Pressure on the Size of the Approved Products List

The recent decision of the Financial Ombudsman’s Service in the Basis Capital case and the Ripoll Inquiry’s recommendation that financial advisers have a legislated fiduciary duty to clients will result in considerable pressure on advisers to review their approved products, particularly the number of products on the list.

The Approved Products List sets out the products that the AFS Licensee has approved for recommendation by their authorised representatives.  They are products that the licensee has researched and reviewed and is comfortable to recommend to clients as part of the relevant asset class in the client’s portfolio.

The adviser in the Basis Capital case argued that he had performed his role because he had chosen a product on his licensee’s approved product list.  But FOS held that simply choosing a product that is approved by the adviser’s licensee does not satisfy the adviser’s obligations under s.945A to a particular client.  FOS said “the adviser must go beyond this to demonstrate care and a detailed understanding of the product before he can assume it suitable for a particular client.”

The obligation for the adviser to ‘demonstrate care’ and to have a ‘detailed’ understanding of the product will require greater product research and understanding by the adviser.  Will that be possible where the list of products to choose from is substantial?  Will it mean that regardless of the size of the list the adviser will create their own sub-list of products that they will be prepared to recommend because they have carried out the necessary research on them, not wanting to repeat that depth of research for other products? Does that render pointless the remainder of the list?  Does that unused remainder constitute a potential danger for the licensee by allowing their representatives to choose a product that they may not fully understand?

The Ripoll Inquiry’s recent recommendation that advisers have a legislated fiduciary duty will require the adviser potentially to act in the best interests of the client at all times and certainly to put the client first in any situation of conflict.  Such a fiduciary duty should also put pressure on the size of the approved products list.

For example, one of ASIC’s case studies in their Ripoll submission highlighted the need for an adviser to choose the cheapest product out of three that were equally suitable for the client.  Is there any point in retaining the other two on the approved products list if each time they are considered they will have to be discarded in order for the adviser to meet their fiduciary duty?  Should the approved products list be reduced by deleting similar products and retaining only the cheapest? 

The ASIC submission also specifically said that it did not expect advisers to be able to provide ‘the best advice’ or that the adviser would have to consider every possible option theoretically open to the client.  ASIC specifically stated: “The adviser could, for example, consider all products on their approved product list …”.  How will the adviser show compliance with the ‘best interest’ obligation if they chose a product from an extensive list?  The larger the list the harder this will be.

Licensees may have previously taken their Approved Product List for granted and simply included anything that their research house approved.  But against the backdrop of Basis Capital and Ripoll much more thought needs to go into the creation of such a list.