crisis has emerged and the family is in an emotional state.

If a client is vulnerable or unwell mentally or physically, testing the client’s understanding can be even more difficult, and advisers can place less reliance on the client’s statement that they have understood the advice.

This highlights the importance of addressing frailty and aged care needs ahead of time when the client has the mental and physical capacity to take control of these decisions, as well as the need to further develop communication skills and tools.

Tip There are various communication tools to assist with client understanding.

These tools include advice modelling software which focuses specifically on telling the ‘aged care story’ for effective decisionmaking and comprehension by the clients, as well as brochures and client fact sheets.

To whom is the ‘duty of care’ owed when dealing with families?

Advice in the aged care space typically involves interactions with the wider family, not just the beneficiary of the advice. That is, the person accessing aged care services.

Often the adviser uncovers an aged care need from clients aged 40–65 years who are acting as the decision-maker or influencer for a parent or other family member. The adviser may never meet the

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establishing that person’s fiduciary role.

If the EPOA is an existing client and there arises a conflict between the adviser’s responsibility to the separately identified clients, the adviser may need to refer the client needing advice on care to another appropriate adviser.

Competence in aged care advice ‘Competence’ is a core FASEA value and imposes the need for advisers to have the knowledge, skills and experience necessary to perform their professional obligations (Code of Ethics Guidance).

FASEA guidance explains the ongoing obligation of an adviser to have a “life-long commitment to developing and maintaining knowledge, skills and expertise at a level of currency required to benefit your clients in particular engagements”. Additionally, Standard 10 imposes the need to develop, maintain and apply a high level of relevant knowledge and skills.

This particularly applies to specialist areas such as aged care advice.

While all advisers need to provide an aged care solution (to identify the need and help clients access advice), this does not require all advisers to become aged care experts. Rather, a business solution for how to provide the support within the set business model is important. If the adviser does not possess the competencies required to assist their client, they must refer the client to another professional.

Business solutions may include outsourcing to an accredited aged care professional adviser or outsourcing advice development through specialised paraplanning services. However, if only outsourcing the advice development, the duty of competence rests with the adviser, and competencies should match.

Tip Advisers are likely to develop core competencies and designations rather than provide ‘holistic’ advice to clients.

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In our experience, more advisers are specialising and becoming aged care experts, and licensees are requiring completion of aged care accreditation as a requirement to provide any aged care advice.

Over time, advisers may operate as cross-referrers and work in clusters of specialisations to service clients’ various and complex needs.

Efficiency in the advice delivery Diligence is another core value that necessitates the delivery of professional services in a timely, efficient and cost-effective way.

It requires advisers to review how they manage their time and resources and consider accessing specialist tools and support to deliver customised and quality advice with cost efficiencies.

Advisers and licensees need to evaluate the relative efficiencies of developing tools internally (for instance, calculators via spreadsheets, maintaining statement of advice (SOA) template wording and/or developing marketing and communication client collateral) against outsourcing to subject matter experts. This evaluation should take into consideration: • competence, level of knowledge and capacity to keep up to date with regulatory and strategy changes, and ability to model complex client situations • the risk of errors, adequacy of processes for checking changes, and timeliness in implementing changes • the cost and time of developing and maintaining internal tools • the opportunity cost of diverting time and focus away from other key business services.

Example 14 in the FASEA Code of Ethics Guidance relates to an adviser using a template SOA provided by his licensee. This example demonstrates the pitfalls of providing a long SOA containing generic information that is not tailored to the client’s individual circumstances and specific advice needs.

Ethics Guidance explains to advisers that “you have the primary obligation to regulate your own behaviour to comply with the Code. You have a fundamental, personal, professional obligation to understand and to adhere to your ethical obligations under the Code. You cannot outsource this responsibility to your employer, or your licensee, or any other person.”

Meeting the growing demand for aged care advice In addition to meeting FASEA’s obligations, the growing demand for aged care advice heightens the need and benefits of offering aged care services.

The demand for aged care advice has been growing and is expected to continue, given the increasing longevity of the Australian population and the higher incidence of frailty, as well as the increasing cost and complexity involved with accessing aged care. The demand for aged care advice was illustrated in a recent Australian Securities and Investments Commission (ASIC) survey on what clients want, and summarised in its Report 627 Financial advice: What consumers really think (REP 627).

ASIC’s research explored overall use of financial advisers and consumer attitudes towards the financial advice industry. A survey question asked what were the most common topics that survey participants had either received or were interested in receiving advice on. The top-10 topics or issues for which Australians seek financial advice are illustrated in Figure 1.

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The quote

With three out of the 12 standards specifically requiring consideration of the broader long-term interests, it cannot be clearer that advisers must consider the entirety of a client’s retirement.

Figure 1. Topics for which Australians want advice

Tip To comply with the ‘Diligence’ value, advisers and licensees should access specialist tools and support to deliver customised and quality advice with cost

Source: Figure compiled from data in ASIC REP 627

efficiencies.

For instance, Aged Care Steps’ Advice Generator is a highly specialised modelling tool which enables advisers to produce aged care advice, efficiently and accurately with a high degree of flexibility.

The need for business efficiency is increased with the shift in responsibility for complying with the FASEA obligations to individual advisers. The FASEA Code of

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Tip According to ASIC’s survey, clients seeking personal advice ranked aged care planning in the top five topics or issues of importance.

This accentuates the opportunities arising from advisers meeting client demands by providing aged care advice solutions.

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Aged care planning featured in the top five topics or issues for which clients want advice. This ranking exceeded the demand for advice on key financial planning areas including self-managed superannuation funds, risk protection, estate planning and debt management.

Conclusion Financial advisers can no longer delay implementing an aged care solution into their business model. Further, they need to adapt their business and client service models to incorporate aged care advice for existing and new clients as well as part of their ongoing review services.

The FASEA obligations reinforce the fact that aged care advice has grown into a core component of financial planning. As such, advisers need to build capabilities, confidence and efficiencies to ensure they are able to support clients throughout their frailty years.

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Advisers who avoid aged care advice, risk failing to comply with the FASEA Code of Ethics as well as failing to satisfy clients’ needs.

To get started with delivering aged care services, advisers need to understand how aged care works and the options available to clients.

Moreover, they need to be confident in raising the conversation with clients and their families.

Advisers who wish to take a more active role, can build on this knowledge and undertake accreditation aged care training to develop the skills and knowledge required to provide personal aged care advice. Soft skills also need to be developed to build capability in dealing with families facing difficult and emotional times.

When implementing the aged care service, regardless of the chosen business model, it is important that advisers access practical tools to support each stage of their advice process to enable them to implement efficient processes and maximise opportunities. fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. In terms of information gathering, advisers have an ethical duty to: a) Actively enquire about clients’ circumstances b) Prioritise clients’ current circumstances c) Limit their focus to the information provided by clients d) Limit their responsibilities to those under powers of attorney or guardianship

4. In terms of a duty of care and aged care advice: a) The adviser is obligated meet the advice beneficiary in-person b) The adviser may need to prioritise interests of family members over the advice beneficiary c) Interactions will typically involve the client’s wider family d) If the enduring power of attorney is an existing client, they must be referred to another adviser

2. What observation did the author make regarding adviser behaviour and aged care advice? a) Advisers would likely remain ‘holistic’ providers and treat aged care as a peripheral competency b) Advisers often avoided aged care conversations if they could not do so adequately and simply c) Advisers were often overconfident and underestimated the complexities of aged care advice d) Advisers were often not interested in aged care planning due to low demand confirmed by ASIC’s findings

5. T he author views phases of retirement: a) A s being age-defined b) In terms of immutable goals and objectives c) As being subject to diminished control and choices d) In terms of independence and frailty levels

3. T he FASEA standards include the obligation to take into account clients’ broader long-term needs in relation to aged care advice. a) True b) False

6. Which of the following are potential challenges regarding aged care advice? a) T he client may not seek advice until a crisis has emerged b) Addressing aged care needs while the client has their mental and physical faculties c) The client’s family may be in a fragile emotional state d) All of the above

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Banks are adept at surviving major crises. While history never repeats exactly, today’s banks have greater support from strong capital buffers, deleveraged balance sheets and onside governments to help counter the COVID-19 fallout.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Global banks: resilience in the face of crisis

W

John J. Flynn and Eric M. Hagemann

e view the potential for a systemic bank failure due to the coronavirus (COVID-19) economic shock as low. Today’s banks are more resilient than in the past, given their robust capital positions and lower risk profile, not to mention supportive liquidity operations provided by central banks.

Banks stand out

While their valuations suggest the need for industrywide dilutive capital raises, banks are broadly in good shape relative to other segments of the economy and their history.

Banks’ strength Equity capital is at post-World War II highs. Combined with derisked and deleveraged balance sheets over the last decade, this implies that widespread bank insolvencies are less likely than in the past.

Bank stocks have come under intense pressure as investors contemplate the potential for meaningful credit losses on their balance sheets.

Markets tend to fixate on recent history, and we argue that there are many reasons to believe this period will resemble a ‘typical’ recessionary environment—not the global financial crisis (GFC) of 2008.

Strong capital positions and supportive government actions bolstering liquidity have reduced the risk of systemic bank failures related

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to the COVID-19-induced shock. After examining how banks have fared in prior periods of economic decline, we believe that this time will not resemble the pattern of the GFC. To examine what lessons we can draw, we surveyed global developed-market credit cycles going back to the Great Depression. This historical survey supports our view that in aggregate, the banking system today can sustain a once-in-a-century level of loan losses without the risk of meaningful dilution to equity owners. Importantly, however, this does not preclude individual banks from having credit issues requiring more capital.

Before digging into the data, it is useful to review some fundamental mechanics about how banks work, such as how credit events impact a bank’s earnings and its balance sheet. In its simplest form, a bank gathers deposits and advances the money out to borrowers in the form of loans. The spread between the lending rate and the rate paid to depositors provides an earnings buffer to absorb any losses that may occur from a borrower’s failure to repay. Banks are required to set up a reserve for loan losses and to maintain equity capital in case those losses exceed current earnings.

Each reporting period, banks estimate future loan losses and adjust the size of the reserve accordingly. The adjustment, or ‘provision for loan losses’, is accounted for in the profit and loss statement, and the ‘reserve’ resides on the balance sheet. Any profits earned by a bank are either added to its capital and used to fund growth or returned to shareholders through dividends or buybacks or both.

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John J. Flynn, Pzena Investment Management John J. Flynn is a principal and portfolio manager at Pzena Investment Management.

Previously, he was an associate at Weston Presidio.

He holds an MBA with distinction from Harvard Business School.

Eric M. Hagemann, Pzena Investment Management Eric M. Hagemann, CFA, is a principal and senior research analyst at Pzena Investment Management.

Previously, he was a summer analyst at Echo Street Capital Management. He holds an MBA from Columbia Business School.

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Credit events rarely lead to capital destruction for banks

Banks have rarely endured large losses

The process of monitoring loans and adjusting reserves happens throughout all credit environments. Most of the time, delinquencies are more than offset by a bank’s overall earnings and are manageable without the bank having to raise additional capital.

In more extreme credit events, a significant increase in expected loan losses causes a bank’s capital levels to fall below the regulatory minimums. Though the exact calculations and standards vary by region, regulators around the world require banks to maintain a certain amount of capital relative to their assets. Breaching these minimums due to losses from poor credit can ultimately result in shareholder dilution, via a forced capital raise at a distressed price, or an outright nationalisation of the bank.

In looking at nearly 130 years of banking history, we see that credit events resulting in significant capital destruction have been less frequent than intuition suggests.

Only a few recessions globally have resulted in large bank losses—the Great Depression, the savings and loan (S&L) crisis, the bursting of Japan’s real estate and stock market bubble, the Asian financial crisis, and the GFC. The good news is that bank equity capital is at postWorld War II highs and, relative to assets, is approximately 40% greater than in 2007. These additional equity buffers combined with de-risked balance sheets over the last decade imply that widespread bank insolvencies are less likely than in the past.

Current valuations imply that banks will book loan losses in orders of magnitude unlike any recorded in US history and, further, that announced government interventions will be broadly ineffective. There is no reward without some level of risk, but we believe the trade-off today is asymmetrical and skewed to the upside.

Figure 1 demonstrates clearly that large credit events in the US have been the exception rather than the rule.

Even the extreme calamities that include two world wars and the Spanish Flu of 1918 did not lead to large-scale losses for banks. We will broaden the scope of our analysis outside of the US shortly, but start here because it provides the most extended history of data on the subject.

