Analysis of the Ripoll Report: The Risks of Fiduciary Duty for Advisers

The Ripoll Inquiry was announced on 25 February 2009. The press release called it “a new inquiry into the underlying issues associated with recent financial service company collapses, such as Storm Financial, Opes Prime and MFS.”1

Given that its alleged raison d’etre was the high-profile collapse of a number of financial products, its terms of reference were curious. They focused on the advising industry. This is somewhat like blaming the car salesperson when the new car is a lemon. Although the salesperson has some responsibility, is it not the manufacturer that is primarily responsible?

There were nine parts to the terms of reference. For the purpose of the analysis in this paper, the salient ones were:

  • The role of financial advisers.
  • The appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served.
  • The adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers.
  • The need for any legislative or regulatory change.2

An Adviser’s Legal Obligations

The inquiry began inauspiciously by incorrectly representing the current law in the press release: “… current law only requires an adviser to ‘know the client’ rather than to know what is in the ‘best interests of the client’”. 3

In fact, the current law (s945A of the Corporations Act) requires the adviser to not only determine their client’s personal circumstances but then to:

  • Conduct reasonable investigation and consideration of the subject matter of the advice.
  • Ensure that the advice is appropriate, having regard to both the client’s circumstances and the results of 1 above.

There is clearly a difference between ‘appropriate’ advice and ‘advice in the best interest of the client’. But the latter standard is arguably unfair on advisers. The concept of ‘best’ is an absolute, and such a high standard is never possible in practice. The Australian Securities and Investments Commission (ASIC) recognised this in its submission to the inquiry. There is not even any certainty that such a high standard will result in greater protection of consumers. Inappropriate advice is readily compensated under the Act.

Effectiveness of the Inquiry in Addressing Consumer Dissatisfaction

Was the inquiry necessary to better enable consumers to take action against their advisers in relation to these product failures? Arguably not. The Financial Ombudsmans Service (FOS) decision in the Basis Capital Fund Management case (Determination No. 18959)4 on 30 June 2009 clearly sets out the obligations of an adviser governed by the FOS regime and reiterates the high standard required of such advisers. Generally, those high standards were not met in cases where consumers lost money in these product failures. Clients already had their claims against the advisers and really did not require anything more.

For example, in a letter to the editor of The Age in March of 2009, a forensic accountant and former financial planner highlighted a vast array of problems with the advice given to his elderly friends (who were making claims against their adviser for putting them into Storm Financial). His friends, a 70-year old man and his 65-year old wife, were advised to cash out their allocated pensions and take out a margin loan for AUS$500,000 – in spite of the fact that they had no income to support a margin call and no real understanding of the intricacies of the product they were about to invest in. The clients in this case would have succeeded with a claim at FOS on any of a dozen different grounds against the adviser, who was clearly guilty of giving reprehensibly bad advice. Unfortunately, the FOS limit is just AUS$150,000 in such cases and their losses were much higher.

Furthermore, the clients would have succeeded in a claim against the adviser for breaching s945A. It is unimaginable that the adviser’s advice in such a case could be considered ‘appropriate’.

Our courts do not need greater powers to properly compensate an adviser’s damaged clients. The court system has essentially established the required standard of performance for advisers. Although FOS is not a court, it cannot ignore the law as expressed by the Courts, particularly in cases, which have interpreted and given substance to legislative and common law principles. The Basis Capital case, therefore, grounds much of its finding on existing case law, to the extent that it takes a slightly different approach than a court (which FOS is entitled to do under its constitution as a private complaints resolution service), it reflects industry best practice. Such practice would be admissible in a court to inform of how an adviser’s performance should be measured. Neither FOS nor the Courts needed extra help in providing compensation to aggrieved clients of Basis Capital.

Therefore, the Basis Capital case sets out the standards of performance that an adviser has to achieve. The goal, according to the FOS determination, is full compliance with s945A and sufficient advice so that the client can provide informed consent. The adviser’s greatest protection is that informed consent. Nowhere is it required that advisers must effectively guarantee the performance of their clients’ portfolios; if the standard of performance is unachievably high then it is tantamount to such a guarantee. On the contrary, the client must retain the ultimate responsibility by providing informed consent and thereby releasing the adviser from that virtual guarantee. To the extent that the consent is not sufficiently informed due to the adviser’s failings, the adviser remains liable.

The federal government clearly felt that there were no votes in maintaining the status quo, particularly in light of the spate of high-profile product failures. Apparently it was not seen as relevant that the main reason for failure was:

  • The products’ design.
  • That the advisers were already liable for putting clients into products which the clients did not understand; products the advisers had failed to properly explain.

Ripoll Recommendations – Fiduciary Duty for Advisers

On 23 November 2009, the Ripoll Inquiry issued 11 recommendations for reform. Relevant for this paper is Recommendation 1 which it is informative to quote in full: “The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.”5

Unfortunately there is no reasoning behind why the inquiry felt this recommendation was worthwhile, and no support for its likely efficacy. The main proponent of the recommendation was ASIC so it must be assumed that the Inquiry agrees with the ASIC submission. That submission is, likewise, very short on reasoning and on support.

Interestingly, the Ripoll recommendation is not in the same form as ASIC’s submission. Paragraph 137 of ASIC’s submission suggested that: “…the Corporations Act could be amended to clarify that advisers must act in good faith in the best interests of their clients and, where there is a conflict between their clients’ interest and their own interests, to give priority to their clients’ interests.”6

There are three arms to ASIC’s characterisation of advisers’ obligations, namely:

  • Act in good faith.
  • Act in the best interests of the client.
  • Give priority to their clients’ interests in any conflict.

