Limited AFS licensees: Advice conduct and disclosure obligations

This information sheet (INFO 228) sets out the conduct and disclosure obligations that apply to a limited AFS licensee and, in some cases, a representative of a limited AFS licensee when providing advice to retail clients.

Preparing and providing a Financial Services Guide (FSG)

As a limited AFS licensee, you must prepare a Financial Services Guide (FSG) for the retail clients you provide financial services to. Typically, an FSG must be given to the client as soon as you realise that you are likely to provide a financial service (such as financial product advice or arranging to deal in interests in an SMSF) to them and before the financial service is provided: see sections 941A, 941B and 941D(1) of the Corporations Act 2001 (Corporations Act).

There are specific rules about what information must go into an FSG: see Section C of Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure (RG 175). Generally, the FSG provisions are designed to ensure that retail clients are given sufficient information to enable them to decide whether to obtain financial services from you.

Best interests duty and related obligations

When, as an individual who is a limited AFS licensee or a representative of a limited AFS licensee, you provide personal advice to a retail client (even if the scope of the advice is limited to a specific issue), you must:

Act in the best interests of your client

When providing personal advice to a retail client, you must act in their best interests in relation to that advice: see section 961B. We refer to this as the ‘best interests duty’.

When assessing whether you have complied with the best interests duty, we will consider whether, at the time the advice is given, a reasonable advice provider would believe that your client is likely to be in a better position if they follow your advice.

Scaled advice

The advice that you provide to a retail client can be ‘scaled’ or ‘limited in scope’. For example, you might scale or limit the scope because the client requests it or because you suggest it on the basis that your limited AFS licence authorisations only allow you to provide a limited scope of advice.

However, you must use your judgement when deciding on the scope of the advice and define the scope in a way that is still in your client’s best interests – that is, in a way that is consistent with their relevant circumstances and the subject matter of the advice they are seeking.

It is important that you make clear to your client, from the outset, the scope of the advice you are providing.

‘Safe harbour’ steps

One way to satisfy the best interests duty is to show that you have taken the ‘safe harbour’ steps set out in section 961B(2) of the Corporations Act. If you do not take these steps, we expect you to take other steps that would, at a minimum, produce the same standard of advice for the client as if the safe harbour steps had been complied with.

To comply with the safe harbour steps, you must:

  • identify the objectives, financial situation and needs of your client that were disclosed by them
  • identify:
    • the subject matter of the advice sought by your client (whether explicitly or implicitly)
    • the objectives, financial situation and needs of your client that would reasonably be considered relevant to advice sought on that subject matter (client’s relevant circumstances)
  • if it is reasonably apparent that the information you have about your client’s relevant circumstances is incomplete or inaccurate, make reasonable inquiries to obtain complete and accurate information
  • assess whether you have the expertise required to provide your client with advice on the subject matter sought and, if not, decline to provide the advice
  • if it would be reasonable to consider recommending a financial product (such as an interest in an SMSF):
    • conduct a reasonable investigation into the financial products that might achieve the objectives and meet the needs of your client and that would reasonably be considered relevant to advice on that subject matter (i.e. in the case of an SMSF recommendation, the client’s existing superannuation fund(s) and the SMSF. If you have the authorisation to provide class of product advice about superannuation, you may also wish to consider non-SMSF self-directed or ‘do-it-yourself’ superannuation products generally)
    • assess the information gathered in the investigation
  • base all judgements in advising your client on their relevant circumstances
  • take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of your client, given their relevant circumstances.

For more information on how we assess compliance with the best interests duty, see Section E of Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure (RG 175). Appendix 3 to RG 175 includes two examples of the process that we would apply when reviewing your personal advice to determine whether you have complied with the best interests duty.

See also Table 12 in Appendix 3 to Report 515 Financial advice: Review of how large institutions oversee their advisers (REP 515), which is a checklist of issues that should be considered when personal advice is being reviewed to determine whether the best interests duty (and related obligations) have been met. As well as helping you to prepare advice, this checklist will help when you carry out audits of the advice given to your clients.

