What is “Financial Product Advice” for AFSL Holders in Australia?

Introduction

Providing “financial product advice” is a fundamental financial service for many Australian Financial Services Licence (AFSL) holders. For those operating under an AFSL, a clear understanding of what constitutes financial product advice under the Corporations Act 2001 (Cth) is essential. This understanding is critical to ensure that AFSL Holders operate within the bounds of their licence and meet their regulatory obligations when providing financial services.

This guide aims to clarify and explain the concept of financial product advice for AFSL holders in Australia. It will explore the meaning of financial product advice, clarify the distinction between personal advice and general advice, and highlight key considerations for financial advisers. Ultimately, this guide is designed to assist AFSL holders know what they need to do to legally provide financial product advice within the Australian regulatory landscape.

‘Financial Product Advice’ Must Be a Recommendation or Opinion

A Recommendation or Opinion Triggers Regulatory Scrutiny

Under section 766B of the Corporations Act 2001 (Cth), financial product advice is defined as a ‘recommendation’ or ‘statement of opinion’, which clarifies what constitutes advice in the realm of financial products. This definition ensures consumer protection during financial decision-making. Crucially, Corporations Act 2001 (Cth) specifies that such advice includes:

• Direct recommendations (suggesting a specific course of action related to a financial product).
• Statements of opinion (assertions of belief or judgement about a financial product’s features or suitability).

Additionally, the Corporations Act 2001 (Cth) extends this definition to reports containing either a recommendation or statement of opinion. For these components to qualify as financial product advice, they must meet specific conditions outlined in the legislation.

The Role of Intent in Shaping Financial Decisions

A communication is classified as financial product advice under the Corporations Act 2001 (Cth) only if it is provided with the intention to influence a person’s decision regarding a financial product. As outlined in sections 766B(1)(a) and (b) of the Corporations Act 2001 (Cth):

• The intention to influence can be direct (explicitly stated) or reasonably inferred from the context.
• Even without explicit intent, advice may still fall under the definition if it could reasonably be perceived as guiding or persuading financial choices.

This applies to decisions about a specific financial product or a class of financial products, ensuring the protections under the Corporations Act 2001 (Cth) align with real-world consumer interactions.

The Difference Between ‘Personal Advice’ vs ‘General Advice’

‘Personal Advice’ Requires Tailoring to Individual Needs

Under the Corporations Act 2001 (Cth), personal advice is financial product advice that is:

• Directed to a person (including via electronic communication); and
• Tailored to their circumstances, meaning the provider has considered at least one aspect of the client’s objectives, financial situation, or needs.

The Corporations Act 2001 (Cth) specifies that advice is classified as personal if either:

1. The provider explicitly considered the client’s personal circumstances; or
2. A reasonable person in the client’s position would expect the provider to have considered these factors.

This expectation-based test ensures protections apply even when personal circumstances are not directly addressed but are contextually relevant.

‘General Advice’ Avoids Personal Circumstances

General advice under the Corporations Act 2001 (Cth) refers to financial product advice that:

• Lacks personal consideration: It is not tailored to the client’s objectives, financial situation, or needs.
• Applies broadly: Examples include guidance, advertising, promotional content, or sales material.

Crucially, general advice does not imply that the provider has assessed the recipient’s specific circumstances. This includes communications highlighting a product’s features or benefits in a non-personalised manner.

The Difference Between ‘Factual Information’ vs ‘Financial Product Advice’

Factual Statements Stay Neutral and Objective

Factual information is defined as objective data that is ascertainable and whose truth or accuracy cannot be reasonably questioned. Communications consisting solely of factual information generally do not express opinions or recommendations, and therefore, typically do not constitute financial product advice.

Examples of factual information in a financial context include:

• Information about the generally understood meaning of a ‘salary sacrifice arrangement’.
• Details on the differences in policy coverage between two insurance policies.
• Quotations for different insurance policies.
• Interest rates for savings accounts and term deposits.
• General descriptions of various types of financial products available for investment purposes.
• Confirmation that a financial institution offers income protection insurance products.
• Information about the rights and obligations of persons under relevant legislation, such as the Superannuation Guarantee (Administration) Act 1992 (Cth).

When ‘Factual Information’ Transitions into ‘Financial Product Advice’

Although factual information itself is not typically considered financial product advice, it can transition into advice depending on its presentation. When factual information is communicated in a manner that suggests or implies a recommendation, it may cross the line into financial product advice. This is especially true if the presentation implies a specific course of action regarding a financial product.

Examples of how factual information can transition into financial product advice

Comparative Judgement

If a fund representative expresses a qualitative or comparative judgement about salary sacrifice arrangements, such as stating that “sacrificing salary into a superannuation fund is very tax effective”, this goes beyond factual information and becomes financial product advice.

Value Judgement

In a call centre scenario, if an operator, after explaining the differences between third-party liability and comprehensive car insurance, states that “comprehensive cover is the best choice for most people”, this expresses a value judgement. Such a statement, even without specific client details, is likely to be considered financial product advice because it suggests a comparative merit of the two policies.

Attractive Feature

When a bank officer explains interest rates for different facilities and adds that there is an “attractive special rate” on term deposits, this is likely financial product advice. The term “attractive” is an opinion, and suggesting it could influence the client’s decision towards term deposits.

Desirability Claim

In a seminar, if a presenter claims that “property trusts are more desirable than shares during stock market volatility because they offer more consistent returns”, this is financial product advice. Desirability is subjective, and this statement could be seen as intending to influence attendees to invest in property trusts.

Suggestion of Action

If a customer service representative suggests that a client “should consider taking out income protection insurance because it can give ‘peace of mind’ in meeting mortgage payments”, this is likely financial product advice. Whether income protection insurance provides peace of mind is an opinion, and the suggestion could influence the client to purchase it.

