Walking the general advice tightrope
The recent High Court case, Westpac Securities Administration Ltd & Anor v Australian Securities and Investment Commission [2021] HCA 3 (the “Westpac Case”) put into sharp relief the complexities of the distinction between personal and general advice. Unintentionally falling on the personal advice side of the line has serious consequences, including contraventions of financial services laws, civil penalties and breaches of financial services licensee obligations.
Calls are gathering pace to reform the laws that regulate financial product advice. In the assessment of the Financial Services Council, general advice is “effectively unworkable as a model” as a result of the Westpac Case, because “simple direct engagement with consumers is likely to trigger personal advice requirements, therefore increasing regulatory costs for businesses.”
General advice vs personal advice
“General advice” and “personal advice” are concepts created by legislation. They were introduced into the Corporations Act by the financial services reforms which came into effect in 2002.
The Corporations Act says that all financial product advice is either personal advice or general advice. Anything that is not personal advice is classed as general advice.
Personal advice is defined as financial product advice that is given or directed to a person where the adviser has considered one or more of the client’s objectives, financial situation and needs. Importantly for the Westpac Case, personal advice also includes financial product advice given or directed to a person in circumstances where a reasonable person might expect the provider to have considered one or more of the person’s objectives, financial situation and needs.
In the real world, the distinction between general and personal advice is not always easy to draw.
The reason why a person giving financial product advice might want to stick to general advice rather than veering into personal advice is that personal advice has a much heavier compliance load.
When personal advice is given, the person giving the advice may have to provide the customer with a written statement of advice. The adviser also has a best interests duty to the customer.
Because of the compliance costs of personal advice, financial advice in Australia is becoming ever more expensive, and the number of financial advisers is plummeting.
Facts of the Westpac Case
Between 2013 and 2016, two companies in the Westpac group (“Westpac”) ran a campaign to get customers to rollover their superannuation accounts with other entities into their existing Westpac superannuation accounts. Westpac wrote to the customers offering a free search for other superannuation accounts that the customer might hold. This was followed up with a telephone call in which Westpac staff offered to arrange a rollover of any other super accounts into the customer’s Westpac account.
The campaign was successful and Westpac was able to increase its funds under management by almost $650 million.
The campaign was designed so that any advice given to customers would be general advice rather than personal advice. The calls followed a similar pattern:
The adviser stated at the beginning of the telephone call that “everything discussed today is general in nature, it won’t take into account your personal financial needs.”
The adviser sought information about the customer’s personal objectives and discussed those objectives in the context of rolling over external superannuation accounts into the customer’s Westpac superannuation account.
Advisers used “social proofing” marketing tactics to confirm the validity of the members objectives; for example, if a member’s objectives were saving fees and easier management, stating to the member that “saving fees and manageability are the two main reasons our clients do like to bring their supers together.”
The adviser then offered to assist the member over the phone to move the accounts while on the telephone call.
There was no mention of any potential negative factors in rolling over superannuation, or any suggestion to obtain tailored or personal advice.
In 2016, ASIC launched proceedings in the Federal Court against Westpac, based on Westpac contacts with a small number of selected customers in its campaign. ASIC alleged that personal advice was given to some of the customers. Westpac disputed this, claiming that the advice given was general advice.
The original decision in December 2018 found in favour of Westpac on the question of whether personal or general advice was given. ASIC then appealed to the Full Federal Court and won the appeal, in a decision handed down in October 2019.
The final chapter in the case history was an appeal by Westpac to the High Court of Australia.
High Court decision
The key question for determination by the High Court was whether a reasonable person in the position of each of the members called by Westpac might expect Westpac to have considered one or more of the member’s objectives, financial situation and needs when recommending that the member accept Westpac’s offer to rollover their external superannuation accounts into the member’s Westpac account.
In its February 2021 decision, the High Court turned down the appeal, finding that Westpac had given personal advice. The High Court decision brings home how hard it is to conduct targeted marketing to customers without stepping over the line into personal financial advice.
Personal advice will be determined in each case based on the circumstances and context of the advice, including the subject matter of the advice and significance of decision. Superannuation is a complex and difficult area which often requires tailored advice. The consequences of making an error can be major. The High Court noted the consolidation of multiple superannuation accounts was a significant financial decision.