Provide appropriate advice

Personal advice must only be provided to a retail client if it would be reasonable to conclude that the advice is appropriate for them, assuming that the best interests duty had been complied with: see section 961G. This means that you are assumed to know all the information about the client, strategy and product (if any) that you would know if you had properly complied with the best interests duty.

We consider that advice is appropriate if it would be reasonable to conclude, at the time the advice is provided, that:

  • it is fit for its purpose – that is, following the advice is likely to satisfy the client’s relevant circumstances
  • the client is likely to be in a better position if they follow the advice.

For more information on your obligation to provide appropriate advice, see Section E of RG 175.

Warn if advice is based on incomplete or inaccurate information

You must make reasonable inquiries to obtain complete and accurate information about a retail client’s relevant circumstances when providing personal advice. If, after making these inquiries, it is reasonably apparent that you have based your advice on incomplete or inaccurate information about your client's relevant circumstances, you must warn your client: see section 961H.

The warning should say that:

  • the advice is, or may be, based on incomplete or inaccurate information
  • because of this, your client should consider the appropriateness of the advice – taking into account their objectives, financial situation and needs – before acting on it.

For more information on your obligation to give a warning if advice is based on incomplete or inaccurate information, see Section E of RG 175.

Give priority to the client’s interests

You must prioritise a retail client’s interests if, when you give advice, you know or reasonably ought to know that there is a conflict between the interests of the client and your interests or the interests of an associate of yours (e.g. a director of the entity that is the limited AFS licensee or a related entity): see section 961J.

To comply with this obligation, you should first identify what interests you and your associates have. An interest includes any benefits that you or your associates may receive if your client adopts your advice. For example, if you advise your client to establish an SMSF and you would receive payment for assisting to establish the SMSF and its ongoing administration if they did so, these would be interests. Another example might be if a partner in your firm (i.e. an associate) stands to receive fees from the client for auditing the client’s SMSF.

While the obligation to prioritise the interests of your client when giving advice does not prevent you from having these interests, you must ensure that you do not act to further your interests or those of one of your associates over those of your client when giving your advice. In complying with this obligation, you should consider what a reasonable advice provider without a conflict of interest would do.

For more information on how we will administer the obligation to prioritise clients’ interests, see Section E of RG 175.

Complying with the best interests duty when providing advice about SMSFs

One of the key things that you are likely to provide advice on is whether your client should establish an SMSF. Setting up an SMSF is a significant decision. For this reason, ensuring that clients receive high-quality advice about SMSFs is a key priority for ASIC.

We have prepared specific guidance about providing advice on establishing an SMSF in Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206).

Summarised below are some of the key messages from INFO 205 and INFO 206.

Discussion about risks

When you give advice to a retail client about establishing an SMSF, you should advise them on the risks associated with establishing and running an SMSF.

The effect on insurance

One issue to pay particular attention to is your client’s need for appropriate and affordable life insurance (including death and total and permanent disability insurance), and the effect that establishing and rolling their superannuation money over into an SMSF may have on your client’s existing cover. A lack of life insurance may have very real and significant consequences for your client.

Before recommending that your client establishes an SMSF, you should:

  • explain the importance of maintaining life insurance by providing factual information and educational material
  • inform them that life insurance might be more expensive and harder to obtain for SMSFs than for larger APRA-regulated superannuation funds.

There might be circumstances where you can provide advice about establishing an SMSF without discussing life insurance in more detail. For example, your client might not have life insurance through their existing superannuation product and might have confirmed that they do not want life insurance advice. Because many consumers are not aware that they have life insurance through their superannuation, we would expect you to take reasonable steps to verify that they do not hold life insurance through their existing superannuation before proceeding on that basis.

Other circumstances where you can provide advice about establishing an SMSF without discussing life insurance would be when your client tells you that they:

  • hold adequate life insurance outside their superannuation, or
  • consider they have sufficient other assets and do not require life insurance.

In cases where you do provide advice about establishing an SMSF without discussing life insurance, you should make it clear to your client that you are not providing life insurance advice and you should explain the basis on which you did not consider this advice to be necessary. We would also expect you to note this in the Statement of Advice (SOA) that you give to your client: see preparing and providing a Statement of Advice below. You should also explain the potential downside, if any, to your client of not receiving advice on this aspect of their personal circumstances.

