Author: Sheila Baker, Managing Director, Gold Seal.

We’ve had a few queries to the Compliance Helpline recently which indicate that the knowledge once held by Brokers about FSR basics has become less clear than it could be. We recommend that you refresh yourself on the principles…even if you think you know them.

Financial Services Reform (FSR) was the culmination of an extensive review which examined regulatory requirements for the financial services industry. This review resulted in the passing of Chapter 7 of the Corporations Act by the Australian Parliament and the requirement for financial services businesses to obtain an Australian Financial Services Licence. Licensees have been working in a regulated FSRA environment since March 2004.

The following are the important points the legislation governs:

 1. The two types of financial product advice: General Advice and Personal Advice.

General Advice
General Advice is about an insurer or insurance product, which does not involve considering a client’s particular circumstances. General Advice is given when you express an opinion or view about an insurer or insurance product.

Example:
If you tell a client that replacement cover is generally better than indemnity cover for protection of an insured item because it offers replacement on a new for old basis – you are providing General Advice.

Where you only provide General Advice, a General Advice Warning must be given, telling the client that the advice has been prepared without taking into account the client’s objectives, financial situation or needs.

Personal Advice
Personal Advice relates to the suitability of a product or insurer for the client’s particular circumstances. This advice takes into consideration the client’s personal objectives, financial situation and needs.

Examples of Personal Advice
Examples of situations where you could be providing Personal Advice include commenting on any of the following:

  • Whether one product is more suitable for the client than another (e.g. prestige home building policy for a home that is worth $4m as opposed to a basic home building/contents cover)
  • Whether to increase the excess for a reduction in the premium based on what the client has told you about their financial situation
  • Other advice specific to the client’s insurance, for example:
  • Helping to determine an appropriate sum insured to insure particular items owned by the client (e.g. artwork, antiques)
  • The recommendation to use itemised coverage to protect a particularly valuable item the client owns (e.g. valuables cover for jewellery)

Appropriate Advice
In determining whether appropriate advice has been given, ASIC will take into account all the circumstances, including whether the advice:

  • is “Fit” for purpose – so that if the client follows the advice they are likely to achieve their objectives and the advice will satisfy their relevant circumstances.
  • manages the client’s expectations as to the outcomes they will achieve if they follow your advice.
  • is likely to put the client in a better position than they would be in if they didn’t follow the advice.

Implied Personal Advice
It is easy to give ‘Implied Personal Advice’ as the recipient of the advice may feel they have received a personal recommendation.

Example:
A client gives many details about themselves to you, but you respond in general advice terms. It is possible they will think they have received Personal Advice because they have told you about their personal circumstances and you then expressed an opinion.

Even if you haven’t really considered their particular circumstances, if they are under the impression you have then you could be seen to be giving Personal Advice. In this case you should always provide them with a General Advice Warning and state the type of advice you gave clearly in a written format.

          2. The definition of Retail and Wholesale Clients.

  • What is a Retail Client?

A retail client is an individual or a small business that purchases a retail product.

Examples:
Examples may be a small business that purchases a fleet motor vehicle insurance policy or an investor who purchases a home for rental purposes.

A small business is one employing less than 100 people if it’s a manufacturing business or less than 20 people if it’s any other type of business. The small business must purchase the insurance for use in connection with the business.

  • What is a Wholesale Client?

Wholesale clients are all other clients.

Example:
Clients who purchase workers compensation, marine insurance (other than pleasure craft), professional indemnity, public liability and most aviation insurance; or a large business that purchases fleet motor vehicle insurance.

Is my client Wholesale or Retail?
The retail client definition test is different to how you may use the words retail and wholesale in the industry – A wholesale broker arranges cover as if they were an insurer while a retail broker deals with the client.

Where the client/situation falls outside these parameters, the client would usually be considered wholesale.

Why do I need to know all this?

It’s important to know all this so you can recognise your Disclosure Obligations.  It is critical that you recognise your Retail clients in order to provide the required disclosure documents under Chapter 7 of the Corporations Act.

If any of this is unclear to you, remember it’s best not to guess – give the Compliance Helpline a call if you need some clarification

If you or any of your team would like to complete a refresher on FSR Compliance, Gold Seal has the course for you.  Please click here for the online module and purchasing details. At $35+GST, it may be worth it to make sure everybody in your team is getting it right.

For assistance or guidance on any Compliance matter call  our Compliance Helpline on 03 9510 5100.