Today’s loan losses are not a threat to solvency One way to quantify bank solvency is to determine how much loan losses could grow before breaching minimum capital requirements. At the end of 2019, banks had reserves equal to approximately 1.2% of loans. In addition, their annual earnings before the provision for loan losses were about 3.4% of loan balances. (This is the five-year average of the entire US banking sector.)1 Thus, if the loan losses had to be absorbed over three years, banks could forfeit 10.1% of their beginning loan balances before eating into capital. US banks ended 2019 with 7.8% in excess capital relative to loan balances. So, adding the 1.2% in existing reserves, the 10.1% in cumulative earnings over three years, and the 7.8% in excess capital, banks can absorb total loan losses of up to 19.1% before breaching minimum capital requirements. Put simply, capital cushions are far more robust than they were during the GFC, leaving banks better equipped to absorb losses than they were in the past.

Moving on to banks in the eurozone, we see from Figure 2 on the next page that they can absorb 9.4% in loan losses. The combination of lower excess capital and lower profitability via earnings illustrates decreased flexibility among eurozone banks relative to the US.

Figure 1. Banks have rarely provisioned for more than 2% of loans

Source: Federal Deposit Insurance Corporation, SNL Financial, Autonomous Research, Pzena analysis

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In summary, banks have a substantially greater capacity for absorption that should shield them from more extreme loss rates incurred in past credit crises.2 Like everything, the devil is in the details. Despite the overall healthy nature of the industry, individual banks are bound to book outsised credit losses and be forced to raise capital. The opportunity for investors today lies in picking among the solid franchises and taking advantage of the fear surrounding this industry because we believe the aggregate picture is bright.

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Figure 2: Banks annually could absorb all Great Depression-era write-downs

A run-up normally causes large bank losses in credit To get a better sense of what bad credit events look like and how today’s loss-absorption capacity of 19.1% compares, we examined 10 periods of extreme banking system stress around the world, including: • the US Great Depression (starting in 1929) • the US S&L crisis (1987) • Japan’s bubble (1989) • the Scandinavian crisis (1991) • several emerging market (EM) debt crises (1994/1997/1998/2001) • the GFC (2008) • the peripheral European crisis (2008–2012).

Each of these events were preceded by a meaningful increase in private debt-to-GDP, a characteristic that does not exist today.

Periods of excessive debt-to-GDP growth naturally coincide with booms in fixed-asset investment (FAI).

The progression of rising debt-to-GDP, inflating asset prices, and increasing leverage causes an asset bubble that ultimately hits a breaking point, then the bubble bursts. The collateral for the excess debt becomes impaired and leads to a credit cycle.

Japan’s property bubble during the 1980s serves as an example. High savings and negative interest rates caused overinvestment in real estate, pushing asset prices ever higher. Similarly, the Baltic region in the early 2000s experienced an unprecedented pace of growth in foreign direct investment driving up asset prices and ending in a banking crisis. Figure 3 illustrates that the peaks in debtto-GDP growth often coincide with the onset of financial crises.

But this pandemic-inspired recession is quite different. The post-GFC recovery did not include a run-up in FAI. There has been no run-up in private debt-to-GDP, nor has there been a comparable bubble in real asset prices. This downturn is a consumption-driven recession caused by public health issues.

It is undeniable that some segments have re-leveraged (for instance, private-equity-sponsored, below-investment-grade corporate issuers, etc.). However, this type of debt is held mostly outside of the banks due to both regulatory constraints and because banks’ business models have substantially reduced risk since the GFC. Further, the private sector had been deleveraging going into

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Figures may not sum due to rounding. *A higher proportion of low-risk loans, such as high-quality mortgages on European balance sheets, drives some of the gap in loan loss absorption capacity.

Source: Pzena analysis, Federal Deposit Insurance Corporation, European Central Bank

Figure 3: A Run-up in debt-to-GDP portends trouble

Source: Federal Reserve Bank of St. Louis

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this downturn. This is especially true of consumers, who accounted for some of the worst credit performance during the GFC. Other crises were exacerbated by regulatory problems that led to liquidity issues and the subsequent deleveraging among banks. For instance, failures during the Great Depression were caused largely by a deposit-driven bank run, leading to a liquidity event. In the current crisis, regulators and governments have been proactive in supporting banks from both a liquidity and capital perspective.

For instance, the US Federal Reserve bought more assets in the first two months of this downturn than in the first five years of the GFC. Regardless of one’s politics, it is difficult to deny that the magnitude of today’s interventions to buttress the economy is unprecedented. The point is not to minimise the economic shock from COVID-19 but to contextualise it in terms of capital and liquidity and how these safeguards seem disconnected from current valuations.

During the Great Depression, over 50003 banks failed—more failures than over the next 90 years combined. In this case, it was not loan losses that posed the problem, but liquidity. A run on the banks drained deposits, as panicked customers demanded cash. With 30% of deposits withdrawn, the banks quickly tightened credit, contracting their loans outstanding by 47%.4 This event prompted the creation of the Federal Deposit Insurance Corporation to ensure that depositors’ funds were protected in the event of a bank failure, another bank run, or any corresponding forced deleveraging.

Turning to the GFC, excessive lending in the US housing market created a bubble in home prices. Many loans were made to borrowers who were incapable of servicing their debt, and the subsequent defaults led to sizeable losses for lenders. Once again, liquidity issues

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exacerbated the losses, this time in wholesale funding and shadow banking (non-bank lenders), sparking solvency concerns for banking systems first in the US and then around the world. To meet short-term liabilities, numerous banks offered their illiquid assets at fire-sale prices, pushing loan losses arguably higher than they should have been.

So, what kind of systemic credit losses are possible from any single crisis? Figure 4 shows that based on history, losses have ranged between 2% and 12% and have typically been absorbed over several years. The bursting of the Japan asset bubble was an exception; here, the 12% loan losses took more than a decade to materialise.

Figure 4: In aggregate, the banking system absorbs fewer losses

*Reflects the change preceding the crisis. For the GFC, Japan, and S&L crises the data reflect a 10-year change; for the Depression, five years.

Source: Pzena analysis; Federal Deposit Insurance Corporation; US Federal Reserve; World Bank; KBW; Eesti Pank; Latvijas Banka; Hoshi T, ed., Crisis and Change in the Japanese Financial System, 2000

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Recall that banks have the capacity today to manage sizeable losses in the US (up to 19.2%) and the eurozone (up to 9.4%). Given the historical range of a cumulative 2% –12% in total losses for banking systems, banks are well positioned to deal with a substantial crisis today.

Governments and regulators: Friends or foes?

Like any regulated industry, banks are at the mercy of political forces; in their case, a combination of government agencies and central banks. Actions taken by those entities have far-reaching consequences for the industry. The policy response during the Great Depression was liquidation, an approach that is now viewed as more damaging than supportive of the broader economy. The regulatory reaction during the S&L crisis of the 1980s was characterised by lenience and forbearance, which led to moral hazard and an expensive taxpayer bailout.

In the current recession, regulators have considered banks to be part of the solution. Governments need banks to work swiftly and around the clock to properly distribute money to the intended beneficiaries of public support (for instance, Payroll Protection and Main Street Lending Programs). Regulators are encouraging them to work with borrowers and are already working to help banks defer customer loans without increasing risk-weighted capital charges. While the winds of politics can shift, so far, banks are viewed as constructive part-

ners to the government in bolstering a sensitive economy.

The magnitude of the actions taken by central banks so far is astounding (see Figure 5). As mentioned earlier, the US Federal Reserve expanded its balance sheet with unprecedented speed in the early days of COVID-19 lockdowns, growing its balance sheet by over 50%. Developed economies around the globe have taken similar actions to those moves by the US Federal reserve.

In March, the European Central Bank announced a series of asset purchase programs, including a €750 billion Pandemic Emergency Purchase Program, to inject liquidity into both public and private sector capital markets. As with their US counterparts, European regulators have taken a constructive stance toward banks both by permitting them to consume countercyclical capital buffers and delaying the implementation of new Basel IV capital rules. In return, they expect banks will remain supportive to borrowers. Japan and the UK have deployed similar playbooks. In all cases, monetary policy and regulatory easing have been complemented by a massive fiscal stimulus to protect consumers and corporate balance sheets—measures which we expect to partially mitigate the extent of loan losses.

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The quote

In looking at nearly 130 years of banking history, we see that credit events resulting in significant capital destruction have been less frequent than intuition suggests.

Bottom line Today’s economic environment is like no other that we have seen in modern history, and against this volatile backdrop, bank stocks stand out. While their valuations

Figure 5: Central banks’ unprecedented balance sheet expansion

Source: Federal Reserve Bank of St. Louis, European Central Bank

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. According to data cited, which of the following statements regarding bank loss-absorption capacity is correct? a) US banks can absorb just under 9.5% b) Eurozone banks can absorb just over 19% c) US banks can absorb just over 19% d) Eurozone banks can absorb just under 12%

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suggest the need for industry wide dilutive capital raises, banks are broadly in good shape relative to other segments of the economy and their history.

After being widely maligned and held accountable for the GFC, this time, banks get to be part of the solution. In much of the developed world, they are working in concert with their local governments to bolster the public by creating liquidity for a wide range of businesses, large and small. Further, many of these banking franchises are leaner, more resilient, and have balance sheets that are fortified to withstand a protracted downturn. In our opinion, the banking system has more-than-adequate capital to remain solvent under the current circumstances. For our part, the ability to focus on bottomup, bank-by-bank analyses within a healthy global bank ecosystem confirms our belief that banking is one of the most compelling areas for investment that we have seen. fs Notes

2. As highlighted by the authors, why is the COVID-19induced recession different from the GFC? a) There was no run-up in private debt-to-GDP b) There was no comparable bubble in real asset prices c) It is consumption-driven, based on health issues d) All of the above

1 Normally investors consider pre-tax, pre-provision return on assets. This has averaged 1.8%. Since loans are 55% of assets, that translates into 3.4% of loan balances (Federal Deposit Insurance Corporation).

2 Simplifying assumptions: 1. Stress scenarios generally inflate risk-weighted assets (RWA) as borrowers tap undrawn facilities, and worsening credit conditions drive higher risk weightings. (For perspective, if RWA inflation is 10%, the above factors would reduce banks’ total loss absorption capacity by over 1%.) 2. A bank’s pre-

3. Even though banks are well equipped to handle COVID-19, the authors caution that: a) Credit events leading to significant capital destruction have been more frequent than suggested b) Developed global economies have largely not followed US balance-sheet expansion initiatives c) US banks will book loan losses in orders of magnitude unlike any recorded in the country’s history d) Despite a fairly healthy banking eco-system, there are few compelling reasons to invest in banks

provision earnings profile in a stress scenario depends on such factors as the level of interest rates and transaction activity and the business mix. 3. Overall analysis belies significant variation across geographies or individual companies, particularly Europe. For example, the five-year average pre-tax return on banks’ assets starts as a losing proposition at –114 basis points—in Greece—and ranges up to +170 basis points—in Estonia (European Central Bank).

3 Federal Deposit Insurance Corporation, KBW research.

4 St. Louis Fed in Banking and monetary statistics 1914–1941.

4. Which of the following attributes do the authors see as holding the banks in good stead during COVID-19? a) Stronger equity positions than the past b) Derisked balance sheets c) Bank-government harmonisation d) All of the above 5. I n today’s environment, individual banks are essentially immune from credit issues. a) True b) False 6. The Great Depression and GFC were underpinned by liquidity issues. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Selling a financial planning practice

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By Scott Brewster, ümlaut

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper provides guidance on enhancing a financial planning practice’s saleability, ascertaining its market value, getting records in order and nurturing its most valuable asset-the client base.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Selling a financial planning practice Tips for a successful transition

D Scott Brewster

ue to tighter compliance requirements and changing personal priorities, many financial advisers are beginning to think of selling their practice.

However, selling a practice is not like listing a products store for sale. Its client base is the main asset, and the ownership transition needs to be managed carefully to keep clients’ confidence and trust.

Getting record-keeping systems in order is one way to increase the perceived value of a business and make the transition smoother.

This and other steps to help create a stress-free, successful sale are examined in this paper.

Your clients are your biggest asset An adviser may have spent years building up their business, but maybe the time to sell the financial planning practice is drawing near.

Do you just slap a ‘for sale’ sign out the front and hope for the best?