Other than those limited circumstances described above where life insurance advice may be ‘scoped out’, you should do the following if you are advising a retail client on whether to establish an SMSF:

  • if your limited AFS licence authorises you to provide financial product advice on a client’s existing superannuation product to the extent required for making a recommendation to establish an SMSF – explain the life insurance held within their existing superannuation (e.g. the type of cover and the level of cover), if relevant, and/or
  • if your limited AFS licence authorises you to provide class of product advice on life insurance products – give advice about the kind and level of life insurance that your client should hold, whether inside or outside superannuation (but you may not recommend a specific product).

You should also recommend that your client seek specific life insurance advice from a suitably authorised advice provider and:

  • wait for the life insurance advice to be provided to them before establishing the SMSF, or
  • if they choose to purchase life insurance directly from a life insurer, wait until that has occurred, or
  • if your limited AFS licence authorises you to provide financial product advice on a client’s existing superannuation product to the extent required for making a recommendation to establish an SMSF, recommend that your client:
    • maintain a minimum balance in their existing superannuation fund
    • if needed to maintain the insurance cover under their existing fund’s rules – continue to direct contributions to that fund.

When discussing with your client whether they should maintain a minimum balance in their existing superannuation fund, you should make them aware that:

  • you are not giving them any recommendation or opinion about whether the cover in their existing superannuation fund is adequate or appropriate for them
  • there are costs and disadvantages associated with belonging to more than one fund
  • the balance in an APRA-regulated superannuation fund may reduce to a point where there is no member benefit left to pay the insurance premium, requiring the client to make arrangements to cover the shortfall.

Other risks

Other key risks you should advise your client on include:

  • Lack of statutory compensation – You should tell your client that SMSFs are not subject to the same government protections that are available to APRA-regulated superannuation funds, such as statutory compensation in the event of theft or fraud.
  • Access to complaints mechanisms – You should ensure that your client understands that certain dispute resolution mechanisms, such as the Superannuation Complaints Tribunal (SCT), may not be available to SMSFs.
  • Trustee obligations and time and skill necessary to operate an SMSF – You should consider whether an SMSF is appropriate for your client in terms of the time and skills that may be needed to operate the SMSF and to generate the benefits expected. You should also ensure that your client is aware of the time and skills required and the potential consequences of failing to comply with the obligations under superannuation and taxation law.
  • Need to consider an exit strategy – You should ensure your client is aware of what may be required to wind up their SMSF and the likely costs involved. You should encourage them to consider and develop an exit strategy for the SMSF.

For more compliance tips when giving advice about the risks of establishing an SMSF and some other risks we expect you to consider and discuss with your clients, see INFO 205.

Discussion about costs

As well as advising a retail client about the potential risks of establishing an SMSF, you should advise them on the costs associated with establishing an SMSF. For example:

  • Advice on the cost-effectiveness of an SMSF – Our view is that, in many cases, recommending that a client set up an SMSF with a starting balance of $200,000 or less is unlikely to be in their best interests. For clarity, the starting balance refers to the net assets of the fund at its inception. While there might be circumstances where a lower starting balance is in the client’s best interests, we are likely to look more closely at any advice recommending an SMSF with a starting balance of $200,000 or less.
  • Advice on the costs of setting up, operating and winding up an SMSF – There are many costs involved in setting up, operating and winding up an SMSF. Some of these are optional, such as professional investment advice fees or the cost of establishing and maintaining the registration of a corporate trustee. However, some costs, such as the annual SMSF supervisory levy collected by the Australian Taxation Office and the costs to produce an annual financial statement, are unavoidable. These costs should be clearly conveyed to your client when recommending that they set up an SMSF.
  • Advice on the continued suitability of an SMSF for the client – If you later give advice about the ongoing appropriateness of an SMSF for your client, this should consider whether their relevant circumstances are significantly different from when the initial advice to set up the SMSF was given.

For more compliance tips on giving advice about the costs associated with an SMSF, see INFO 206.

‘Super switching advice’

If your limited AFS licence allows you to make recommendations about a retail client’s existing superannuation fund, you can do so to the extent needed when making a recommendation to establish an SMSF or when providing advice about contributions or pensions.

