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Tuesday 24 February 2015

15-036MR ASIC takes action on deficient advice on complex structured investment products

ASIC concerns about financial advice relating to complex products has led to 10 licensees undertaking corrective action.

ASIC released a report in December 2013 which looked at advice provided by 10 licensees in relation to retail structured products. These are investments whose value is based on the movement of underlying assets such as a share index, generally using derivatives arrangements. The report also looked at advice on limited recourse (or 'protected') loans that are used to buy shares.

ASIC's report had a particular focus on structured products described as 'capital protected' or 'capital guaranteed' because these labels tend to attract consumers who are after lower risk products. However, the complex nature of these products meant that some consumers did not understand what, if anything, was protected. Too often advisers promoting these products were not adequately considering the consumer's needs and circumstances.    

The report identified a range of conduct and disclosure concerns and set out that ASIC would be taking follow up action with licensees involved in the review.  (refer: 13-324MR).

ASIC is providing a public update on actions since the report was released. ASIC’s  subsequent surveillances and regulatory actions led to:

  • licensees commencing a wider review of relevant advisers and clients to determine whether breaches of disclosure or conduct requirements had occurred, the extent of those breaches, and whether client, adviser and licensee remediation was required
  • two of the licensees submitting notifications of significant breaches to ASIC
  • one licensee terminating the authorisations of a corporate authorised representative and two individual authorised representatives, after identifying systemic breaches by those representatives, and
  • other remedial actions by licensees including client compensation, fee or commission refunds, corrective or improved disclosure, increased supervision and monitoring of advisers, and changes to licensees' systems and procedures for providing advice on complex products.

A summary of the licensees’ actions are in the appendix to this media release, below.

Almost 1,000 clients who received advice will either have their files reviewed, or be contacted by the licensee to offer a review.

ASIC finalised five of the actions in 2014. We are continuing to monitor the outcome of several other matters. Where inappropriate advice was provided, we are considering whether to take further enforcement action, such as bannings of individual advisers.

Consumers who have concerns about financial advice may lodge a complaint with the licensee's internal dispute resolution process, or contact the relevant external dispute resolution scheme, such as the Financial Ombudsman Scheme or the Credit Ombudsman Scheme Limited.

ASIC acknowledges the cooperation of the licensees involved in this matter.


Report  377 Review of advice on retail structured products (REP 377) published in December 2013 described the results of ASIC's review of a sample of five advice files from each of 10 Australian financial services (AFS) licensees (50 advice files in total). This review identified a range of conduct or disclosure concerns across the licensees in the sample, including:

  • 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;
  • a ‘one-size fits all’ approach, with inadequate consideration of the client’s needs and circumstances and alternative strategies/asset allocation, with a lack of diversification;
  • 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; and
  • misrepresentation of product features, including the degree of capital protection.

Appendix: Summary of licensee actions to address ASIC's concerns (licensees listed in alphabetical order)

Consultum Financial Advisers Ltd

ASIC identified conduct and disclosure concerns in the representatives' structured product advice. The licensee committed to measures to address these concerns, including the pre-vetting of all statements of advice (SOAs) when structured products are recommended, and improved disclosure to address deficiencies identified by reviews by ASIC and the licensee.

Count Financial Ltd

ASIC was concerned that some client files reviewed did not contain all necessary evidence of a reasonable basis for the advice. The licensee's review of the files supported this finding. The licensee then reviewed a further sample of advisers and client files and found instances of contraventions of its internal business rules, including in relation to client fact finding, insurance and gearing analysis, and in documenting the basis for advice provided.

As a result:

  • relevant clients are being provided with advice reviews at no cost, and are being informed of their rights to access external dispute resolution if they disagree with the licensee's assessment of their advice and any compensation that may be offered;
  • the licensee has implemented additional risk controls including pre-vetting all advice on retail structured products before it is provided to clients, and inclusion of retail structured product advice in adviser compliance audits; and
  • the licensee has communicated to all authorised representatives the internal business rule requirements for client fact finding, cash flow and insurance analysis when advising on structured products and gearing.

FSS Advisory Pty Ltd

ASIC was concerned that the nature and risks of products recommended were not adequately disclosed to clients, and that in some cases there was insufficient evidence of a reasonable basis for the advice. To address these concerns, the licensee:

  • reviewed the position of relevant clients and found that in some cases there was insufficient evidence of a reasonable basis for advice in the client files. The licensee is arranging meetings with clients to provide updated disclosure, and to ensure the advice is appropriate for the clients' circumstances;
  • made changes to its systems and procedures, including improved fact-finding process, improved disclosure of product costs and risks, new advice templates, and increased education and accreditation for representatives; and
  • appointed an external compliance consultant to review these new policies and procedures.

ASIC will monitor the outcome of this review.