As the examples have clearly demonstrated to prevent factual information from being misconstrued as financial product advice, it is essential to clarify that the provided information is purely factual and not intended as a recommendation or opinion about a financial product.

Key Lessons from the Westpac v ASIC Case for AFSL Holders

General Advice Disclaimers Are Not Enough

The High Court case of Westpac Securities Administration Ltd & Anor v. Australian Securities and Investments Commission [2021] HCA 3 (Westpac v ASIC) highlighted that general advice disclaimers are not always sufficient to ensure advice is classified as “general advice.” Westpac’s Super Activation Team used disclaimers at the beginning of phone calls with members, stating that the advice was general and did not consider personal needs. Despite these disclaimers, the High Court found that the advice provided was actually personal advice.

This determination was made because the substance of the communication and the context in which it was delivered suggested otherwise. The Court emphasised that focusing on the actual interaction with the client and the overall communication is more critical than merely relying on disclaimers. AFSL holders should understand that the presence of a disclaimer alone does not automatically classify advice as general if the interaction itself suggests personal advice is being given.

“Personal Advice” is Interpreted Broadly

The Westpac v ASIC case underscored the broad interpretation of “personal advice” under the Corporations Act 2001 (Cth), particularly concerning client expectations. The High Court applied the ‘reasonable person’ test, concluding that if a reasonable person in the client’s position might expect the advice provider to have considered their personal circumstances, the advice is likely personal advice. This is regardless of whether the provider actually undertook a detailed consideration.

Key points from this interpretation include:

• AFSL holders must consider what a client might reasonably expect from their interaction, not just what the adviser explicitly states.
• The Court clarified that the test is based on “reasonable possibility”, not “reasonable probability,” meaning the threshold for triggering the expectation of personal advice is relatively low.
• Therefore, even without explicit statements of tailored advice, if the context of the communication leads a client to reasonably expect personal consideration, it will likely be deemed personal advice.

What the Westpac v ASIC Case Means for AFSL Holders

The Westpac v ASIC decision carries significant implications for AFSL holders, particularly in how they structure client communications and staff training. It is crucial for AFSL holders to:

• Review Communication Materials: Examine communication scripts, marketing materials, and any client-facing documents to ensure they do not inadvertently provide personal advice when only authorised to give general advice.
• Focus on Substance Over Form: Ensure that the substance of the communication aligns with general advice, rather than relying solely on disclaimers.
• Implement Robust Training Programs: Develop and maintain training programs that help staff understand the distinction between general and personal advice, enabling them to deliver advice within their authorised scope consistently.
• Monitor Client Interactions: Conduct ongoing monitoring of client interactions to identify and mitigate any risks of inadvertently providing personal advice.
• Regularly Update Frameworks: Keep training programs and communication frameworks up to date with regulatory obligations under the Corporations Act 2001 (Cth) to ensure continued compliance.

By addressing these areas, AFSL holders can better navigate the complexities highlighted by the Westpac v ASIC case and maintain adherence to compliance requirements.

Obligations for Providers of Financial Product Advice under an AFSL

Providing Financial Product Advice Requires an AFSL (or Exemption)

To provide financial services in Australia, including financial product advice, a business must generally hold an AFSL by either applying for an AFSL or by purchasing an existing AFSL. 

An important exemption to consider pertains to those acting as ‘authorised representatives’ of an AFSL holder. If you provide financial product advice as an authorised representative, you do not need to hold your own AFSL since you operate under the licence of your principal. However, it is crucial to understand that this exemption is limited to representatives acting on behalf of an AFSL holder and does not extend beyond that scope.

AFSL Holders Must Uphold Strict Conduct and Disclosure Standards

AFSL holders are subject to a comprehensive range of conduct and disclosure obligations under the Corporations Act 2001 (Cth). These obligations ensure that financial services are delivered to clients efficiently, honestly, and fairly. Key responsibilities include:

• Managing Conflicts of Interest:

  • Establishing and maintaining adequate arrangements to manage any conflicts of interest that may arise in business operations.

• Compliance with AFSL Conditions and Financial Services Laws:

  • Adhering to all conditions of the AFSL.
  • Ensuring compliance with all relevant financial services laws.
  • Taking reasonable steps to guarantee that representatives also comply with these laws.

• Maintaining Competence and Resources:

  • Ensuring that adequate resources are available to maintain competence.
  • Providing adequate training to representatives to ensure they remain competent in delivering appropriate financial services.

For services provided to retail clients, additional obligations include:

• Dispute Resolution Systems: Implementing a dispute resolution system that meets specific regulatory requirements.
• Risk Management Systems: Maintaining robust risk management systems to identify and mitigate potential risks.
• Compensation Arrangements: Establishing compensation arrangements to ensure consumers have recourse in the event of loss due to misconduct or negligence.

These measures collectively aim to protect consumers and uphold the integrity of the financial services industry, ensuring that AFSL holders operate within their authorised scope and maintain high standards of service.

Conclusion

Understanding financial product advice is crucial for AFSL holders to operate compliantly within the regulatory framework of the Corporations Act 2001 (Cth). This article has clarified the definition of financial product advice, highlighting its core components as a recommendation or statement of opinion intended to influence financial decisions. It has also underscored the essential distinction between personal advice, which necessitates consideration of a client’s personal circumstances, and general advice, which does not.

Navigating the complexities of financial product advice requires a deep understanding of these definitions and obligations. To ensure your business operates within best practices and maintains full compliance, book a free initial consultation with one of our experienced AFSL lawyers today. Our 100% success rate in obtaining AFSLs and unmatched expertise in Australian financial services compliance and regulation positions us to provide you with tailored solutions and support, ensuring you confidently navigate the landscape of providing financial product advice.

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