ob体育鈥檚 assessment of advice provided by financial services firms to investors about capital protected products found many advisers did not make adequate enquiries into their clients鈥� personal circumstances.
Report 377 Review of advice on retail structured products (REP 377) found that in approximately half of the files, there was insufficient evidence to show that advisers had met their obligations to investigate clients鈥� relevant circumstances, the subject matter of the advice and then to provide appropriate recommendations.
This report is part of ob体育鈥檚 ongoing review of the provision of complex capital protected products to retail investors. A report in May 2013 found significant concerns around the marketing of such products (refer: 13-093MR).
ob体育 reviewed five pieces of advice from each of ten firms providing these products to retail investors. The majority of advice reviewed was provided in 2012 and had to comply with section 945A of the Corporations Act 2001. This was the part of the law that required an adviser to have a 鈥榬easonable basis鈥� for the advice. That section of the law has since been replaced by the Future of Financial Advice (FOFA) reforms, which include a requirement that advisers must act in the best interests of their clients.
ob体育 Deputy Chairman Peter Kell said, 鈥楾he findings were disappointing and with FOFA now raising the bar for advisers, our warning against inappropriate selling of complex products cannot be clearer.
鈥楥apital protected products are complex and can be difficult for investors to understand. Advice about them needs to be appropriate and accurate. Where it isn鈥檛, we will take action.
鈥榃here our review identified concerns with the advice provided, we are analysing the cause of the problem and considering appropriate regulatory outcomes. In some cases, we are conducting further surveillance with a view to enforcement action where merited.
鈥榃e will also ensure that where we have significant concerns with the advice provided to individual clients, those clients have their position appropriately reviewed.鈥�
REP 377 found:
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advisers narrowing the scope of advice to a single structured product or focusing on one product, rather than considering a range of potentially suitable products
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a 鈥榦ne-size fits all鈥� approach, with inadequate consideration of the client鈥檚 needs and circumstances and alternative strategies/asset allocation, with a lack of diversification, and
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unsuitable gearing recommendations or a lack of evidence to support gearing recommendations - for example, to clients who may not have been able to afford the loan interest payments, or tax-driven advice where relevant risks were not highlighted.
REP 377 also details concerns with disclosure, including misrepresentation of the features of products recommended, including the degree of safety or capital protection.
Background
The advice review included a sample of five advice files from each of 10 Australian financial services licensees (50 advice files in total). The sample was not intended to be representative of the whole market for structured products advice. For example, it included some advice files and products where we perceived there was potential for inappropriate advice, though most files were not selected for this reason.
REP 377 is part of ob体育鈥檚 crackdown on the sale of complex products promoted as having capital protection or a capital guarantee, or as offering 鈥榗ontingent鈥� or 鈥榗onditional鈥� forms of protection. In May 2013 a review of the sector found there was a need to ensure that marketing and advice directed at retail investors is more appropriate and accurate, especially where an investor鈥檚 capital was at risk (refer: 13-093MR). The review鈥檚 findings were summarised in Report 340 鈥楥apital protected鈥� and 鈥榗apital guaranteed鈥� retail structured products (REP 340).
Following the release of REP 340, Commonwealth Bank of Australia, Credit Suisse Investments Services (Australia) Limited, HSBC Bank, Instreet Investment Ltd and UBS AG (Australia branch) amended or withdrew certain promotional materials for complex structured products, to address ob体育鈥檚 concerns (refer: 13-176MR and 13-246MR).
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