Selling a financial planning practice is not like selling most other businesses. Customers buying from Widgets ‘R’ Us generally do not know– or care–who owns the store. However, customers using the services of a qualified professional–like a doctor or a financial planner–do care.

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Consider If the doctor you have been seeing since childhood retired tomorrow, would you feel comfortable seeing a brand new doctor at their practice out of the blue? Or would you feel better if your existing doctor introduced you to the new one, and handed over your notes with care before you saw them completely on their own?

So, if you were in your clients’ shoes, you would most likely want the same consideration from your financial adviser.

Adviser-client rapport is often built up over many years. Thus, clients deserve to be treated with respect, which means planning the sale carefully and transitioning them smoothly through to the new owners.

Reasons for selling a financial planning practice While everyone has their own motivations for wanting to sell, here are some common reasons for deciding to take the step.

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Retirement

With a sizeable number of Australian financial advisers in their mid-50s, many will be looking to retire in the next few years, particularly as a result of industry changes.

Education requirements

As a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) findings and Financial Adviser Standards and Ethics Authority standards, advisers are now required to meet more stringent education criteria.

In many cases, this means advisers have to become degree-qualified within the next four to five years. This has seen more experienced advisers deciding to bring forward their retirement. Others who are not prepared to spend the time and money on an additional qualification are also thinking about leaving the industry.

Adviser Ratings predicted in 2018 that more than 14,000 advisers would exit the financial advice industry over the next five years. That is more than 50%.

Changes in grandfathering commissions

Additionally, changes in grandfathering commissions and trails have drastically diminished the value of many advisory businesses. Multipliers have dropped from 3.5 to as low as 1 or 1.5. It is easy to imagine the impact this will have on the standard financial planning firm business model.

Other reasons

Other common causes for choosing to sell a financial planning business include: • relocating • personal circumstances (e.g. ill health) • the need for a change.

Whatever the reason for selling, with so many advisers looking to sell up in the next few years, it is worth starting to plan the sale now. Not only will there be less competition and more time to find the right buyer, but it may be feasible to increase the selling price significantly.

Ways to sell a financial planning practice How an owner sells their financial planning practice may depend on their licensee.

For instance, a buyer of last resort agreement means a financial planning practice owner can sell their client book back to the licensee/dealer group. However, depending on the terms, sellers may end up with a lower price than they would like.

Some firms let the owner sell within their licensee network and possibly even outside of the network with permission. Other than this, the selling options basically boil down to two methods.

1. Selling internally

Selling a business internally means selling to either a family member or an employee.

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Tip If the new owner is a current junior member of your business, you may want to implement a transition over an extended period of time to make sure they are ready to take on running the business.

If they are not already on your team, look at hiring someone now with the view to them purchasing your business when the time is right.

2. Selling externally

Selling a business externally involves selling to another business or person with no connection to the owner.

However, this option can be very time-consuming and complex.

Tip It may be worth using a broker to help take the hassle out of the process of selling externally. However, make sure you check they are reputable before you engage their services.

How to prepare a business for sale What do buyers look for in a financial planning business?

Anyone who is looking at buying a financial planning practice will want to carry out the necessary due diligence. They will want to see that the business has been running profitably, and that it has a sustainable future.

As part of the process, they will want to examine several things, such as: • previous financial records to assess a business’s profitability and any money owing

Scott Brewster, ümlaut Scott Brewster is a co-founder and director at ümlaut. With over 18 years’ experience in IT-focused management and professional services, he brings an extensive knowledge of data applications and ecosystems to deliver tailored business solutions to help improve clients’ business procedures, fix data disorders, more easily meet compliance requirements and add value.

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• client records to see the mix of client base and products • asset lists to determine what assets the business owns.

Potential buyers are also likely to be particularly interested in aspects of a business that were affected by the Future of Financial Advice (FoFA) reforms introduced in 2013.

Tip To help them prospective buyers, be prepared to answer questions such as: • How many new clients have you brought on board since July 2013?

• Which clients are grandfathered under FoFA? Getting records in order

Buyers can see the value of a business more easily if the owner has good record-keeping systems in place.

Keeping accurate records is also a requirement of both your licensee (if you have one) and the Australian Securities and Investments Commission. This includes client records and business processes.

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Tip Think about engaging a software business solutions provider to help get your systems in order, and then build reports and dashboards to help track relevant metrics.

Business processes

Many business owners keep all their processes in their heads.

However, if they are thinking of selling, they need to have everything formalised ‘on paper’ to enable a smooth transition.

Laying out clear, formalised staff procedures gives any prospective buyer more confidence in a business. It shows that the practice is running well, and that it does not just rely on the owner to survive.

Further, well-documented procedures will also improve business efficiency while readying for sale.

Consider If you are trying to get your business ready to sell without ‘tipping off’ your clients or team, sorting out your record-keeping can just

Client records

look like ‘meeting the requirements’. It does not have to be a red

Client records need to be in good order within a proper system of record [that is, an information storage and retrieval system]. Licensees also generally require that an owner digitises a business’s records within a relevant system before they leave the business.

Additionally, storing records properly within a system of record allows an owner to quickly generate reports for buyers. This means that revenue numbers, client demographics, client retention rates and any other information needed to carry out due diligence can be readily provided.

flag.

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Work out a business’s value

As mentioned earlier, selling a financial planning practice is not like selling a shop or a factory. Its main asset is not stock or equipment; it is the client list. And that can be hard to value.

However, the business value of a financial planning practice can be calculated in different ways.

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Multiple method

One rule-of-thumb valuation method—the multiple method—is based comparing the quality of a business with that of similar businesses.

This method calculates value as either multiples of revenue or multiples of cash flow.

For multiples of revenue, apply a multiplier to a firm’s trailing 12-month revenue. In previous years, this multiplier has been between two and three times a business’s recurring revenue.

However, since 2018 and the Royal Commission, prices being offered for advisory businesses have declined. This is partly due to stricter compliance regulations, partly because finance is growing more difficult to obtain, and partly because more businesses are coming onto the market.

RiskInfo data from May 2019 found that it is now a buyers’ market. In this market, “higher-quality advice businesses are now selling for between 1.5x and 2x recurring revenue, while conventional advice businesses are selling for between 0.5x and 1x recurring revenue multiples".

The multiple method can also be used with multiples of cash flow. This allows the valuation to account for expenses rather than just revenue. It is often calculated using earnings before interest and tax (EBIT).

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Consider Every business is unique, so it can pay to seek the advice of experts like business valuators to help work out a fair price for a business.

What to do during and after the sale Just as you would like to smoothly transition to seeing a new doctor, make sure you transition your clients to their new financial adviser proceeds in a similar fashion.

The quote

Buyers can see the value of a business more easily if the owner has good record-keeping systems in place.

Tip It is a good idea to create a takeover strategy as a roadmap to ensure the transition goes smoothly and nothing is forgotten. This should be a ‘living’ document that you update as things change or progress.

As a strategy is created, the following points need to be kept mind.

Income approach

Rather than comparing a financial planning practice with other such businesses, the income approach bases its valuations on actual income estimates. Again, valuations can use two approaches: • The discounted cash flow method uses a business’s cash flow forecast, then applies a discount to bring the value back to the current time. While this method is accurate, it is also complicated, given the need to predict future cash flow, growth and market.

• There is also a less complicated income approach that assumes a normalised growth rate, called the single period capitialisation method.

Fine tune with research Consider Whichever method you use to value your business, it pays to fine tune your price by conducting market research. It is worth researching what similar businesses are selling for in your area.

However, the end price can be influenced by many factors, for instance: • business location • mix of clients and demographics (e.g. age and net worth) • earnings potential • profitability • future growth potential.

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Communicate clearly and often

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of ascertaining a business’s value, the multiple method: a) Can only be used with multiples of cash flow b) Can only be used with multiples of revenue c) Can be used with either multiples of revenue or cash flow d) Does not lend itself to using EBIT calculations 2. What action does the author believe will help the smooth sale of a financial planning practice? a) Being available after the sale to answer any questions from the new owner b) An introductory process for clients and the new owner c) Clear and frequent communication with clients during the sale process d) All of the above 3. In terms of ascertaining a business’s value, the income approach: a) Compares a financial planning practice with similar businesses b) Bases its valuations on cash flow forecasts c) Is incompatible with using a normalised growth rate d) Bases its valuations on real-time data

Contact your clients to let them know about the sale and any impact it may have on them. The more you communicate with your clients, the greater their chance of staying with your firm during and after the transition.

Introduce your clients to the new owner

It may be helpful for both you and the new owner to meet with clients to go over their portfolios and answer any questions. This can improve their chances of remaining with the business, and increase their confidence in the new adviser.

Be available after the sale

Be willing to answer any questions from the new owner, or help with any issues for a period of time after the sale.

Enjoy your new life

Move on to the next stage of your life—whether that is retirement or a new direction— knowing that you have done your best to ease the transition for your clients.

Conclusion According to Business Health, only 30% of firms have documented succession plans. This leaves them completely vulnerable if the unexpected happens.

Even if an owner is only thinking about selling their practice and has not decided whether to take the leap, a succession plan helps disaster-proof the business. Moreover, it provides security for the practice which the owner would have most likely spent a significant part of their life building up. fs

4. What action does the author rec-ommend regarding selling a financial planning business? a) Get record-keeping systems in order b) Utilise short lead times as a strategy to entice potential buyers c) Leverage the efficiencies of selling externally d) Maintain fluid and informal business processes 5. A ccording to data cited by the author, only around 50% of firms have a documented succession plan. a) True b) False 6. According to the author, FoFA’s impacts on financial planning businesses are seen by many buyers as ‘ancient history’. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Ethics & Governance:

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Fairness, vulnerability and fintechs

By Michele Levine, The Fold Legal

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Fairness and catering to vulnerable consumers are closely intertwined, however, ‘vulnerability’ lacks regulatory definition in Australia. This paper discusses identifying and managing vulnerable clients, and examines why fintechs have fared well in this space.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Fairness, vulnerability and fintechs

R Michele Levine

egulators have focused intensely on ‘fairness’ following the numerous scandals involving overcharging, underservicing and poor customer outcomes that were laid bare in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). For fintechs, this means making sure fairness is embedded at every customer touchpoint.

This is no simple task as fairness is contextual and needs to address any customer vulnerabilities. In the midst of the coronavirus (COVID-19) global pandemic, identifying and responding to vulnerable customers fairly is more important than ever.

What is fairness?

What is fair is not universal—it depends on the context, products or services and the consumer’s circumstances.

When it comes to fairness, fintechs fare better than most. Why? Because they want to challenge the status quo, address a consumer gap or need and foster deeper customer trust.

Some fintechs are using features like greater transparency, improved comparability, better rates, lower fees, increased personalisation and greater customer control. These features help create fairer products and services, but alone will not ensure consumer

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fairness. Why? Because fairness needs to be embedded in all touchpoints of the customer journey. This is no small feat.

Catering to vulnerable consumers is a good place to start A good litmus test for fairness is how you cater to your most vulnerable consumers. Vulnerability is the next frontier in the consumer space, but it is yet to be defined by regulators in Australia.

Who is a vulnerable customer?

In the UK, the Financial Conduct Authority (FCA) defines a vulnerable customer as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.

This is a broad definition and does not differentiate between potential versus actual vulnerability and permanent versus transient vulnerability. In our view, this is because the FCA wants vulnerable characteristics to be considered at all stages of adviser-customer interaction.

In the context of the COVID-19 global pandemic, fintechs may find that a significantly larger percentage of their customer base may be vulnerable—whether due to lost/reduced income, health issues (physical or mental), or additional caring responsibilities, just to name a few.

This is certainly in line with the FCA’s guidance, which has identified four key drivers of vulnerability, namely:

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• health—health conditions or illnesses that affect the ability to carry out day to day tasks • life events—major life events such as bereavement or relationship breakdown • resilience—low ability to withstand financial or emotional shocks • capability—low knowledge of financial matters or low confidence in managing money.

The FCA has also issued draft guidance on what is required to drive better outcomes for vulnerable customers. Key to this is embedding a lifecycle approach to vulnerability that: • understands the needs of vulnerable customers, including drivers, impacts and effects of vulnerability • ensures staff have the requisite skills and capacity • takes practical action (e.g. product and service design, customer service and communications) • fosters continuous improvement, including monitoring and evaluation.

While this provides a strong framework for advisers to consider vulnerability, what it means in practice will vary depending on the products or services and potential and actual customer base. It will also need to consider any specific challenges customers are facing due to COVID-19.