A general advice warning to a client will be of no protection, if information on the customer’s objectives, financial situation or needs is elicited and a reasonable person in the situation of the person receiving the advice might expect that information to be considered. Nor will offering a “free service” prevent any opinion or recommendation being personal advice.
The High Court made clear that even if only one of the customer’s objectives, financial situation or needs are taken into account, that is enough to make it personal advice. They said that the definition of personal advice “does not provide that the provider must have considered all of those matters.”
And if the objectives of the customer happen to apply to many other people in the position of the customer, that does mean they are not personal objectives: “advice which is personal advice” the Court ruled, “does not cease to be so because the content of that advice is such as to be generally applicable to all or most persons in the position of the client as well as to the particular client.”
The High Court also held that the requirement to have “considered” the objectives, financial situation or needs only meant that the provider “took account of” those matters, nothing more.
The definition of personal advice in the Corporations Act says that advice will be personal even if the provider did not in fact consider one or more of the objectives, financial situation or needs of the client, as long as a reasonable person might expect the advice giver to have considered one or more of those matters. That was crucial in this case. Because there was a pre-existing relationship between each member and Westpac, one of trustee and beneficiary, the High Court found that a reasonable person might expect that the adviser would be acting in the member's best interests, including by considering one or more of their objectives, financial situation or needs before giving financial product advice.
Justice Gordon made the point that even where an adviser who had no previous relationship with the member made the call, or was not provided with information by the member prior to the call, a reasonable person might expect the adviser to be continuing the pre-existing relationship and, as a representative of Westpac, the adviser might have access to relevant information that Westpac held for consideration in providing the advice.
What’s more, the members were asked about their objectives on the phone calls, so a reasonable person “might expect that the objectives articulated were relevant to, and would be considered by Westpac in, the provision of any subsequent financial product advice.” The use of social proof marketing techniques, where a person’s needs or objectives are validated as correct or socially acceptable behaviour by the adviser, may well increase the chance a reasonable person might expect that those needs or objectives have been considered by the adviser.
ASIC guidance
It seems clear from the Westpac Case that using a general advice model for any targeted marketing is a minefield. If personal information about a client is used to tailor communication to the client, there is a heightened risk that the communication will become personal advice.
In its Regulatory Guide 244: Giving information, general advice and scaled advice (“RG 244”), ASIC says that if you have personal information about a client, this will not, by itself, mean that the general advice you give them is personal advice.
“You can use personal information about a client to give general advice that is more relevant to a client. However, you must ensure that you do not, in fact, consider the client’s relevant circumstances when you prepare and give the general advice.”
But what if you don’t consider the client’s circumstances, yet the client thinks you did? If a reasonable person might expect this, you have still given personal advice.
ASIC has adopted a “no-action” position here: it may be personal advice under the legislation, but ASIC will not prosecute you. This no-action stance is set out in RG 244:
“We will not take action where you give personal advice merely because you give general advice using personal information about a client’s relevant circumstances to choose general advice that is relevant and useful to them.”
However, there are conditions attached: the no-action position only applies if you do not, in fact, consider the client’s relevant circumstances when you prepare the advice, and it is unlikely that the client would expect the advice provided to reflect a consideration of their relevant circumstances.
These conditions do not give much comfort. As long as personal advice can be a matter of perception by a reasonable person in the shoes of the advice recipient rather than a matter of what the service provider intends, targeted general advice is hazardous.
Where to now?
Legislative reform could be the most cost-effective answer. The Morrison Government has announced that it will commission a review of the financial advice sector next year, as recommended by the Banking Royal Commission. On 19 April the Financial Services Council issued a green paper on accessible and affordable financial advice, proposing an end to the binary general advice/personal advice model and replacing this with a graduated approach ranging from “general information” to simple personal advice through to complex personal advice.
In the meantime, we suggest careful consideration of any tailored direct marketing. Please contact us if you need advice on the development and rollout of financial product marketing campaigns.
Kathleen Harris and Patrick Dwyer
Legal Directors
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