Under the rule that came into effect with a raft of other FoFA reforms in July 2013, financial advisers must act in the best interests of their clients at all times. Among other things, it's a way of preventing advisers from recommended products that may bring them higher commissions but aren't appropriate for the customer, a practice that had been rampant in the industry.
Now ASIC, which is charged with enforcing the reforms, is taking action against Melbourne-based NSG Services (formerly National Sterling Group) for foisting "costly, unsuitable, and unnecessary financial arrangements" on clients.
Flogging life insurance
NSG has been licensed since April 2008 to provide advice on risk insurance and superannuation products but not, it turns out, to push those products indiscriminately.
According to ASIC, NSG "trained its advisers that it is almost always in a client's best interest to take out some form of life risk insurance, regardless of a client's financial situation".
Life insurance commissions, which are exempt from the FoFA reforms, are among the highest, up to 120% of the first year's premium followed by trail commissions of about 10% for the life of the policy.
Since July 2013, there have been at least eight cases in which NSG sold ill-advised life insurance products to clients or convinced them to transfer to another superannuation account (or "rollover" their super), according to ASIC.
The firm appears to have operated with blithe disregard for the FoFA reforms, whose overarching aim is to lift standards and restore consumer confidence in the scandal-ridden financial advice industry.
"NSG's written policies relating to legal and regulatory compliance and risk management have been inadequate, and in any event, not followed or enforced," ASIC says.
Lack of training also a fail
Along with doling out self-serving advice, ASIC says the firm also fell short of its FoFA duties by not training advisers on how to serve a client's best interests or seeing if they knew how to do so. NSG also neglected to discipline advisers who put their own interests first.
What is "best interests"?
The financial services industry has pointed to ambiguities in FoFA's best interests duty and attempted to water it down under the Abbott administration. The proposed changes would have given advisers the leeway to decide when the duty should and shouldn't be applied.
In the end, the industry-driven amendments didn't make their way through parliament. Meanwhile, ASIC has advised the financial advice industry that the test of the best interests duty is whether "it was reasonable for the advice provider to believe that the advice would be likely to leave the client in a better position".
The first hearing of the case in Federal Court is scheduled for 8 July 2016.