Ethics & Governance

It is also worth noting that the ACCC has listed vulnerable and disadvantaged customers as an enduring priority in its 2020 Compliance and Enforcement Policy and Priorities. It will be interesting to see how this plays out in the context of COVID-19 and ASIC’s focus postRoyal Commission.

Design and distribution ASIC’s new design and distribution obligations go some way towards addressing vulnerable customers in relation to financial products. This is because these obligations require product designers to identify the target market for a product and ensure distribution (directly or indirectly) is limited to them.

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Vulnerability is not specifically regulated in Australia, but there are a range of regulatory requirements/ interactions that are relevant to vulnerability or touch upon vulnerability.

Australia’s position on vulnerability Vulnerability is not specifically regulated in Australia, but there are a range of regulatory requirements/interactions that are relevant to vulnerability or touch upon vulnerability.

Competition In 2011, the Australian Competition and Consumer Commission (ACCC) issued a compliance guide for businesses dealing with disadvantaged or vulnerable customers. The guide does not define who is a vulnerable customer, but it does identify a range of characteristics and includes some high-level principles and examples based on actual cases.

These characteristics include: • having a low income • coming from a non-English speaking background • having a disability—intellectual, psychiatric, physical, sensory, neurological or a learning disability • having a serious or chronic illness • having poor reading, writing and numerical skills • homelessness • being very young • being old • coming from a remote area, and/or • having an Indigenous background.

While useful, the guidance is framed in the context of unconscionable conduct and misleading and deceptive conduct. It does not take into account the broader concepts of fairness that underpin financial services and credit activities.

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Michele Levine, The Fold Legal Michele Levine is a senior associate at The Fold Legal, acting for a wide range of clients across financial services, credit, insurance and fintech. As a financial services professional, she has in-depth knowledge and experience in legal, governance and risk, and compliance.

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When determining the target market, product designers should identify any vulnerable customers and how the product caters to them. Implemented as intended, these obligations should ensure that products are fit for purpose and target the appropriate customers. This should shrink the potential vulnerable population somewhat, but is not a cure-all.

Why? Because the right customers may acquire the product, but nonetheless be vulnerable. The obligations also does not address the servicing of vulnerable customers.

ASIC’s priorities In light of COVID-19, ASIC has changed its priorities and will (among other things) “heighten its support for consumers who may be vulnerable to scams and sharp practices, receive poor advice, or need assistance in finding information and support should they fall into hardship”.

ASIC’s focus on consumer vulnerability has now been captured in its Interim Corporate Plan 2020–21, released on 11 June 2020. In this report, ASIC acknowledged the increased risk and impact of consumer vulnerability in the context of COVID-19, given: • heightened economic uncertainty and widespread job losses • increased scam activity and misleading advertising targeting susceptible consumers • reliance on temporary relief from federal government assistance, hardship arrangements and mortgage payment deferral • the widespread use and proliferation of credit • the risk of underinsurance, given the concurrent increase in insurance premiums and reduction in wages • early access to superannuation.

While ASIC’s focus on vulnerability is contextual and targeted, it does indicate the regulator has vulnerability considerations front of mind in its supervision of financial services and credit more broadly.

It will be interesting to see what ASIC does in the space postpandemic and if it will build on any lessons learnt.

Complaints The Australian Financial Complaints Authority (AFCA) has, since inception, been assessing complaints from a fairness and vulnerability perspective, particularly in the credit space.

From what we have seen, AFCA is applying industry codes as best practice, even if the provider is not a member and not required to be a member. This is an interesting development and, in our view, AFCA is likely to drive much of Australia’s approach to vulnerability.

Best interests Financial advisers have a duty to act in their clients’ best interests.

If a client is vulnerable and a financial adviser does not ask the right questions or act appropriately on their client’s responses, it will be difficult for them to demonstrate they discharged the best interests duty.

Financial advisers are generally in a sound position to uncover vulnerability, given the nature of their relationship, service scope and contact points. The fact find and review process present an opportune time for financial advisers to identify relevant vulnerabilities for clients.

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Responsible lending Responsible lending obligations require credit providers to consider any known vulnerabilities identified in the application process. The obligations do not prevent them from lending to vulnerable customers. Providers should have robust processes in place to identify relevant vulnerabilities. However, these processes may not identify customer vulnerability. Why? Because it requires full and transparent disclosure about matters consumers may not think relevant or want to discuss.

Industry codes We have also seen industry develop its own codes of practice. For instance, the draft Code of Practice for Buy Now Pay Later Providers, General Insurance Code of Practice (aiming to be operative 1 July 2020) and Banking Code of Practice (which commenced 1 March 2020). These codes all list common vulnerability characteristics and build in a range of protections for vulnerable customers.

Most require identification of vulnerable customers, adequate training of staff, and customer support (guidance, referrals or product/service changes). While a great step forward, these protections are high-level commitments. Advisers will need to flesh out what it means in terms of their products or service and broader customer experience.

This will be an interesting exercise for fintechs as many have frictionless customer onboarding and often minimal human-to-human touchpoints. What this means for fintechs in the context of a global pandemic is also untested and uncharted. Key to this will be having processes in place that identify vulnerable customers early on and respond appropriately.

Identifying vulnerability in the customer journey?

Think about the following aspects: • Product features—are they fair? Can they be customised?

What levers can be used for different customers?

• Service touchpoints—are there key touchpoints where you should ask customers to give you information? Will customer answers, behaviours or data raise red flags for you?

• Data—what data do you collect? What inferences can be made from that data? Can you incorporate artificial intelligence?

• Assessment—do you conduct any customer pre-vetting, risk or suitability assessment? Do you assess customers on an ongoing basis? How can you extend these to cover vulnerability?

• Training—how will you empower your staff to identify and respond to vulnerability?

• Recourse—what measures do you have in place for vulnerable customers?

• Review—what processes do you have in place to review your practices and build a culture of continuous improvement?

Vulnerability practices are still at an early stage. It will take time and many iterations before businesses can better cater and respond to customer vulnerability. COVID-19 provides fintechs with a greenfield opportunity to design and test vulnerability measures in a heightened environment with a potentially significant vulnerable customer population. For those who have not thought about it yet, it is important to consider vulnerability now in terms of product/ service design, distribution, and the broader customer journey. fs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. In terms of identifying a vulnerable customer, the UK Financial Conduct Authority (FCA): a) Adopts a lifecycle approach b) Differentiates permanent and transient vulnerability c) Differentiates potential and actual vulnerability d) Adopts a ranked/tiered approach 2. T he ACCC’s compliance guide for dealing with disadvantaged or vulnerable customers: a) Provides a clear definition as to what constitutes a vulnerable customer b) Is framed around unconscionable and misleading and deceptive conduct c) Is framed around broader concepts of fairness as a foundation for financial services and credit activities d) Avoids using actual cases and opts for abstract, albeit useful, examples 3. T he concept of vulnerability lacks regulatory definition in Australia. a) True b) False

4. A s highlighted by the author, in relation to identifying and managing client vulnerabilities, advisers can be challenged in terms of: a) Asking the right questions b) Full and relevant disclosure on the part of consumers c) Industry codes taking a high-level approach to consumer protections d) All of the above 5. A ccording to the author, what are some elements for consideration to help identify and manage client vulnerability? a) Recourse measures for those identified as vulnerable b) Assessment procedures regarding risk or suitability c) Service touchpoints regarding sourcing of client information d) All of the above 6. According to the author, AFCA uses industry codes as a best practice means to deal with vulnerability and fairness complaints. a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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What limits SMSF advisers should be aware of when providing advice

By Daniel Butler, DBA Lawyers

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper considers the boundaries, traps, allowances and nuances regarding SMSF, taxation, financial product and legal advice to help SMSF advisers avoid ‘stepping over the line’.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Limits SMSF advisers should be aware of when providing advice

T Daniel Butler

his paper examines what advice self-managed superannuation fund (SMSF) advisers can and cannot provide without ‘stepping over the line’ especially in providing taxation, financial product, or legal advice which they may not be permitted to provide.

For example, an adviser providing legal advice or services (for instance, preparing an SMSF deed update, binding death benefit nomination (BDBN) or deed of change of trustee) exposes themselves and their firm to significant risk and legal claims, especially if their professional indemnity (PI) insurance does not cover such activities. Moreover, an adviser providing financial product or tax advice can similarly be subject to significant liability and penalties.

This paper also provides some guidance on practical solutions to minimise risk and adopt best practice.

Can an adviser provide advice on SIS Act and superannuation law matters?

It may appear surprising to many SMSF advisers that unless they are a qualified and registered lawyer that they are generally prohibited

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on advising on superannuation law matters that impacts a person’s rights and obligations (as this constitutes a legal service), unless they are a registered lawyer who is authorised to provide legal advice for a fee.

Thus, are there any relevant carve outs or exceptions under the law for advisers to provide Superannuation Industry (Supervision) Act 1993 (SIS Act) advice?

Possible carve out for advisers providing advice on Commonwealth taxation law There may be a potential argument for advisers providing advice on Commonwealth ‘taxation law’ (as defined below) who are a registered tax practitioner with the Tax Practitioners Board (TPB) who may be able to rely on the ‘carve out’ under the Tax Agents Services Act 2009 (TASA). This Act gives ‘registered tax agents’ a right to provide ‘tax agent services’ (as defined in section 90-5 of TASA) as any service: (a) that relates to: (i) ascertaining liabilities, obligations or entitlements of an entity that arise, or could arise, under a *taxation law; or (ii) advising an entity about liabilities, obligations or entitlements of the entity or another entity that arise, or could arise, under a taxation law; or

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(iii) representing an entity in their dealings with the Commissioner …; and (b) that is provided in circumstances where the entity can reasonably be expected to rely on the service for either or both of the following purposes: (i) to satisfy liabilities or obligations that arise, or could arise, under a taxation law; (ii) to claim entitlements that arise, or could arise, under a taxation law.

The term “taxation law”, in section 995-1 of the Income Tax Assessment Act 1997 is taken to mean: (a) an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act); or (b) legislative instruments made under such an Act (including such a part of an Act); or (c) the Tax Agent Services Act 2009 or regulations made under that Act. Note therefore that an adviser who is registered with the TPB under TASA may provide advice on Commonwealth taxation law. This carve out does not, however, cover state taxes such as stamp duty, payroll tax, land tax and the wide array of other state taxes. Thus, an adviser providing advice on stamp duty, payroll tax or land tax for a fee without being a registered lawyer would be at risk of being convicted under the Legal Profession Uniform Law Application Act 2014 (Vic) (LP Act) and subject to a penalty of $41,305 or imprisonment for two years, or both.

Further, in any negligence action or similar claim against an adviser providing legal services where any loss or damage was suffered, that adviser is likely be tested against the standard of a reasonably competent legal practitioner providing a similar service. Moreover, and to add ‘salt to these wounds’, such an unqualified adviser is likely to have disqualified themselves under their PI insurance cover and will be responsible for any loss or damage suffered.

It is important to note here that an action in negligence can also be made directly to an adviser, even if they are employed on behalf of a company with insufficient assets or insurance. Thus, advisers need to be mindful of their personal exposure, as some of their ‘assets may be on the line’, even though they are employed by a company with limited liability.

Possible carve out for tax agents providing advice on SIS Act matters Thus, it is clear that a tax agent’s service such providing advice on Commonwealth taxation law can be provided by a tax agent registered with the TPB (without needing to be a lawyer). This opens up the question of how broad a range of services does ‘taxation law’ cover? In particular, this definition (refer to the definition above) includes: … a part of an Act to the extent to which the Commissioner has the general administration of the Act …

Fortunately, the Australian Taxation Office (ATO) as the compliance regulator for SMSFs administers certain

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parts of the SIS Act. Thus, it is arguable that an adviser may be able to provide certain advice in their role as a registered tax agent in relation to SIS Act matters.

In particular, the ATO has specific regulatory supervisory powers under the SIS Act that relate to SMSFs. In particular, the SIS Act confers powers on the relevant ‘regulator’ in respect of relevant parts or sections of the legislation. Section 6 of the SIS Act sets out the SIS Act’s powers for the various regulators. The ‘regulator’ for nonSMSFs is the Australian Prudential Regulation Authority (APRA) and the Australian Investment and Securities Commission (ASIC). Specific powers are also conferred on APRA and ASIC under section 6 of the SIS Act. The Commissioner of Taxation’s powers and functions are specified at sections 6(1)(e), (ea), (f), (fa) and (g), and (2AA) to (2AC) of the SIS Act. Of those provisions, section 6(1)(e) is the most relevant: the Commissioner of Taxation has the general administration of the following [SIS Act] provisions to the extent that they relate to SMSFs: (ia) Division 2 of Part 3B; (i) Parts 4, 5, 7 (other than s 68A) and 8; (ii) Part 12 other than section 105; (iii) Parts 13 and 14; (iv) Part 15; (v) Division 2 of Part 16 and s 128P; (vi) Part 17 other than s 140; (vii) Parts 21 and 24 (viii) Divisions 2, 3 and 4 of Part 25A.