Because of the importance of ‘super switching advice’ (i.e. advice to transfer some or all of a client’s existing superannuation money from one superannuation fund to another, or advice to redirect future contributions away from one superannuation fund to another), we have provided specific guidance for advisers who provide this kind of advice in Information Sheet 182 Super switching advice: Complying with your obligations (INFO 182). As we explain in INFO 182, you must:

  • Consider whether there is an overall advantage from the switch – We are likely to look more closely at a recommendation that your client switch all or part of their balance or the direction of their future contributions (e.g. from an APRA-regulated fund to an SMSF) if there is no obvious overall advantage to them in making the switch. In particular, we will look closely at:
    • whether the advice is appropriate for the client
    • whether you have acted in the client’s best interests when providing the advice
    • the disclosure given to the client about conflicts, fees and the basis for the advice.
  • Accurately describe the features of the ‘to’ fund – It might be misleading to describe a feature of the ‘to’ fund (the ‘to’ fund might be the SMSF if that is being newly established) as a benefit of making the switch unless that feature satisfies a client’s needs or objectives and is not already available in the ‘from’ fund (e.g. the APRA-regulated fund they are currently invested in).

Additional information will also need to be included in your SOA if you provide switching advice: see content of an SOA below.

Preparing and providing a Statement of Advice (SOA)

If you provide personal advice to a retail client, you must prepare and provide your client with an SOA – usually at the same time as, or as soon as practicable after, the advice is provided: see section 946A. The purpose of the SOA is to help your client understand, and decide whether to rely on, the personal advice you give them.

However, there are some limited instances when an SOA is not required. For example, you do not need to give your client an SOA about further advice you give them if:

  • you have already given them an SOA setting out their relevant circumstances
  • their relevant circumstances for the further advice, and the basis on which you give the advice, are not significantly different (see regulation 7.7.10AE of the Corporations Regulations 2001).

In both of these instances, you do still need to give them information about potential conflicts of interest and keep a record of the advice. For more information on the circumstances where an SOA is not required, and other conditions that should be complied with instead, see Section D of RG 175.

Content of an SOA

There are detailed requirements about what you must include in an SOA. All SOAs must set out, in a clear, concise and effective manner:

  • the advice and the reasoning that led to the advice
  • information about certain remuneration and benefits that you and certain related parties will receive, or reasonably expect to receive
  • all conflicts of interest that may affect the advice
  • the costs, loss of benefits and other significant consequences when recommending switching between financial products (e.g. out of an APRA-regulated fund and into an SMSF).

See Regulatory Guide 90 Example Statement of Advice: Scaled advice for a new client (RG 90), which includes guidance and an example SOA based on a hypothetical and limited financial advice scenario.

Record-keeping obligations that apply to personal advice

When you provide personal advice to a retail client, records of that advice must be kept for at least seven years after the advice is provided and the records must be accessible: see section 912G. This includes records of all information relied on, and actions taken, which show compliance by you or your representatives with the best interests duty and related obligations. Some examples of these records might be:

  • SOAs
  • file notes
  • correspondence
  • audio recordings.

Records that show the compliance systems used in connection with giving personal advice should also be retained, including:

  • training materials
  • records of who is attending the training
  • call scripts.

For more information on preparing, providing and keeping records relating to personal advice, see Section E of RG 175. See also Class Order [CO 14/923] Record-keeping obligations for Australian financial services licensees when giving personal advice, which modifies Division 3 of Part 7.6 of the Corporations Act, as it applies to all AFS licensees, to insert section 912G.

General advice warning

Whenever you provide ‘general advice’ to a retail client, you should warn your client that:

  • the advice has been prepared without taking into account their objectives, financial situation or needs
  • they should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before following the advice
  • if the advice relates to the acquisition or possible acquisition of a particular financial product (such as a pension through an existing superannuation product), they should obtain a copy of, and consider, the Product Disclosure Statement (PDS) for that product before making any decision (see section 949A).

If you are providing the general advice verbally, you still need to provide a warning. The verbal warning can be simpler as long as it warns that the advice is general and may not be appropriate for the client. For example, you could say ‘You will need to decide whether this advice meets your needs because I haven’t considered this.’