Genesys Wealth Advisers Ltd

ASIC was concerned that advisers from a corporate authorised representative of the licensee had not adequately disclosed the risks, features or costs of the products recommended, and the investment performance required for clients to break even or receive a profit from their investment. As a result of ASIC's concerns, prior to the release of the report the licensee:

  • arranged meetings with clients to review their position including whether the advice was appropriate for their needs;
  • provided clients with corrective or improved disclosure;
  • increased its supervision and monitoring of certain authorised representatives; and
  • introduced new adviser training and approval processes for advice on structured products, improved disclosure to clients about the performance, risks, costs and commissions of products, and a requirement that advisers consider several different strategies and products when providing advice.

HSBC Bank Australia Ltd

ASIC's review found that in some cases where the scope of advice was restricted to a single HSBC structured product, advisers had obtained little or no information about clients' relevant personal circumstances, such as their assets, liabilities, income or debts, before providing the advice. In some cases we were concerned that there was insufficient evidence that the advice was appropriate for the clients' circumstances or needs.

As a result of these concerns, the licensee:

  • reviewed a sample of relevant client files and found that in two instances there was no evidence to support that the advisers had made necessary enquiries regarding the clients' personal circumstances. The bank has contacted the two clients to assess whether remediation is required;
  • is pro-actively reviewing all limited scope advice on retail structured products from 2009 until 2013; and
  • has appointed an external compliance consultancy firm to review all of its financial advice processes and make recommendations for changes where appropriate. The expert's report will be provided to ASIC.

ASIC will assess whether the systems changes and any additional changes are sufficient to address the concerns.

Madison Financial Group

ASIC was concerned that the degree of capital protection provided by certain products was misrepresented, that advisers had failed to consider less complex or costly strategies to meet clients' objectives, that tax risks were not considered, and in relation to the narrow scoping of advice to a single structured product. As a result, the licensee:

  • reviewed client files and found two instances of poor record keeping in relation to the scoping of advice as disclosed in the SOAs and consideration of alternative strategies to meet clients' goals. The licensee is contacting these two clients to ensure the scope of advice in the SOA was accurate, and to provide corrective disclosure where required;
  • will change how advisers describe structured products so that clients are not misled as to the complexities, features or risks. For example, 'capital-at-risk' structured products will not be described as having features of fixed interest or bank deposits; and
  • has implemented new policies for advice on structured and complex products, including improved supervision, monitoring and record keeping procedures.

MASU Financial Management Pty Ltd

ASIC's review identified concerns that there was 'one size fits all' SOAs and 'boiler plated' advice and disclosures. In response, the licensee:

  • commenced a review of all of its policies, systems and procedures; and
  • has appointed an external compliance expert to review whether the revised processes are adequate to ensure compliance with the financial services laws. The expert will assess whether client remediation is required, provide recommendations for additional compliance measures if needed, and verify whether the changes operate effectively.

ASIC will assess the expert's report and recommendations and consider whether the changes are sufficient to address the concerns.

Meritum Financial Group Pty Ltd

ASIC's review indicated potential breaches of the requirement to make enquiries of clients' relevant personal circumstances and to provide a statement of advice in the required time-frame, as well as other disclosure concerns including potential misrepresentation of product features. Following notification of ASIC's concerns, the licensee:

  • identified systemic breaches by two representatives and an associated corporate authorised representative, and subsequently terminated all three authorisations;
  • has written to affected clients to notify them of these terminations, and is assessing whether client compensation is required; and
  • lodged a significant breach notification to ASIC, relating to the adequacy of the licensee's supervision and monitoring framework which failed to detect these breaches.

ASIC is assessing the information obtained from the licensee to determine whether further regulatory actions are required.

Sentry Financial Services Pty Ltd

ASIC was concerned that advice provided by a former representative was inappropriate, noting particular concerns with product replacement advice. As a result, the licensee:

  • investigated the former representative and confirmed systemic breaches across the client files reviewed;
  • submitted a significant breach notification to ASIC relating to breaches of the reasonable basis for advice and commission disclosure requirements; and
  • is contacting and reviewing affected clients to determine whether the breaches led to financial losses that require compensation.

The licensee will report to ASIC on its follow-up activities in relation to the clients and we are assessing whether further regulatory actions are required in relation to the adviser.

Westpac Banking Corporation

ASIC's initial concerns related to the appropriateness of advice, disclosure of product risks, scoping of advice, fee disclosure and commission disclosure. As a result of these concerns:

  • Westpac conducted a wider review of representatives' advice on structured products, finding some instances of inappropriate advice, which led to fee refunds and other remedial actions;
  • Westpac determined that the recommendation of a 'Protected Equity Loan' to one client was inappropriate due to the client's low tolerance for risk. In that instance Westpac refunded the advice fees the client had paid and determined that further compensation was not required as the product had matured with a net gain;
  • for other deficiencies identified, remedial actions included fee rebates to clients, offers of free advice reviews, and corrective disclosure provided to clients; and
  • Westpac made changes to its systems and policies to improve advice on structured products, made changes to record keeping practices, and removed all protected equity loans from the approved product lists of the Westpac and St George financial planning divisions.
Last updated: 30/03/2021 09:37