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Daniel Butler, DBA Lawyers Daniel Butler, Director, DBA Lawyers, is one of Australia’s leading SMSF lawyers complemented by his taxation and commercial expertise. He is a Chartered Tax Adviser, Chartered Accountant and holds an MBA from the University of Melbourne.

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Superannuation

The above means that advisers who are providing advice on taxation law as a registered tax agent need to be careful to check that they are only advising in respect of SIS Act provisions in relation to which the ATO has relevant power. If a tax agent is advising on parts of the SIS Act that fall outside the specific SIS Act powers referred to above that fall within the ATO’s powers, for instance, advice in relation to a large APRA superannuation fund, then they will likely be providing legal advice that will expose them to the usual risks outlined in this paper if they are not a qualified lawyer.

For example, a registered tax agent may, under the above analysis, provide advice to an SMSF trustee on what acquisitions of assets are permitted under section 66 of the SIS Act (which falls under Part 7 of the SIS Act) because if this provision is contravened, the SMSF may be rendered non-complying and subject to a hefty tax liability and related penalties.

Note: in this example, the (SIS Act) advice provided has been linked with a tax outcome to minimise the risk of it constituting legal advice.

To explain further on this point, say an adviser merely stated to the SMSF trustee that it could not acquire a residential property from a member because the maximum penalty under section 66 of SIS Act is one year’s imprisonment. This advice, not be linked to a tax outcome, could constitute legal advice which must be provided by a lawyer.

However, in the prior section 66 example, linking the section 66 advice to a tax outcome (that is, a non-complying fund is taxed at 45%, etc.) provides the tax agent an argument that the adviser was not providing legal advice but was advising on ‘taxation law’ which includes parts of SIS Act that the ATO has power of administration over.

Naturally, a written disclaimer should also be provided by such an adviser to the client along the following lines: The adviser is not qualified nor registered as a lawyer and if you require legal advice you should consult a lawyer. Please let me know if you require a referral to a lawyer.

When in doubt, this disclaimer is worthwhile adding to any written or verbal communication (with a follow-up email confirming same) where there is any advice provided which may be in the nature of legal advice, even if the advice covered is within the specific parts of the SIS Act which the ATO administers.

Further, if one is not a lawyer, one should at least recommend that each client has any legal document impacting their legal rights and obligations reviewed by a lawyer.

Australian financial services licence regime Accountants and other SMSF advisers who are not covered by an Australian financial services (AFS) licence are not permitted to provide financial product advice or related financial services under the Corporations Act 2001 (Corporations Act).

While some commentators argue that the preparation of an investment strategy is not a financial product requiring a licensed adviser, an adviser who is not covered by a licence would be placing themselves at substantial legal risk of contravening the Corporations Act and potential exposure to damages and other claims by simply providing an investment strategy, especially if this proved unsatisfactory.

For example, a non-licensed adviser supplying an investment strategy covering investments that lost substantial value may be at risk in relation to an SMSF trustee that suffers any loss and damages from the fund’s poor investment performance.

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While the adviser may argue that the investment strategy template was merely provided to satisfy the SIS Act and Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) criteria and was not intended to be relied upon as a ‘real’ investment strategy, that adviser will be tested to the level of care and skill that a reasonably competent licensed professional providing investment strategies would prepare (especially after appropriate fact finding and disclosures of the service offering, etc.).

An adviser with an AFS licence should typically run through the following steps in relation to preparing an investment strategy for a client: • Agree upon their relevant terms of engagement and scope, and provide their financial services guide.

• Undertake an extensive fact-finding exercise.

• Undertake risk profiling of the client based on their goals and level of risks, etc.

• Provide a statement of advice.

• Provide an investment strategy based on the above.

• Ensure each step above is appropriately documented/recorded.

A non-licensed adviser who merely provides an investment strategy template without going through the above process, in addition to contravening the Corporations Act and not being covered by their PI insurance, would be measured to the standard of a reasonably competent professional adviser with an appropriate licence under the Corporations Act. Further, the SMSF auditor negligence case, Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, highlights how advisers can readily be liable for any shortcomings in an SMSF’s investment strategy.

Broadly, in this case, the SMSF auditor had an ‘indirect’ responsibility for checking the SMSF investment strategy for SIS Act/SIS Regulations and financial statement purposes, and the auditor was held primarily liable for the investment losses suffered.

Similarly, as noted in the above example, a non-licensed adviser simply providing an investment strategy template where the SMSF trustee suffers a material loss could potentially be liable for any consequential loss or damages suffered. Further, as lawyers often point out, there is always the risk of a vexatious litigant.

Moreover, assume that the template investment strategy also covered the requirement regarding the consideration of insurance in SIS regulation 4.09(2)(e) and that the non-licensed adviser wanted the client to also be covered from a SIS Act/SIS Regulations viewpoint.

Thus, the template investment strategy may include wording such as: The trustees have considered insurance cover on each member and have resolved not to implement any cover.

Now assume that one of the members, who happens to be the main ‘breadwinner’ of the family, dies without any insurance. The nonlicensed adviser could be liable for substantial damages on the basis that such an investment strategy was a recommendation not to implement insurance when that recommendation has subsequently proved to be inappropriate due to the death of the SMSF member.

This is where the investment strategy involves financial product advice under the Corporations Act. Such an adviser may be potentially liable in, among other things, negligence to the SMSF member or anyone else who may suffer due to no or inappropriate insurance in place.

An adviser must generally be licensed to provide a recommendation in relation to insurance. A non-licensed adviser can provide limited factual advice on the general types of insurance available to

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manage risk without making any recommendation, where a recommendation can include seeking to influence a decision in relation to a financial product.

Thus, SMSF advisers need to understand their limits, and contravening the Corporations Act can result in significant liabilities and penalties.

Prohibition regarding ‘engaging in legal practice’ Each jurisdiction in Australia prohibits non-lawyers engaging in legal practice or marketing services as being legal services when provided by an unqualified practitioner.

In Victoria, for example, the LP Act provides that (schedule 1 section 10(1)): An entity must not engage in legal practice in this jurisdiction, unless it is a qualified entity.

Penalty: 250 penalty units or imprisonment for 2 years, or both.

The penalty of 250 penalty units based on the 1 July 2019 penalty unit in Victoria of $165.22 per unit equates to a fine of $41,305. This can be imposed in addition to a two-year prison sentence. Despite the various law institutes and societies around Australia not being active at policing who provides legal services, these penalties are not something to readily ignore.

Further, it is worthwhile noting that an ‘entity’ is defined to include an individual, an incorporated body and a partnership. Accordingly, if one is, for example, an adviser, this prohibition applies regardless of how one’s business is structured.

This then raises the question of what it means to ‘engage in legal practice’. Section 6(1) of schedule 1 to the LP Act provides that ‘engage in legal practice’ includes practise law or provide legal services.

There is some difference from jurisdiction to jurisdiction in Australia on what constitutes to engage in legal practice and there is no ‘clear line’ of demarcation where ‘practising law’ begins and ends, and where the ‘provision of legal services’ begins and ends. However, where an adviser is preparing a document that affects an entity’s legal rights or obligations, they are likely to be providing legal services.

Moreover, where an entity provides advice in a context that the receiver of that information has reason to consider it is backed with relevant expertise and qualifications, then that is another factor in determining whether legal services were provided if the document or service was one that would normally be provided by a lawyer.

Table 1. Types of advice and who can provide Type of advice

Who can provide

Legal advice

• A lawyer who has a current practising certificate in accordance with the relevant state or territory legal profession legislation (registered lawyer).

Taxation advice––Commonwealth Taxation advice––state or territory SIS Act advice

• A registered tax agent with the TPB under TASA (tax agent).

• Registered lawyer.

• Registered lawyer.

• Tax Agent—provided the advice falls within the specified limits of section 6 of the SIS Act. • Registered lawyer.

Other superannuation law advice

• Registered lawyer.

Financial product advice

• An adviser with an appropriate class of authority under an AFS licence in accordance with the Corporations Act.

Source: DBA Lawyers

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. A non-licensed adviser providing an investment strategy template where the SMSF trustee suffers a material loss: a) Could be held to the standard of a reasonably competent non-licensed adviser b) Is likely to be immune from any consequential loss or damages suffered c) Could be potentially liable for any consequential loss or damages d) Will be indemnified if the template pertained purely to insurance recommendations 2. An adviser who is a registered tax agent may be able to provide SMSF advice on SIS Act provisions under which: a) APRA has relevant power b) The ATO has relevant powe c) ASIC has relevant power d) The TPB has relevant power 3. In any negligence action against an adviser providing legal services where any loss or damage was suffered, that adviser: a) Is likely to have forfeited their PI insurance cover b) Will be responsible for any loss or damage suffered c) Is likely to be tested against the standard of a reasonably competent legal practitioner d) All of the above.

4. A TPB-registered adviser under TASA: a) Can provide advice on Commonwealth taxation law without being a lawyer b) Must avoid any ‘advice’ in relation to insurance c) May provide advice on land tax without being a lawyer d) Can provide advice on Commonwealth taxation law, only if they have a law degree 5. A ustralian jurisdictions concur on what it means to ‘engage in legal practice’. a) True b) False

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As one would appreciate, it is a simple fact that each profession has its limits. Indeed, the various codes of professional and ethical behaviour of numerous professional accounting and financial planning bodies preclude their members, for good reason, from providing legal services. Obviously, no professional body would want its members contravening the law and exposing its members to significant risk.

One further major risk that many advisers may not realise is that their PI insurance cover is likely to exclude claims where the adviser or any of their staff contravene the law or act outside the bounds of their ‘licence’ (assuming they have an AFS licence or restrictions under their licensing arrangements with their relevant AFS licence holder).

For example, an SMSF adviser providing legal advice or services, such as preparing an SMSF deed update, BDBN, reversionary pension nomination or deed of change of trustee, exposes themselves and their firm to significant risk and legal claims especially if their PI insurance does not cover such activity.

Many SMSF advisers would not like to hear this truthful account of the law, especially as many document suppliers misrepresent the fact that their documents are signed-off or in some other manner approved by a lawyer. However, each of these typical documents, for instance, an SMSF deed update, BDBN, reversionary pension nomination or deed of change of trustee if prepared by a non-qualified lawyer involves the provision of legal services with the consequent liability and penalties outlined earlier. Certainly, an adviser can disclaim they are not providing legal services, but ultimately the adviser will be accountable if any legal challenge arises. Such disputes are increasingly surfacing, especially in relation to death benefit disputes.

Summary of who can provide what advice Table 1 contains a brief and broad summary of the types of advice on which various entities can provide.

As noted above, each profession has its limits, and SMSF advisers need to be aware of what they can and cannot do and when they may be assuming too much risk. They should then ‘team up’ with an appropriate range of other providers who are suitably qualified and competent to provide the services in a professional manner that is in each client’s best interests.

Conclusion Advisers need to be well aware of what they can and cannot advise on. Every adviser should aim to deliver the best quality advice and documents available. The best way to do so is to be aligned with a high-quality and appropriately qualified adviser network. If an adviser is not wanting to achieve best practice, then they should make sure they are informed of the risks, as what may appear less costly and more profitable now may readily change when the first legal dispute or claim arises. fs

6. An action in negligence regarding provision of legal services can be made directly to an adviser. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Actions needed for investment funds to manage liquidity risks

By Jon Ireland, Norton Rose Fulbright Australia

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper highlights key considerations for responsible entities regarding investment fund liquidity in light of ASIC’s concerns and expectations regarding management of liquidity risks and marketing and distribution strategies.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Actions needed for investment funds to manage liquidity risks

I

Jon Ireland

n response to recent market volatility and disruption, investment fund issuers and their boards have been reminded of their governance and conduct obligations in light of emerging liquidity risks. In addition, issuers and distributors will need to place additional focus on their marketing and promotion strategies.