For more information on the general advice warning, see Section B of RG 175.

Conflicted remuneration

If you provide financial product advice to a retail client (whether personal or general advice), you must consider whether you are receiving or will receive conflicted remuneration. Conflicted remuneration (unless an exemption applies) is any benefit given to you or your representatives that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence:

  • the choice of financial product recommended to your clients, or
  • the financial product advice given to your clients (see section 963A).

There is a presumption that benefits that are available or calculated based on the value or number of products recommended to or acquired by clients (i.e. ‘volume-based benefits’) are conflicted remuneration: see section 963L.

There are prohibitions on:

  • you or your representatives accepting conflicted remuneration (see sections 963E, 963G and 963H)
  • product issuers and sellers giving conflicted remuneration (see section 963K)
  • employers giving their employees who provide financial services conflicted remuneration for work they carry out as an employee (see section 963J).

An example of how the conflicted remuneration rules might apply is set out below.

For more information on the rules relating to conflicted remuneration (including the exceptions), see Regulatory Guide 246 Conflicted remuneration (RG 246).

Ongoing fee arrangements

If you give personal advice to a retail client and you and the client have entered into an arrangement under which they pay you a fee during a period of more than 12 months, then (subject to some limited exceptions) you have an ‘ongoing fee arrangement’ with that client: see section 962A. This is illustrated in Table 1 below.

Table 1: Ongoing fee arrangements

Not likely to be an ongoing fee arrangement

Likely to be an ongoing fee arrangement

You charge your client:

  • a one-off fee to recommend that they establish an SMSF, and
  • later, another one-off fee to arrange for them to become a member of the SMSF.

You charge your client:

  • a continuing fee that is calculated as a percentage of their SMSF balance, and
  • the fee will be paid over a period of longer than 12 months.

If you have an ongoing fee arrangement with your client, you must:

  • comply with the ‘opt-in requirement’, including by giving the client a renewal notice (unless an exemption applies) (see section 962K)
  • provide the client with a fee disclosure statement on an annual basis (see section 962G).

Opt-in requirement

To meet the opt-in requirement, you must give a retail client a written renewal notice every two years that requires them to opt in to renew your ongoing fee arrangement. If the client does not opt in, the ongoing fee arrangement terminates. This requirement is intended to ensure that disengaged clients do not pay ongoing financial advice fees if they receive little or no service.

For more information on the opt-in requirement, see sections 962K–962Q of the Corporations Act.

Fee disclosure statements

If you have an ongoing fee arrangement with a retail client (whether you were the person who originally entered into the arrangement or another licensee assigned the rights under the arrangement to you), you must give your client a fee disclosure statement each year. The fee disclosure statement must set out, for the previous 12 months:

  • the amount of fees paid by the client
  • the services the client received
  • the services the client was entitled to receive.

This obligation is designed to help your clients ascertain whether they are receiving services from you that are commensurate with the ongoing fees they are paying.

For more information on preparing and giving a fee disclosure statement, see Regulatory Guide 245 Fee disclosure statements (RG 245).

Where can I get more information?

  • Limited AFS licensees – check whether you are a limited AFS licensee or a representative of a limited AFS licensee
  • RG 90 Example Statement of Advice: Scaled advice for a new client
  • RG 175 Licensing: Financial product advisers—Conduct and disclosure
  • RG 246 Conflicted remuneration
  • INFO 182 Super switching advice: Complying with your obligations
  • INFO 205 Advice on self-managed superannuation funds: Disclosure of risks
  • INFO 206 Advice on self-managed superannuation funds: Disclosure of costs
  • INFO 227 What can limited AFS licensees do?, which explains the scope of the activities you can carry out under your limited AFS licence
  • INFO 229 Limited AFS licensees: Complying with your licensing obligations, which explains what you must do as a limited AFS licensee on an ongoing basis
  • Limited AFS licensees: Quick guide – download a ‘quick guide’, which highlights some of the main obligations that apply when giving advice to retail clients under a limited AFS licence

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.

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Last updated: 16/08/2019 09:57