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• asking extra questions of the client to test the client’s level of understanding of the recommendations being made, and the basis for making them • ensuring as far as possible that the client feels equally free to reject the recommendation to reduce the risk that the client may be substituting trust in the adviser for rational decision-making • recommending the client undertakes education tailored to their capacity to understand • in personal advice situations: • encouraging the client to seek input from a trusted friend or family member with no conflicting interest in the outcome, and offering to meet and explain the recommendations to the family member • asking questions of the client to test their level of understanding of the recommendations being made, and the basis for making them • asking the client to explain back key elements of the advice to the adviser • presenting lower-risk options to the client in the advice to facilitate comparison and effective choice in the client’s decision-making.

To ensure that you can show you have based your advice on the client’s relevant circumstances, the following practices should be undertaken: • Show that you had concerns with the vulnerability of the client, and the steps you took to address this. This may mean refusing to provide your services to the client. • Consider if simpler or lower-risk products would be more appropriate to the level of the client’s understanding. • Do not recommend products that require client control or intervention (e.g. self-managed superannuation funds (SMSFs)). • If you are providing trading services, do not allow clients to trade using their SMSFs unless they can show a high degree of financial literacy. • Embed vulnerable client behaviours into your key risk indicators (KRIs). Your monitoring and supervision program should identify KRIs unique to your business. When the KRIs are triggered, your monitoring and supervision program should delve deeper into the representative behaviours connected with that KRI. • Document every step and action taken.

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Ethics & Governance

CPD Questions

Earn CPD hours by completing this quiz via FS Aspire CPD

1. Sid’s existing client puts pressure on him to provide financial advice to a vulnerable client. Which of the following statements is correct?

a) The issue of vulnerability has been flagged, so Sid can proceed with impunity b) Though unethical, this behaviour is in no way a conflict of interest c) It is may be a conflict of interest under the Corporations Act d) As per the Corporations Act, Sid must avoid all dealings with these two parties

2. As outlined by FASEA, what could an adviser do to help ensure a vulnerable client is not disadvantaged?

a) Avoid testing their understanding through questions as this may cause distress b) Encourage them to seek input from a trusted friend who has no conflicting interest c) Use short decision-making timeframes so the client feels they’ve achieved a result d) Recommend education slightly above their comfort zone as a benevolent ‘push’

3. Which of the following situations does ASIC believe may render a client vulnerable?

a) Addiction b) Job loss c) Having a baby d) All of the above

4. As per the commentary, which of the following actions show that an adviser has taken into account a vulnerable client’s relevant circumstances?

a) Assume they have low financial literacy b) Recommend products that need client control c) Refuse to provide services if warranted d) Avoid any SMSF recommendations

5. AFCA research found that if two clients are interviewed together, vulnerable members of the partnership are more likely to disclose accurate information.

a) True b) False

6. The Royal Commission found that the complexity of financial services today has disadvantaged vulnerable clients.

a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Volume 16 Issue 01 I 2021

Conflicts of interest and vulnerable clients

AFS licensees are required to manage conflicts of interest (Corporations Act section 912A(1)(aa)). Further, if you provide personal advice to a retail client, you must prioritise the interests of the client if a conflict exists (Corporations Act section 961J). When dealing with vulnerable clients, there may be other circumstances where a conflict may arise, including if: • you are pressured to provide advice for a vulnerable client by an existing client • you recognise that the client is vulnerable and proceed with the advice without taking the appropriate precautions • you provide advice to a couple and you are concerned one of them is a vulnerable client.

Key take outs

As an AFS licence holder, it is important to: • have a clear policy in place for how vulnerable clients are to be identified and assisted • conduct training with staff on how to identify vulnerable clients, and the factors that may make a client vulnerable • monitor and supervise representatives using KRIs that consider client vulnerability • develop a clear process for identifying and servicing vulnerable clients, which may include refusing to provide certain services • ensure when dealing with vulnerable clients that all file notes and process are documented. fs

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Applied Financial Planning:

42 Borrowing from others: What is really at stake

By Drew Browne, Sapience Financial

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Applied Financial Planning

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CPD

Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD.

Worth a read because:

A joint mortgage may sound appealing, but it comes with a ‘sting in the tail’. Joint and several liability means a person effectively wears the consequences of a co-borrower defaulting. Further, it can have a knock-on effect in terms of their credit score and future loans.

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Borrowing from others

What is really at stake?