The Australian Securities and Investments Commission (ASIC) has just completed a surveillance exercise in relation to advertising and disclosure. This initiative follows its request earlier this year that responsible entities (REs), as the operators of registered schemes (retail funds), assist the regulator with monitoring the liquidity risk situation by introducing notification measures.

This paper considers what these regulatory actions may imply for marketing and distribution strategies, existing compliance measures, as well as the testing of operational and risk management systems.

In recent months, Australian and global markets have been impacted by the disruption caused by the coronavirus (COVID-19) pandemic. This has played out in different contexts in asset management, but from a liquidity management perspective, it has been felt both at the underlying asset level and through trading operations. Certain asset classes and sectors have been more clearly affected such as retail, tourism and airlines. In addition, volatility in bond markets has caused certain unlisted bond funds to adjust their

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buy-sell spreads in order to cater for the pricing impacts. In the medium term, we may also expect to see investor-led changes to the patterns of applications and redemptions from investment funds as the broader economic effects of the pandemic play through. These factors all have the potential for a significant effect on the liquidity profile of certain investment funds.

Marketing and distribution issues arising from changing liquidity profiles On 15 June 2020, ASIC published high-level findings from riskbased surveillance undertaken into advertising material, website disclosure and product disclosure statements from managed funds during the COVID-19 pandemic. The results of that surveillance were concerning to the regulator in the sense that they indicated some funds were providing inadequate information or were not appropriately representing the key features of their investment products.

The surveillance caused ASIC to directly contact seven REs in connection with advertising and disclosure for 13 investment funds, holding collectively assets under management of $2.5 billion. ASIC confirmed that all seven REs had taken corrective action as a result of being contacted.

ASIC’s surveillance has highlighted potential risk areas for REs in their investment funds’ marketing and distribution strategies.

In this context, ASIC has existing guidance on the requirements

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under the Corporations Act 2001 for disclosure and advertising, including Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guide. In the case of the REs contacted, the gap in compliance centred around three key areas: • Unbalanced comparisons—REs had provided comparisons which focused on one particular aspect of the managed fund (e.g. higher returns), but without providing a fair and balanced indication of key differences and risks.

• Safety and stability representations—there were instances of managed funds being promoted as having little or no risk of capital loss, despite the funds’ underlying assets being subject to considerable risk and market volatility.

• Withdrawal representations—consumers had been given the impression that it was easy to withdraw funds on short notice, whereas the liquidity of the managed fund assets did not support this claim.

It is clear that in each of the areas identified by ASIC as a concern, the shifting market and asset-holding environment resulting from COVID-19 has created the potential for a mismatch between the way in which managed funds had previously been marketed and the

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current position. This evidences the need for marketing and distribution strategies to be kept under review in order to ensure alignment between disclosures and the current circumstances of the managed funds, particularly where this may change the risk profile. As ASIC deputy chair Karen Chester stated in a media release of 15 June 2020: “Current market uncertainty and volatility brings a heightened imperative for REs to ensure consumers are not misled or misinformed. This is critical when it comes to the investment product’s risk profile, returns and the fund’s liquidity.

“It is now widely acknowledged that disclosure alone is not enough to protect consumer interests. But balanced and accurate product information, especially about associated risks, remains fundamental for consumers to have at least a shot at understanding what they are getting into.”

In the case of the REs contacted by ASIC, the corrective action undertaken included: • Cessation of advertising of funds and a review of advertising content • Suspending the acceptance of investments into the funds • Withdrawal and updating of product disclosure statements

Jon Ireland, Norton Rose Fulbright Australia Jon Ireland is a leading corporate and financial services lawyer and national head of Norton Rose Fulbright’s funds and financial services practice.

He specialises in complex transactions, funds management and investment distribution, and advises Australian and international financial services clients on corporate, commercial and regulatory issues.

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• Updating disclosure more generally to provide a better balance and more prominent disclosure of investment risks and disclaimers • Clarification of withdrawal terms • Removal of comparisons being made on websites between the funds and other (lower-risk) products Quite aside from the potential for consumer harm that can arise from inappropriate advertising and disclosure, the types of corrective action illustrated in this case also demonstrate how disruptive a compliance failure can be for a managed fund offering.

Having to withdraw fund-offering documents and pause acceptance of new applications can have adverse reputational outcomes as well as substantial consequential operational impacts through the distribution chain.

Where funds are offered on platform menus or as part of model portfolio offerings, a withdrawal can potentially trigger a review of the product, and impact future investment flows. This scenario will also be a key issue for compliance and monitoring, as managed funds issuers transition into the upcoming design and distribution obligations regime next year.

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In light of this action from ASIC and the current environment, it is therefore arguably a good time for all managed funds providers (wholesale and retail) to take proactive steps to ensure that their marketing and distribution strategies are aligned with the market and asset trading position of their funds as well as regulatory requirements. Particular areas of focus in this respect may include: • ensuring existing advertising and promotional materials and also offering documents do not contain statements which misrepresent the liquidity position of underlying assets or give false assurance as to availability of funds • checking that the policies and procedures for marketing and disclosure materials are suitably up to date and reflective of ASIC’s guidance • ensuring all relevant staff and representatives who have responsibilities in this context are aware (e.g. through training) of the risk of inappropriate, false or misleading statements and that the risks are not exclusive to the retail market • placing a particular focus on certain types of statements such as that a fund may be ‘high yield’, ‘low risk’, or as to ‘guarantees’ or inappropriate comparisons with other types of products (e.g. term deposits) • monitoring use by representatives of social media, which is increasingly being relied on as a channel for sharing fund information.

Governance and conduct obligations also a concern in light of liquidity risks While liquidity risk management has had an established focus with ASIC for some time, it is emerging this year as a continuing theme.

As a precursor to ASIC’s surveillance on advertising and disclosure, earlier this year the regulator reminded REs of their overarching governance and conduct obligations in light of potential liquidity risks. This initiative had a much broader base and reminded REs and their boards of some key statutory obligations in this context: • The RE and its officers owe duties to the members of the scheme to ensure that they exercise their powers and carry out their duties in the best interests of the scheme members. Other general registered scheme obligations complement this primary duty, including ensuring that scheme property is valued at regular intervals appropriate to the nature of the property—a key obligation at times of liquidity uncertainty.

• The primary scheme-related obligations are complemented by an RE’s ongoing duties as an Australian financial services (AFS) licensee. These include doing all things necessary to ensure that the financial services covered by the AFS licence are provided efficiently, honestly and fairly, having adequate risk management systems and maintaining adequate financial and other resources.

In its letter to REs (published in April this year), ASIC also emphasised some more specific expectations in terms of scheme liquidity: • REs should be actively monitoring the levels of redemptions and applications in relation to their funds.

• The terms on which redemptions are made available should also be actively monitored for each scheme, including ensuring that the terms remain consistent with the underlying liquidity profile of the scheme’s assets. ASIC indicated that any mismatches between the redemption terms and underlying assets should be addressed.

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• The liquidity profile of the scheme should be actively assessed, taking both a short-term and a long-term view in order to ensure future redemption requests can be met. If a scheme becomes non-liquid, ASIC has reminded REs that they should determine whether redemptions need to be suspended in order to protect the interests of all members and to meet the statutory duties.

• REs should be monitoring the valuation of scheme property and its flow through to unit prices, including ensuring appropriate buy-sell spreads have been calculated and are being applied. In this respect, as mentioned earlier, we have already seen some movement in spreads as a response to bond pricing.

• ASIC’s expectations under Regulatory Guide 259: Risk management systems of responsible entities (RG 259) also need to be taken into account, particularly with regard to liquidity management, risk management systems and stress testing.

• Disclosure and member communications must be undertaken in a timely manner and consistent with the obligations for registered schemes (e.g. ensuring that members are treated equally and fairly).

In addition, ASIC has requested REs provide notifications to the regulator in the event that any scheme becomes non-liquid or if a decision is made to suspend redemptions. This notification is separate to the statutory breach reporting obligations. In that sense, it can be viewed as supporting ASIC’s monitoring activity in this area. It may also inform actions that ASIC takes in the future to assist REs and members, should issues arise.

Finally, ASIC in its letter reminded REs that, should they be in a position where they have to declare a scheme as non-liquid for an extended period of time, it may be relevant to consider applying to ASIC for hardship relief. Subject to an entity satisfying the relevant criteria,

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ASIC can grant relief to facilitate partial investor access to funds in cases of hardship and also provide rolling withdrawal relief to REs to simplify the procedure for periodic withdrawal offers.

In light of the above, there is a range of measures that REs can and should be adopting to ensure that their operational and regulatory responses to these developing market conditions are sufficiently robust to address liquidity issues. Key questions for REs to ask may include the following: • Have liquidity management crisis scenarios been updated (where necessary), mapped and stress tested pursuant to RG 259?

• Has a framework been established to account for current scheme financial obligations regarding distributions, redemptions, operational needs and unexpected expenses?

• Have authorisations been obtained and contingency plans been developed for appropriate responses?

• Do changes need to be made to factor in remote working?

• Has there been an assessment of operational resilience and any changes needed to meet recently modified regulatory obligations?

We have already begun to see and advise on proactive steps being taken by a number of REs, including upgrades to third-party asset manager monitoring, reviews of board delegation and reporting processes, as well as checks on current disclosure and constituent document terms.

While it remains to be seen whether there will be a repeat of the profound unlisted scheme liquidity issues that arose in Australia during the global financial crisis, many of the lessons learnt during that period will no doubt be relevant for the current and upcoming challenges faced by investment funds and their operators. fs

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The quote

While liquidity risk management has had an established focus with ASIC for some time, it is emerging this year as a continuing theme.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. What conclusion did ASIC reach after its RE review? a) Most funds were not appropriately representing the key features of their products b) Liquidity risk management is expected to become less of a concern c) Marketing and distribution strategies must be kept under review d) REs were too hasty in applying for hardship relief upon signs of illiquidity 2. Corrective actions undertaken by REs contacted by ASIC as part of its surveillance included: a) Mandating online comparisons between funds and other (low-er-risk) products b) Suspending acceptance of invest-ments into the funds c) Increasing advertising of funds to aid decision-making d) Prioritising disclosure for complex and difficult products 3. A SIC is yet to see REs take proactive steps to better monitor third-party asset managers. a) True b) False

4. The RE compliance gap identified by ASIC centred around: a) Unbalanced comparisons b) Safety and stability representations c) Withdrawal representations d) All of the above 5. I n terms of scheme liquidity, ASIC expects REs to: a) Monitor the valuation of schemes’ property and the flow through to unit prices b) Assess schemes’ short- and long-term liquidity profiles c) Monitor the terms for which redemptions are made available for each scheme d) All of the above 6. The requirement for REs to notify ASIC if a scheme becomes non-liquid is separate to the statutory breach reporting obligations. a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Electronic signing in a pandemic

By Luke Paterson and Rob Macredie, Jackson McDonald

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Knowing what constitutes a valid electronic signature is not always clear. This paper examines the interplay of state and emergency federal legislation regarding electronic signing in light of COVID-19.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Electronic signing in a pandemic

T

Luke Paterson and Rob Macredie

he global response to the coronavirus (COVID-19) pandemic has resulted in many ordinary business dealings now being undertaken remotely due to social distancing protocols and border shutdowns.

The resulting business environment has become one of increasing electronic commerce across many industries. As the isolation period continues, we expect to see businesses continuing to operate as far as possible by replacing physical with electronic means wherever possible, with the aim of mitigating disruption to their operations as much as practicable.

One key aspect of electronic commerce which is already well-positioned for this situation is the signing of documents by electronic and digital means—the electronic transactions legislation serves to make electronic signatures as valid as physical signatures, provided certain criteria are satisfied. However, the use of electronic signatures to achieve efficiencies and more easily do business without the need for physical proximity does require careful consideration, as there are a number of tips and traps that could result in unintended consequences for the unwary. This paper answers some of the most frequently asked questions.

What constitutes an electronic signature?

An electronic signature is any method by which a person ‘signs’ a document through a mark or representation of a name or signature as opposed to a physical ‘wet ink’ signature.

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Example. Common types of electronic signatures Some common examples of electronic signatures that are regularly used, especially where there is a lack of physical proximity of the relevant parties, are pasting an image of a signature into an execution block, signing a document on a stylus or touchscreen, and using the ‘signing’ function of a digital signing platform (like DocuSign).

Is there a difference between electronic and digital signatures?

