This is the first part of a blog series about how automated advice providers can ensure compliance with the best interests duty. In this blog entry, we will consider the best interests duty. Importantly, the same law applies where advice is provided by a person or by digital means. We will examine some of the challenges that arise when providers offer automated advice.
The best interests duty
Section 961B of the Corporations Act 2001 (Cth) ("the Act") requires a provider of financial product advice to act in the best interests of the client in relation to the advice. This duty will be satisfied if the provider proves that it has met the following safe harbour requirements.
The provider must first identify the objectives, financial situation and needs of the client. Next, they must identify the subject matter of the advice. Then they must identify the client's relevant circumstances. This refers to the objectives, the financial situation and the needs of the client that would reasonably be considered as relevant to the advice sought on the subject matter. If any of the information relating to the client's relevant circumstances is incomplete or inaccurate, the provider must make reasonable enquiries to obtain complete and accurate information.
Further, the provider is obliged to assess whether they have the expertise required to provide the client the relevant advice. If they do not possess the necessary expertise, they must decline to provide the advice. If it does seem reasonable to recommend a financial product, the provider must conduct a reasonable investigation into the financial products that might achieve the client's objectives, and assess the information gathered in this investigation. It is crucial that all judgements in advising the client are based on the client's relevant circumstances.
Lastly, the provider must take any other step that would reasonably be regarded as being in the best interests of the client, in light of the client's relevant circumstances, which you will recall are those circumstances relevant to the advice sought on the subject matter.
Section 961(6) of the Act makes it clear that personal financial product advice can be offered through a computer program. The above duty and associated requirements are, therefore, relevant to both traditional providers and automated/digital providers.
What are the compliance challenges facing automated advice providers?
ASIC defines digital advice as the provision of automated financial product advice using algorithms and technology, and without the direct involvement of a human adviser. An automated advice provider is bound to face certain challenges in complying with s961B. This is due to the fact that computers have limited capacity and cannot undertake a conversation with clients. Obtaining and synthesising clients' information via an artificially constructed algorithm necessarily restricts the extent to which the client can receive personalised and tailored advice.
Stay tuned for our next blog which will discuss some of the measures digital advice providers can take to ensure compliance with the Act, drawing on ASIC's recent recommendations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
