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Acting lawfully in the best interests of clients for tax (financial) advisers D32 2016

Exposure draft

TPB Information Sheet TPB(I) D32/2016

Code of Professional Conduct – Acting lawfully in the best interests of clients for tax (financial) advisers

This exposure draft is also available as a PDF – TPB(I) D32/2016 Code of Professional Conduct – Acting lawfully in the best interests of clients for tax (financial) advisers (332 KB)

Tax Practitioners Board exposure draft

The Tax Practitioners Board (TPB) has released this draft Information Sheet as an exposure draft and invites comments and submissions in relation to the information contained in it within 45 days. The closing date for submissions is 11 July 2016. The TPB will then consider any submissions before settling its position, undertaking any further consultation required and finalising the Information Sheet.

Written submissions should be made via email at tpbsubmissions [at] tpb.gov.au or by mail to:

Tax Practitioners Board
GPO Box 1620
SYDNEY NSW 2001

Disclaimer

This document is in draft form, and when finalised, will be intended as information only. While it seeks to provide practical assistance and explanation, it does not exhaust, prescribe or limit the scope of the TPB’s powers in the Tax Agent Services Act 2009 (TASA). The principles and examples in this paper do not constitute legal advice. They are also only at a preliminary stage. The TPB’s conclusions and views may change as a result of comments received or as other circumstances change.

Document history

This draft Information sheet was issued on 25 May 2016 and it is based on the TASA as at 8 March 2016.

Introduction

  1. This draft Information Sheet (TPB(I)) has been prepared by the Tax Practitioners Board (TPB) to assist registered tax (financial) advisers to understand their obligations under subsection 30-10(4) of the Tax Agent Services Act 2009 (TASA) (Code of Professional Conduct (Code) Item 4).[1] While the focus of this draft TPB(I) is on Code item 4, it is also important to note that there are 13 other items in the Code and additional requirements in relation to being a ‘fit and proper’ person which may be relevant.[2]
  2. In this draft TPB(I), you will find the following information:
  • what is the obligation under Code Item 4 (paragraphs 3 to 10)
  • consequences for failing to comply with Code Item 4 (paragraphs 11 to 15)
  • comparison with the Corporations Act 2001 (Cth) (Corporations Act) (paragraphs 16 to 21)
  • practical examples (paragraph 22)
  • consultation questions for stakeholder feedback (paragraph 23).

What is the obligation under Code Item 4?

  1. Code Item 4 provides that tax (financial) advisers must act lawfully in the best interests of their client.

What does acting ‘in the best interests of your client’ mean?

  1. Acting ‘in the best interests of your client’ has been held to mean acting in a representative character in the exercise of the tax (financial) adviser’s responsibility to the client. This requires a tax (financial) adviser to advance and protect their client’s interests to the best of their ability, in all circumstances. However, the Code does not apply to the conduct of a tax (financial) adviser when providing financial services (as opposed to tax (financial) advice services).
  2. The duty imposes the following obligations on tax (financial) advisers:
  • a duty not to promote the tax (financial) adviser’s personal interest in circumstances in which there is an actual or potential conflict between the tax (financial) adviser’s personal interests and those of the client;
  • a duty not to use the tax (financial) adviser’s position to make a personal profit or gain unless authorised to do so by the client and to account to the client for any such unauthorised profit or gain. Accounting for any unauthorised gain will not operate as an excuse for the initial breach that gave rise to the gain.
  1. This duty is similar to the fiduciary duties owed by other professional advisors to clients, and its scope is shaped by the circumstances of the engagement (such as the letter of engagement and any relevant course of conduct between the tax (financial) adviser and the client). However, because the Code creates positive obligations that tax (financial) advisers must comply with in providing tax (financial) advice services to their clients, the duty owed by the tax (financial) adviser to the client is not wholly contractual.
  2. Characteristics of the relationship between a tax (financial) adviser and their client that may be relevant to determining the scope of the duty are:
  • the existence of ‘a relationship of confidence’ and the tax (financial) adviser’s duty to maintain client confidence (Item 6 of the Code);
  • an undertaking by the tax (financial) adviser to perform a task or fulfil a duty in the interests of the client;
  • dependency or vulnerability on the part of the client that causes them to rely on the tax (financial) adviser for the tax (financial) advice services provided;
  • a reasonable expectation that the tax (financial) adviser will act in the client’s best interests.