It is worth noting that there is an important distinction between virtual or remote signatures and digital signatures. Virtual or remote signing usually refers to the practice of a party signing a document with a wet ink signatures in separate locations, exchanging copies of the signed counterparts by email or other electronic means; and then after exchange, compiling the original counterparts.

On the other hand, a digital signature refers to an electronic signature that can be verified using a process that effectively validates and connects a signature to a specific person (without any printing and through a platform like DocuSign).

When are electronic signatures valid?

Generally, there are no restrictions on the use of electronic signatures by companies in relation to their business operations, however,

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their effectiveness will depend upon the intended use (for instance, whether or not a binding contract is required) and whether certain requirements have been met in respect of the signature.

Electronic signatures are valid at general law, and are also given validity under the Electronic Transactions Acts (ETAs) of each state if the electronic signature complies with the relevant statutory requirements. Prior to 6 May 2020, the ETAs did not apply to certain transactions or communications, including any requirement under the Corporations Act 2001 (Corporations Act) (for instance, the signing requirements under section 127 of this Act).

However, in response to the COVID-19 pandemic, the Federal Treasurer issued a modifying instrument to allow for electronic signatures and split execution via electronic communication under section 127 (as detailed in the following section of this paper).

New modifications to electronic signing requirements under Corporations Act The Federal Treasurer recently issued the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 (Instrument) modifying the operation of sections 127(1) (documents executed without seal) and 129(5) (assumptions that can be made with documents signed under seal) of the Corporations Act, using an emergency instrument-making power under the Coronavirus Economic Response Package Omnibus Act 2020.

In effect for the period 6 May 2020 to 6 November 2020, the Instrument modifies section 127(1) to enable a company to execute a document electronically if the authorised signatory uses electronic means which: (a) reliably identify the signatory, and (b) indicate the signatory’s intention about the contents of a document.

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Additionally, the Instrument allows a company the benefit of split execution of documents by company directors, company secretaries and sole company directors by allowing those signatories to either sign a physical copy or counterpart of a document.

The Instrument also modifies section 129(5) allowing a counterparty to rely on the assumption that a document, signed under section 127(1) of the Corporations Act, is valid and effective, providing the requirements described above are compiled with and, in the case of sole directors and sole company secretaries, the person executing the document is identified in the electronic communication as occupying both offices.

However, at the time of publication, Australia has not enacted any legislation allowing electronic witnessing of Wills, enduring powers of attorney, enduring powers of guardians, affidavits or statutory declarations.

Consider Companies should be mindful of this exception, especially when an authorised representative of a company seeks to execute one of these documents on behalf of the company electronically.

Other temporary changes to the law Each state and territory in Australia has enacted legislation and legislative instruments to amend state-based law regarding the execution and attestation of deeds, agreements and other documents (including to temporarily permit the audio-visual attestation of deed).

While this paper does not examine these temporary changes, they are generally designed to better facilitate electronic and digital execution of documents. These changes are not uniform across each state and territory, and we suggest seeking advice in relation to the status of the law in the relevant state.

Luke Paterson is a corporate and commercial lawyer, and partner at Jackson McDonald.

His particular focus is on corporate transactions, family and private business and start-ups.

Luke’s expertise includes M&A, private advisory, fundraising, joint ventures, and procurement.

Rob Macredie, Jackson McDonald Rob Macredie is a special counsel at Jackson McDonald, and advises companies on corporate and commercial law issues across many industries. His areas of expertise include M&A, capital raising, private equity, investment funds, joint ventures, and commercial contracts.

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What are the challenges with electronic signing?

While Australian law has developed to recognise the use of electronic signatures, the law is not always clear as to whether electronic signatures can or should be used for certain classes of documents.

Deeds

To be executed as a deed, the general view is that a document must still be in paper and signed with wet ink, unless a deed is executed in New South Wales (which permits electronic execution of deeds). In addition, the requirement for an individual’s execution of a deed to be witnessed presents a challenge for esigning. This is because attestation (witnessing) involves the witness actually being physically present when, and sign the deed when, the relevant party signs the deed (however, as mentioned, some states have made temporary changes to permit audio-visual witnessing). Further, the ETAs do not apply to the attestation of deeds in Western Australia, so ETAs cannot be relied on to validate electronic attestation.

Some documents must be original

In practice, wet ink signatures are required for a range of documents, including: • documents to be registered at [the Western Australian Land Information Authority] Landgate (e.g. a transfer of land, caveats, discharges or mortgage, etc.)

• forms and documents required by the Australian Securities and Investments Commission (which may now be covered under Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 or the Australian Securities Exchange • other documents that have registration and filing requirements which require a physically signed original to be lodged with a relevant authority.

Execution under section 127 of the Corporations Act

Most companies sign documents under section 127 of the Corporations Act. The ETAs do not usually apply to execution under section 127 of the Corporations Act, however, see the preceding commentary in this paper regarding the emergency Instrument modifying this position.

Recent cases have also suggested that the statutory assumptions should not be limited to wet ink signatures. There is an emerging judicial view that documents can be signed by the placement of electronic signatures under section 127, but the question is not entirely free from doubt.

Split execution

Can two officers of a company sign a separate identical counterpart of a document on behalf of the company, instead of both officers signing a single counterpart? This practice of ‘split execution’ is often utilised where the officers are in different locations, which is entirely possible in a COVID-19-affected business environment.

A recent case, Bendigo and Adelaide Bank Limited v Pickard [2019] SASC 123 (but compare Re CCI Holdings Ltd [2007] FCA 1283 at [6]–[7]), adopted a strict view that the practice of split execution does not satisfy the requirements of section 127, nor

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does the practice of electronically signing and then transmitting an electronic copy of the document for countersignature by the other officer. However, note that the current legislative modifications to split execution as described above (which, at the time of writing, only apply until 6 November 2020).

How can a business best use electronic signatures during an isolation period?

Business continuity plans should: • address how contracts can be electronically signed by the business, and • put in place practices to mitigate risks that contracts are invalidly signed by counterparties.

At a practical level, this may include considerations examined in the following discussion.

Appointing an attorney for wet ink signatures

If it is likely that company officers will be unavailable during a COVID-19 lockdown or remote working environment, the company could execute a power of attorney so that one or more persons can sign those documents that must be signed by a wet ink signature.

For instance, if documents need to be registered at Landgate in Western Australia, the power of attorney will need to be in registrable form and registered at Landgate.

The power of attorney (being a deed and not covered by the ETAs) will itself need to be property executed on behalf of the company with wet ink signatures.

Use of digital signatures

Digital signatures come with the benefit of an authentication function (including date stamping and tracking) on a digital signing platform. This provides a reliable method to authenticate the identity of the person who signed the document, but it does not eliminate all risk.

Like any handwritten signature can be forged, a digital signature can be ‘forged’ if the person does not protect their login information, is hacked or allows unauthorised use of the person signing by digital means.

Asking for evidence of authority

It is reasonable to request evidence that a company has properly authorised the entry into the document, including through a copy of a board resolution authorising the company and its relevant officers to execute the document, including electronically. This will be particularly relevant where a document is signed electronically under section 127 of the Corporations Act. It is also prudent to request supporting confirmation from each signatory that the application of their electronic signature has been personally authenticated by them (that is, email or phone confirmation from the relevant signatory).

Preparing for split execution

During the COVID-19 pandemic, split execution may be unavoidable. In these circumstances, please note the preceding considerations and the modification of usual requirements for split execution.

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Ensuring other requirements for a contract are met

While this paper focuses on signing by electronic means, parties should not overlook that effectively signing a document is just one aspect of creating a valid and enforceable agreement or deed.

Whether an electronically signed document is valid and enforceable will also depend on:

• the legal nature of the entity signing (i.e. a foreign company must sign in accordance with the laws of the place of its incorporation) • whether the relevant contractual and statutory requirements have been satisfied • the capacity in which a person signs (i.e. as an attorney). fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Emergency modifications to section 127 of the Corporations Act in re-sponse to COVID-19: a) Require a counterparty to prove that a document signed under section 127(1) of the Corporations Act is valid and effective b) Forbid split execution of documents by company secretaries c) Allow a counterparty to assume that a document signed under section 127(1) of the Corporations Act is valid and effective d) R emove the distinction between virtual or remote signatures and digital signatures

4. Changes made by the government’s modifying instrument to section 127 of the Corporations Act: a) Reflect the 2019 Bendigo and Adelaide Bank case decision b) Allow for electronic signatures and split execution c) Place restrictions on the use of electronic signatures by companies d) None of the above 5. An electronically signed document’s validity and

2. In terms of electronic witnessing of deeds, the Electronic Transactions Acts of each state and territory: a) Are overridden by the Corporations Act b) Vary regarding allowing this practice c) All allow this practice

enforceability depends on: a) The legal nature of the entity signing b) Satisfying relevant contractual and statutory requirements c) The capacity in which a person signs d) All of the above

d) All forbid this practice 6. Signing a document in wet ink and exchanging copies 3. Electronic signatures are valid at general law. a) True

b) False

electronically is a type of digital signature. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Retirement:

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Is your client’s principal home really exempt?

By Mansi Desai, Challenger

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The principal home is generally an exempt asset, however, situations exist where this does not apply. This paper looks at how to meet the exemption criteria, and highlights unforeseen factors that may affect a client’s homeowner status.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Is your client’s principal home still exempt?

F Mansi Desai

rom a social security assessment point of view, the principal home is generally an exempt asset irrespective of the value of the home. However, there can be circumstances when the exemption may not apply. Many clients may not be aware that simple changes like moving to another home or renting out part of the home to a paying guest can impact their Age Pension entitlement. Therefore, advice plays an important role to help clients understand the rules and minimise any impact on current or future Centrelink entitlements. This paper discusses: • how Centrelink defines and assesses the principal home • the exceptions to how Centrelink determines if an individual is a homeowner.

Defining principal home For the home to be exempt from an assets test perspective, it should meet the following criteria: • A house including the adjacent land which the individual uses for living • the land adjacent to the dwelling is not more than two hectares or if the adjacent land does exceed two hectares, it meets the extended land use test, and • The land is held under the same title as the land on which the house is located.

An individual cannot have more than one principal home. If an

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individual has more than one home, then the principal home is the one in which they spend the greatest amount of time.

It should be noted that if they spend the same amount of time in each of them, then the most expensive home out of the two will be the principal home.

Defining adjacent land

Adjacent land includes the land which the house is built on as well as the land surrounding the principal home that is held under the same title. There are two tests that are used to determine the exempt status of the adjacent land.

Private land use test

This test enables the exemption of the adjacent land not exceeding two hectares, provided the land is used primarily for private and domestic purposes in association with the house. This means if adjacent land is primarily used for commercial purposes, it fails the test and is assessed as an asset. Vacant and unused adjacent land is considered to be used for private and domestic purposes.

Extended land use test

If an individual meets the eligibility criteria, then they can have adjacent land that is more than two hectares also exempt from the assets test.

To be eligible: • the individual or the partner should be above Age Pension age*

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• the individual or their partner should be qualified for an Age Pension* or a Carer Payment • the individual should have a long term (20 years) continuous attachment** to their principal home • the individual should make effective use of productive land to generate an income, taking into account their capacity to do so. *If they are qualified for a Department of Veterans’ Affairs Service Pension, they should have reached qualifying age for Service Pension age, which is 60. **Owned and lived in the home or the property (including those held on multiple adjoining titles) for a continuous period of 20 years.

Effective use of land includes the individual or their family running a business on the land or leasing the land for a commercial rate of return. Centrelink considers a range of factors such as geographical location, condition of the land, health and family situation of the individual in determining whether this requirement is satisfied. The individual is required to provide some supporting evidence or declaration that they have lived on the property for 20 years.

Exceptions to land on one title document

There are three exceptions to the general requirement where the adjacent land to the principal home must be on the same title. Under these exceptions, where the land is held on more than one title, it can be treated as if it was held on the same title as the individual’s house.

Exceptions include: • where the house is located partly on both blocks of land • where all or part of both the blocks of land are protected by law (Commonwealth, state or territory) because of the land’s natural, historic or Indigenous heritage and therefore either of the blocks cannot be sold separately, or • where alienation of one of the blocks would seriously undermine the function of the home as a dwelling.* Structures that are separate or not attached to the principal home are not covered by the exception. For instance, a separate home on block B which is not connected to the home built on block A in Example 1 is not covered by the exception. *The exemption is not available if the structure and essential housingrelated infrastructure is altered since 8 May 2006, and which previously existed on one title.