ASIC called this a “legislative, fiduciary-style duty.”7

Definitions of Fiduciary Duty

The term ‘fiduciary-style duty’ reflects the fact that the definition of what constitutes a fiduciary duty at law is unclear. In his book ‘Fiduciary Obligations’, then Australian National University academic, P D Finn, wrote: “the term ‘fiduciary’ is itself one of the most ill-defined, if not altogether misleading terms in our law”.8

ASIC clearly wanted to by-pass this lack of clarity by inserting a clear legislative definition of the term as it applies to financial advisers. Regrettably, the Ripoll recommendation does not provide that definition, preferring to leave it to the legislative draftsman. The result is that we are no further advanced in understanding how the fiduciary duty could affect advisers.

A strict definition of ‘fiduciary duty’ would require the adviser to act in good faith, to act in the best interests of the client and to not even allow a conflict of interest to exist, let alone impact the adviser’s decision. This is the type of duty placed on trustees. Such a duty applied to a financial adviser could lead to the end of bank-operated advisory groups selling bank products. Potential conflicts abound in such circumstances.

At the other end of the continuum would be a duty simply to put the client first – a duty already placed on Financial Planning Association (FPA) members by that association’s professional standards. In this latter case the existence of the conflict would not be a breach of the duty, only the failure to deal with it effectively. Such a duty would simply require advisers to show that, in their deliberations, they placed their clients’ interests before their own interest.

In its submission to the Ripoll Inquiry, ASIC gave some examples of how its fiduciary-style duty would work.9 The examples imply that ASIC would be satisfied with the less onerous duty. So, an adviser faced with three equally appropriate investments for his/her client would have to pick the one with the lowest fees because that would put the client’s interest of paying low fees ahead of the adviser’s interest of higher commission on higher fees. This is a curious example in light of ASIC’s desire to completely remove adviser commissions. Similarly, an adviser who recommended their client move to a different wrap product would have to show clear benefit to the client, and that the cost of doing so was outweighed by the benefits.

Will it Become Easier for Clients to Make Claims Against Advisers?

Perhaps the greatest concern with a new legislative fiduciary duty is that it will, in practice, reverse the onus of proof. The onus of proof is the obligation on a claimant (plaintiff) to prove their case. Currently a claimant needs to show that the advice was not appropriate because the adviser failed to fulfil their obligations under s945A, or that the client did not provide informed consent because the adviser failed in their obligation to inform the client sufficiently. The issues in proving such things are numerous and could be difficult for a client, particularly if the claim exceeds FOS’ jurisdictional limit and is, therefore, before a court.

However, under a fiduciary duty, and depending on how the term is eventually defined by the legislation, the client need only prove that the adviser did not put the client’s interest first. Not choosing the cheapest product in the approved products list might be all it takes. Failing to fully justify the movement from one wrap account to another or the sale of a particular product might be sufficient.

Case study

Aaron is a financial adviser who needs to determine the best investment product for his client, Jelena. He reviews three different products on the authorised products list in the particular asset class; we?ll call them products A, B and C.

Aaron does not select the cheapest (Product C) because he reasonably believes that one of the other products (Product B) is superior. Therefore, Jelena is invested in Product B which does indeed perform better than Product C. But, three years later, there is an investment team reshuffle at Product B fund managers and, after a short period of disastrous mismanagement, Product B fails.

Jelena makes a claim against Aaron on the grounds that he breached his fiduciary duty by not originally picking the cheapest product for her.Aaron must then defend the claim by showing that, at the time of the advice, the now failed Product B was better than Product C; that Aaron actually put Jelena?s interest first by selecting the better product, even though it resulted in Aaron receiving higher fees (assuming commissions are not banned in the interim). The difficulties of such proof are self-evident, particularly with the passage of time.


Having met the burden of proving their case, the claimant has effectively whacked the ball over the net to make the adviser offer up a defence. The adviser will need to show that the client’s interests were put first – that the benefits of the advice outweighed the detriments. This may be very difficult for the adviser. The claim is unlikely to have been made unless the product has failed and the adviser is therefore left arguing that, at the time of the advice, the product benefits appeared to outweigh any conflicted interests.

The onus of proof remains on the claimant but, by introducing a higher standard of performance in the form of a fiduciary duty, the law makes the claim easier to make and more difficult to defend, effectively reversing the onus of proof.



Much of this paper has been speculative because we simply do not know what kind of fiduciary duty will be introduced, if any. When the definition of the duty is clear we will have greater certainty on the extent of the affect on financial advisers. We will probably still be left wondering why this was necessary in the first place.

1Parliamentary Joint Committee on Corporations and Financial Services (2009).



4The FOS determination into the Basis Capital Yield Fund can be found at:

5Parliamentary Joint Committee on Corporations and Financial Services, Paragraph 6.29, pg124.

6ASIC submission to the PJC Inquiry into Financial Products and Services in Australia (2009), August, paragraph 137, pg 43.

7Ibid, paragraph 136, pg 43.

8Finn, P. D. (1977), Fiduciary Obligations, Law Book Co Ltd, Sydney.

9ASIC submission to the PJC Inquiry into Financial Products and Services in Australia (2009), August, paragraphs 139-142, pgs 43-44.



Related reading