Drew Browne

Get clear on what is at stake when you borrow with others. Understanding 'joint and severally liability loans' and what it means for you You might think when you take out a joint mortgage with someone else that you are only responsible for your ‘half’ or ‘share’ of the loan.

Think again because this is not the case.

By signing a mortgage contract with someone else, you are each agreeing to pay off the whole debt if the other cannot—or will not— pay it.

This is called joint and several liability, and you need to know what it means for you and how to protect yourself.

Buying a property together

Buying a property with your partner is usually straightforward. Combining savings into a single larger deposit can help you both get into a fast-moving property market or reduce (or remove) the need for hefty lenders mortgage insurance fees.

However, the complexity increases when you buy a property with a friend or with a sibling. It becomes even more complicated when you buy a property in a self-managed superannuation fund.

Buying a property and taking out a joint mortgage with your partner is usually straightforward because you have a common goal to live in the property.

However, when you are buying property with multiple people, such as a sibling, a parent or a friend (or a combination), you will all need to have a bigger conversation with everyone involved to agree on what happens when one of you wants (or needs) out.

Have the joint mortgage conversation

Whenever you are about to become a co-borrower, you must first understand the legal position that you are getting yourself into and agree together on the practical details.

This frank conversation needs to cover the following issues: • Do you know whether either of you can afford to buy out the other(s) if need be? • If you later decide to sell, how will you work out and distribute the fair value? • How will you divide the sale proceeds to reflect the fair value of what was contributed upfront and along the way, or the initial deposit that made it possible in the first place? • Who is responsible to keep the property insured and in good order? • What is the ownership structure you will use to hold the property—tenants in common [i.e. each co-owner can have equal or unequal shares in a property, provided it adds up to 100%; and if one of the owners dies, their share remains part of their estate and does not automatically pass on to the other owners]

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or joint tenants [i.e. co-owners have equal shares in the property; and if one of the owners dies, the property is transferred automatically to the surviving owners]? • Will all the parties to the loan be jointly and severally liable? • If so, will you use joint and several insurance to protect each borrower from the full debt, or just their portion of the ownership? • What if you cannot sell later or cannot sell at the price you are hoping to achieve? • What if one of you loses a job or gets sick or injured (e.g. a car accident) and cannot work for a while? • What happens if one of the joint borrowers suffers a sickness or accident that requires expensive medical costs, or they need to move into aged care?

Make your decisions legal

There are many different scenarios to discuss and you should try and talk about all of them.

Tip

The following actions are recommended: • List what you have discussed and what you have agreed upon. • Nominate to use a mediator in the future if required, just in case you reach an impasse and need to get the help of a third party to talk through a decision. • Keep master copies of key documents filed with the lawyers. We also suggest you make a signed legal agreement that records your commitment to ‘act in the best and fair interest of all parties’.

So, who is left carrying the joint mortgage?

The answer is everyone.

The joint mortgage contract will have a legal clause making all borrowers joint and severally liable.

Whenever you buy a property with another, your spouse or with a friend or relative, the mortgage contract you sign states all parties are joint and severally liable. Practically, this term means you are all personally, and jointly 100% responsible for the loan.

All parties are 100% responsible

Because all borrowers are 100% joint and severally liable, if one of you cannot—or will not—pay their share, the bank expects the other person (or people) to pay for all of it. Moreover, if a default happens on your loan because of the other person’s actions, you still get the default listed on your credit file. Maybe this is unfair, but that is the reality of the joint mortgage you sign. What is the effect of a joint and several loan when buying a second property?

There is another consequence of this clause in your home mortgage. That is, if you later want to purchase an investment property, when you are calculating what you can afford, because you already have a joint and several mortgage liability, you are assumed to already be responsible for the entire 100% of the first mortgage, not just your portion.

This means co-ownership of a property with a mortgage can significantly reduce your own future borrowing power.

What happens if you break up?

If you break up with your partner, and you are still a cosignatory, guarantor or joint borrower to a mortgage, expect to be held liable for any debt with a joint and several clause in the loan agreement.

What happens if one person dies?

If your partner or a co-borrower dies, you will still be held personally liable for any or any debt that has a joint and several clause in the loan agreement.

How the ownership structure was initially set up now determines if the co-owner’s share of the value in the property goes to their estate (as per their Will) to be split up, or simply passes to the surviving joint owners and never falls into their estate to be challenged by others.

Drew Browne, Sapience Financial

Drew Browne is owner and senior financial adviser at Sapience Financial. An award-winning writer, speaker, financial adviser, and professional mentor, he works with small business owners and their families to help them better manage life’s risks.