Example 1. Exception to the land on one title Two blocks, A and B, are held on a separate title. The principal home is built on block A. If block B holds an extension that was made 15 years ago and is connected to the principal home, then block B can be treated as if were held on the same title document.

Exceptions to the principal home exemption Despite the nature of its exempt status, certain parts of the principal home may be assessed as an asset. Following are situations where certain parts of the home do not form a part of the principal home and are therefore not exempt.

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Operating business from principal home

If the individual operates a business from their home, the determination of whether the home is exempt or not is made on a case-by-case basis. If part of the property is used for both domestic and business purposes, such as a home office to work from home, then that part of the property forms a part of the principal home and is therefore exempt.

However, if distinct parts of the property are specifically used only for business, then those parts do not form a part of the principal home and are therefore assessed as an asset. The individual needs to quantify the value for the part of the property that is not treated as the principal place, and that part will be assessed as an asset.

Self-contained area

If the home includes a self-contained area (area with private or separate sleeping, cooking and bathroom facilities) then the assessment on whether the self-contained area forms a part of the principal home exemption or not depends on what the area is used for.

If the self-contained area is: • vacant or let to a near relative,* then the area is a part of the individual’s principal home and is therefore exempt • let to a person other than a near relative,* then the area is not a part of the individual’s principal home and is an assessable asset. *A member of the immediate family (partner, parent, sister, brother or child) or an adopted child.

Assessing dual occupancy homes

A dual occupancy home is where there is a detached dwelling or block of units on the same land and on the same title where a home already exists. When determining whether the dual occupancy home forms a part of the principal home or not depends on who paid the construction or purchase costs. It should be noted that a dual occupancy arrangement does not alter the ownership of the property. The assessment criteria is only for social security assessment purposes.

Mansi Desai, Challenger Mansi Desai, DipFP, BCom, is a technical services analyst at Challenger.

She has over 15 years’ financial services industry experience including sales, compliance and technical roles.

Previously, she was a technical consultant at MLC.

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Retirement

Income support recipient pays the construction or purchase costs

If the income support recipient pays for the construction or purchase costs, then the assessment of the dual occupancy is based on whom the property is let out to. If the dual occupancy is: • left vacant or let to a near relative, then the area is considered to be a part of the individual’s home and is therefore exempt • let to a person other than a near relative,* then the area is not considered to be a part of the individual’s principal home and is assessed as an asset. *A member of the immediate family (partner, parent, sister, brother or child) or an adopted child.

Income support recipient does not pay the construction or purchase costs

If anyone other than the income support recipient paid for the construction or purchase costs and has a beneficial or equitable right or interest in the dual occupancy, then the dual occupancy home is not assessed as an asset for the income support recipient.

The surrounding adjacent land is still assessed using usual principal home assessment rules for the income support recipient.

Example 2. Disregarding the second house as an asset Catherine is a pensioner and lives in her own home which is located on a farm that she owns. The farm and her principal home are on the same title. Her son works on the farm and builds a second home on the farm using his own money. He has an agreement with Catherine that the house belongs to him for life. Therefore, the value of the son’s house is disregarded when assessing Catherine’s assets for Age Pension purposes.

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Defining homeownership Centrelink defines a homeowner as a person who has: • a right or interest in the place they live in, and • a reasonable security of tenure as a result of that right or interest.

An individual is also a homeowner if they are a member of a couple, and the legal title of the home is jointly owned or owned only by their partner. This can include a campervan, caravan, transportable home or even a boat, if they have a reasonable security of tenure in it

Exceptions to how the homeownership status is determined There are certain situations where the individual may not meet the general definition and is still treated as a homeowner. These are covered in the following section.

Selling the principal home

When an individual sells their principal home and intends to use the sale proceeds to buy another principal home, there is an assets test exemption available. The amount of sale proceeds which are intended to be applied towards the new principal home are not assessed as an asset for a period of up to 12 months from the date of the sale of the old house. Only the value of the amount intended for the purchase, build, rebuild, repair or renovation of a new principal home can be exempt.

This exemption does not apply if: • there is no intention to use the sale proceeds to purchase, build, rebuild, repair or renovate, and • the individual has any other principal home.

It should be noted that only an assets test exemption applies. There is no income test exemption applicable.

Example 3, Selling the principal home Mary, an Age Pension recipient, wishes to sell her home in Sydney and buy another home in Canberra, close to where her daughter lives. She sold her home in Sydney for $1,200,000 in June 2019 and deposited the money in her bank account. Mary informed Centrelink about the sale and her intention to use only $1 million of the total sale proceeds to buy a new home.

Assessment of sale proceeds for Mary’s Age Pension • The sale proceeds of $1,000,000 are exempt from the assets test and are deemed for income test purposes.

• The remaining $200,000 is not exempt from the assets test, given that Mary does not intend to use those funds for purchasing another home. Therefore, $200,000 is treated as an asset immediately and is subject to deeming.

• Mary is treated as a homeowner, and her pension continues to be paid based on homeowner threshold.

In December 2019, Mary informed Centrelink that she has purchased another home in Canberra for $1 million. Mary continues to retain her homeownership status, and the funds used to purchase the new home are now exempt and are no longer deemed for income test purposes.

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Extension of the exemption timeframe

The period of 12 months can be extended to 24 months if the individual, in an endeavour to purchase, build, rebuild, repair or renovate their new principal home: • made reasonable attempts • made those attempts within a reasonable period after selling their prior home, and • experienced delays beyond their control.

The individual continues to be a homeowner during this exemption period. If another home is not built or purchased within the allowable timeframe, then the individual will be a non-homeowner and the proceeds will no longer be subject to the assets test exemption. Even though the sale proceeds are exempt from the assets test, if retained in the bank account or invested in a financial asset, it will be subject to deeming for income test purposes.

Example 3a. Selling the principal home Mary, from the above example, will be treated as a nonhomeowner and her sale proceeds of $1,200,000 will be assessed as a financial asset subject to deeming if she is unable to buy another principal home before: • her 12 months complete from the date of sale, or • her 24 months complete from the date of sale if she is granted an extension.

Care situations

When an individual vacates their principal home to enter in to a care situation (including community-based care, long-term hospital stays and residential care), an exemption applies to the home under the assets test for a period of up to two years and the individual continues to be a homeowner.

If after two years, the individual has not returned to the principal home, then they are treated as a non-homeowner and the home will be treated as an assessable asset.

If the individual temporarily moves back to the home, a new twoyear exemption period typically does not restart when they re-enter the care situation.

The exemption no longer applies if the home is sold during those two years. This applies even if a new home is purchased with those proceeds. In such cases, the proceeds from the sale are immediately assessed for the assets and income tests.

Temporary vacation of the property

When an individual vacates their principal place of residence tempo-

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rarily, the home continues to be exempt and the individual continues to be a homeowner for a period of up to 12 months. An absence is always regarded as temporary unless the individual expresses a definite intention to not return to their principal home.

If the vacation of the property is not temporary, the home is assessed as an asset at the time the property is vacated, and the individual is treated as a non-homeowner. In cases where the property is lost or damaged, the exemption period may be extended from 12 months to 24 months if certain criteria are met.

This exemption is only available if: • the loss/damage was not intentionally caused by the individual • reasonable attempts were made to repair, rebuild or sell the home or purchase or build another home • those attempts have been made within a reasonable period after the loss/damage • delays were experienced beyond their control in purchasing, building, repairing, or renovating another home.

Special residences

‘Special residence rules’ are used to determine the homeowner status of a person living in special residences. Special residences include a retirement village, granny flat or a sale leaseback home.

However, instead of the general definition, homeownership status is determined by the entry contribution (EC) which is paid to live in these ‘special residences’. The definition of the entry contribution is based on the type of special residence the individual moves in. An EC is the: • total amount the individual pays as a lump sum in order to secure accommodation in a retirement village • usually the value of assets or funds transferred to establish the granny flat right, or • the deferred payment for a person living in a sale leaseback residence.

In order to assess the homeownership status, the EC is compared to extra allowable amount (EAA). If the EC is less than or equal to the EAA, then the individual is treated as a non-homeowner, and the entry contribution is assessed as an asset. However, if the EC is more than the EAA, then the individual is treated as a homeowner and the entry contribution is not assessed as an asset. The EAA ($214,500 for 2020/21) is the difference between the non-homeowner and homeowner assets test limits.

Estranged couples

The homeownership status of a couple is impacted if they are estranged. If the couple is permanently estranged and not living in the home they own, the individual is treated as a single non-homeowner.

However, if they are estranged and living in the home they own or

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are temporarily estranged and not living in the home they own, the individual is treated as a single homeowner.

Home owned by a company or trust

An individual is treated as a homeowner and the home is as assessed as their principal home if: • the home they live in is owned by a company or trust • they have a right or interest in that home, and • the right or interest gives them a reasonable security of tenure.

The right or interest in the home could mean they are a shareholder or a director or a trustee or a beneficiary of that trust or company that owns the home.

In such arrangements, the individual could obtain a reasonable security of tenure in many ways. This could include an agreement that gives the individual a right of occupancy at will or a long-term lease or a life tenancy.

To summarise, in most cases, where the individual is classified as a homeowner, the value of their home is exempt, and where the individual is classified as a non-homeowner, the value of the home is assessable. fs Appendix Exception

Criteria

Homeownership status

Means test

Sale of the home

Purchases another home within 12 months or 24 months (if extension was granted) from the date of sale

Homeowner

Sale proceeds intended to purchase a new home are exempt for assets test only

Does not purchase another home within 12 months or 24 months (if extension was granted) from the date of sale

Non-homeowner

Sale proceeds assessed for assets and income test

Up to two years

Homeowner

Home is exempt under the assets test

More than two years

Non-homeowner

Home assessed for assets test

Up to 12 months or 24 months (if exten-sion was granted)

Homeowner

Home is exempt

More than 12 months or 24 months (if extension was granted)

Non-homeowner

Home assessed for assets test

Entry contribution > extra allowable amount

Homeowner

Entry contribution is exempt

Entry contribution <= extra allowable amount

Non-homeowner

Entry contribution assessed for assets test only

Vacating home for care situation

Temporary vacation of property

Special residences

Source: Challenger

The information in this update is current as at 5 August 2020 2020 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670, the issuer of the Challenger annuities. The information in this update is general information only about our financial products. It is not intended to constitute financial product advice.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In terms of vacating a principal place of residence: a) If it is not temporary, the home will not be assessed as an asset b) If it is temporary, the individual continues to be a homeowner for up to 24 months c) It will be regarded as permanent, unless an intention to return is made d) If it is temporary, the home is exempt for up to 12 months 2. To meet the extended land test eligibility criteria, an individual must: a) Be below Age Pension or DVA Service Pension age b) Desist from using any productive land for an income c) Be qualified for an Age Pension or Carer Payment d) Have lived in the property for a continuous period of 25 years 3. Tom sets up an office in his kitchen to work from home.

How does this affect his exemption status, and why? a) The kitchen is used for business, and assessed as an asset b) The kitchen is part of his principal home, and exempt c) The entire home will now be classified as a business, and assessed as an asset d) Only the work area in the kitchen will be assessed as an asset 4. Elle owns two blocks of land. She builds a house on one block. Ten years later, she builds an extension on the other block, but connected to her house. What bearing does this have on Elle’s exception status, and why? a) S he will be covered because the extension is connected to the principal home b) She will not be covered because the extension is on another block c) She will not be covered because 10 years elapsed before the extension was built d) She will be covered because the extension is on a separate block 5. Under certain circumstances, an individual can have more than one principal home. a) True b) False 6. A retirement village resident’s homeowner status is determined by their entry contribution. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FS Advice

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News and opinions

White papers

AMP

6, 8,

ANZ 6 ASIC

8, 9, 10

Bendigo and Adelaide Bank

15

BT Financial Group

11

Centrepoint Alliance

11

Applied Financial Planning FASEA requirements for aged care advice Global banks’ resilience in the face of crisis

26 31

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Charter Financial Planning

6

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Commonwealth Bank

6

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38

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CountPlus 11 FASEA

6, 10, 12

Fitzpatricks 11 Fortnum Private Wealth FPA Hillross Financial Planning

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Interprac 6

Superannuation What limits SMSF advisers should be aware of when providing advice

50

Investment Actions needed for investment funds to manage liquidity risks

55

IOOF 6 Madison Financial Group

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Compliance

National Australia Bank

6

Electronic signing in a pandemic

OneVue 9 Paragem 11 Sequoia 6 Trio Capital

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Victims of Financial Fraud

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Yellow Brick Road

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