What does acting ‘lawfully’ in the best interests of your client mean?

  1. Acting ‘lawfully’ in the best interests of a client requires a tax (financial) adviser to act in a client’s best interests but only to the extent that their actions are consistent with the law. That is, ‘acting in the best interests of clients’ is not a justification for a tax (financial) adviser to contravene or disregard the law.
  2. When acting for, or on behalf of, a client, a tax (financial) adviser must only act where authorised to do so.
  3. There may also be examples of where the law overrides the duty of a tax (financial) adviser to their client, for example the requirement to provide information to statutory authorities such as the TPB or the Australian Securities and Investments Commission (ASIC) pursuant to notices issued under relevant legislation such as the TASA or the Corporations Act.

Consequences for failing to comply with Code Item 4

  1. If a registered tax (financial) adviser fails to act lawfully in the best interests of their client, the TPB may find that the tax (financial) adviser has breached the Code and may impose sanctions for that breach.
  2. If a tax (financial) adviser breaches the Code, the TPB may impose one or more of the following sanctions:
  • a written caution
  • an order requiring the registered tax (financial) adviser to do something specified in the order
  • suspension of the tax (financial) adviser’s registration
  • termination of the tax (financial) adviser’s registration.
  1. In addition, the same conduct which may amount to a failure to act lawfully in the best interests of the client, under Code item 4, could constitute a breach of another Code item.
  2. In contrast, it is noted that if an Australian financial services (AFS) licensee or an authorised representative of an AFS licensee fails to comply with the Corporations Act (including the Best interests duty), they may be liable for:
  •  a civil penalty[3] and/or
  • an order for compensation for loss or damage suffered by the client. [4]
  1. Ultimately, determining whether a tax (financial) adviser has complied with their obligations under Code Item 4 will be a question of fact. This means that each situation will need to be considered on a case-by-case basis having regard to the particular facts and circumstances.

Comparison with the Corporations Act 2001 (Cth)

  1. The TPB recognises that the obligations of some Australian financial services (AFS) licensees and their representatives under the Corporations Act are similar to some obligations under the TASA (in relation to the activities that a practitioner undertakes in their capacity as a tax practitioner).[5]
  2. Ultimately, while compliance with relevant Corporations Act and ASIC requirements will be a relevant factor, it is not conclusive in relation to whether obligations under Code 5 in the TASA have been satisfied.
  3. In particular, it is noted that subsection 961B(1) of the Corporations Act requires that, in the provision of personal advice to a person as a retail client, the provider ‘must act in the best interests of the client in relation to the advice’ (the Best interests duty).
  4. It is also noted that compliance with the Best interests duty under the Corporations Act is met generally by following the safe harbour steps set out in subsection 961B(2) of the Corporations Act, which include:
  • identify the objectives, financial situation and needs of the clients that were disclosed through instructions;
  • identify the subject matter of the advice that has been sought by the client (whether explicitly or implicitly) and the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter;
  • make reasonable enquiries to obtain complete and accurate information where it is reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate;
  • assess whether the provider has the expertise required to provide the client with advice on the subject matter sought, and if not then decline to provide the advice; and
  • where it would be reasonable to consider recommending a financial product:
  • conduct a reasonable investigation into financial products that might achieve the relevant objectives and needs of the client;
  • assess the information gathered in the investigation;
  • base all judgements in advising the client on the client’s relevant circumstances; and
  • take any other step(s) that would be reasonably regarded as being in the best interests of the client, given the client’s relevant circumstances.[6]
  • The primary distinction between the obligation under Code Item 4 and the Best interests duty under the Corporations Act is that Code Item 4 expressly requires that a tax (financial) adviser consider the lawfulness of acting in accordance with client instructions and to decline to so act if it would be unlawful.
  • Code Item 4 can therefore be seen to place a tax practitioner (including a tax (financial) adviser in a position that is analogous to a legal practitioner – imposing an obligation on the practitioner to uphold the law in acting for clients rather than merely seeking to facilitate the client’s wishes/interests.

