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The Problem with being Independent : s923A

October 10, 2017 imaclegal 1 Comment

It’s not easy for a financial services provider to be independent these days. And even more difficult after ASIC announced its official position on the use of ‘independently owned’ and other words at the end of June.

The problems start with the provisions in s923A and culminate in ASIC’s perplexing position as stated in its media release 17-206MR. As a law firm we have a professional difference of opinion with ASIC insofar as they state that ‘non-aligned’, ‘non-institutionally owned’ and other similar words or expressions cannot be used unless the financial services provider satisfies the conditions set out in s923A.

And s923A is where all the troubles start. So, let’s start at the start and work our way through this quagmire.

There is no doubting that the intent of s923A is laudable. There should be no argument that providers who face clear and present conflicts should not be able to claim they are independent. But s923A goes well beyond that manifestly reasonable aim. And, in our view, ASIC’s recently announced position takes the section’s reach well beyond its intent and what is necessary to achieve its purposes.

Section 923A restricts the use of the words ‘independent’, ‘impartial’ and ‘unbiased’. It also restricts the use of any other word or expression that is “of like import” to those words. Also, s923A extends to any restricted words or expressions that are “part of another word or expression” or used “in combination with other words, letters or other symbols”. As such, it is clear that that words and expressions such as ‘independently’ and ‘independently owned’ are also restricted.

But of course it is possible to use any of those restricted words if, in relation to your business or services, you, as a financial services provider, meet a number of criteria as set out in s923A(2). That subsection contains a number of intricacies but the main criteria are:

  • that you, and certain related associates, do not receive commissions (unless you rebate them in full to your client), remuneration based on the volume of business placed with an issuer of a financial product, or other gifts or benefits from an issuer which may reasonably be expected to influence you;
  • that you must operate free from direct or indirect restrictions relating to the financial products in respect of which you provide financial services;
  • and you must operate without any conflicts of interest that might arise from your association or relationship with issuers or which may be reasonably expected to influence you in carrying on the business or providing your financial services.

And note that if you do breach any of these requirements, you may be guilty of an offence from the first day on which the offence is committed and each subsequent day where the circumstances that gave rise to you committing the offence continue. So, they are not to be trifled with.

However, a couple of things are troubling about these provisions.

First, the provisions themselves are laden with over-simplifications and bias. In particular, they are biased against certain forms of payment such as commissions, suggesting they are inherently conflicted. But this approach is about as useful as saying “all forms of remuneration are conflicted” and should therefore be banned. On one level, this is some truth to the fact that all forms of remuneration create conflict but the law needs to reflect a more sophisticated and nuanced approach. For example, a flat fee-charging adviser who is struggling to put food on their family’s table and is therefore motivated to provide advice, any advice, to earn some income is arguably more conflicted than an adviser who accepts an insurance commission that pays them no more than the competitor insurance products. s923A does not make those distinctions. It merely throws a blanket over the lot.

Also, you can throw any typical notions of what you understand “independent” to be out the back door. The provisions have nothing to do with what you, I or anyone else would typically understand “independent” to be. Put simply, you could be the most objective, fair and independent-minded adviser around but if you receive any commissions (e.g. even for insurances where such commissions are not banned) or fall foul of any of the other tests set out in s923A(2) you will not be able to use independent, impartial, unbiased or like words.

Which leads us to the most recent developments, mentioned in the introduction to this article, where ASIC has stated their public position, based as they say on legal advice, that the expressions ‘non-aligned’ and ‘non-institutionally owned’ are also banned under s923A, unless an adviser or licensee meets the relevant exceptions as summarised above.

As mentioned earlier, given that the terms restricted at law include words or expressions that are part of another word or expression or used in combination with other words, letters or symbols, it is no surprise that independently and independently owned are also restricted. It is written in the statute.

However, it is very difficult to see how or why terms such as ‘non-aligned’ and’ non-institutionally owned’ are banned or restricted. For this to be the case, it needs to be shown that these words and expressions are “of like import” to the expressly restricted words independent, impartial and unbiased.

We have scratched our heads and looked at this from numerous angles but we are still none the wiser as to how one can conclude that ‘non-aligned’ or ‘non-institutionally owned’ are of like import to independent, impartial and unbiased. While we are not privy to the legal advice that ASIC received, and it is not our usual practice to criticise our fellow lawyers in public, it seems to us that suggesting a nexus between ‘non-aligned’ and ‘non-institutionally owned’ on the one hand and ‘independent’, ‘impartial’ and ‘unbiased’ on the other hand, is drawing a rather long bow.

In our discussions with numerous licensees, we know that some are very disappointed in ASIC’s approach, some are resigned, some are sanguine, some are incredulous, and some brave souls may even wish to press ASIC on the issue. Of course, ASIC’s guidance is only that, it is not the law. It is perfectly open to advisers and licensees to hold, based on well-founded reasons, contrary views. But naturally, wittingly and willingly putting yourself at odds with the regulator’s stated position on an issue is never for the faint-hearted.

For us, we think that the current provisions and construction of s923A do not serve a legitimate, meaningful regulatory purpose – they go beyond the ‘mischief’ that the provisions purport to remedy. They are also, in our view harmful, in that they put unnecessary restrictions and barriers on otherwise highly professional and objectively independent advisers and licensees. At imac legal, we think s923A needs to be revisited and re-drafted.

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