Practical examples involving Code Item 4

  1. Outlined further below are possible indicative examples for the purpose of illustrating the general application of Code Item 4. In all cases, consideration will need to be given to the specific facts and circumstances.

Example 1

Scenario

Drew engages Kylie, a registered tax (financial) adviser, to withdraw money from his self-managed superannuation fund (SMSF) cash account. Kylie is aware that Drew cannot lawfully withdraw money from his SMSF cash account.

Code of Professional Conduct requirements

Kylie must advise Drew in accordance with the relevant laws and must not act in accordance with Drew’s instructions.

Example 2

Scenario

Michael provides advice to his clients Mr. and Mrs. Brown about retirement options. Michael recommends that his clients invest in a particular property through a unit trust. Michael correctly advises his clients on the superannuation and other taxation implications for the investment. However, Michael grossly fails to assess and inform his clients of the financial risks involved in the investment

Code of Professional Conduct requirements

Michael has reasonably ascertained the liabilities, obligations and entitlements of his clients that could arise under a taxation law with respect to the investment and advised his clients accordingly. As such, Michael has acted lawfully in the best interests of his clients in relation to the tax (financial) advice service, and therefore has not contravened the Code.

While the Code has not been breached in this scenario, the TPB may find that Michael’s conduct impinges on his fitness and propriety to be a registered tax (financial) adviser.

Further, it is noted that the Australian Securities and Investments Commission is responsible for the regulation of financial services and Michael’s conduct may impact on his obligations under the Corporations Act 2001 (Cth).

Consultation questions

  1. The TPB is inviting stakeholders to provide specific comment in relation to the following questions:
  • Do you agree with the general principles outlined in paragraphs 4 to 7?
  • Paragraph 7 details some characteristics that may be relevant to determining the scope of the duty to act lawfully in the best interests of a client under the Tax Agent Services Act 2009 (TASA):
    • Do you agree with these circumstances?
    • What other circumstances, if any, should be included in the list?
  • In relation to Examples 1 and 2, do you have any comments about:
    • the scenarios?
    • what steps would be required for the purpose of acting lawfully in the best interests of a client?
  • Are there any additional examples or scenarios that should be incorporated into the information product? If so, please also outline what you consider is required for the purpose of acting lawfully in the best interests of a client in relation to these examples / scenarios.
     

[1]Although this TPB(I) has been prepared specifically for tax (financial) advisers, the principles regarding Code Item 4 apply to all registered tax practitioners (that is, tax (financial) advisers, tax agents and BAS agents). See also TPB(EP) 01/2010 Code of Professional Conduct (PDF), noting that the TPB intends to release an updated version of this Explanatory paper in due course, incorporating relevant information in relation to the obligations of registered tax (financial) advisers under the Code of Professional Conduct in the Tax Agent Services Act 2009 (TASA).

[2]For further information, see TPB Explanatory paper TPB (EP) 02/2010 Fit and proper person.

[3]See sections 961K and 961Q in the Corporations Act.

[4]See section 961M in the Corporations Act.

[5] For further information on what constitutes a tax (financial) advice service, including facts and circumstances considered in determining whether a client can reasonably be expected to rely on a service being provided, refer to TPB(I) 20/2014: What is a tax (financial) advice service?

[6] For further information, see ASIC Regulatory Guides RG 175: Licensing: Financial product advisers - conduct and disclosure and RG 244: Giving information, general advice and scaled advice.