Why financial advisers must choose their words wisely

Choose your words carefully

Using promotional words like “free”, “guaranteed” and “safe” may attract clients, but they could also have ASIC knocking on your office door. Here’s a quick guide to the dangerous words and doubtful claims used on social media and in promotional materials that can get financial services firms into trouble.

By Stephen Craft and Louise McCabe

Updated 10 April 2017

“Free SMSF set-up!” … “No industry fund can compete with this!” … “Highest account balances of all super funds!”

Claims like these have become increasingly common as financial services firms take to social media to promote their wares. While promotional words such as “free” may seem great for capturing eyeballs online, they can also attract less-welcome attention from regulators.

A slew of recent cases where the Australian Securities & Investments Commission (ASIC) has come down heavily on firms whose social media claims were potentially misleading demonstrate that it’s important for financial services professionals to remind themselves of the rules governing prohibited words online – including some traps for the unwary.

What it takes for a firm to be truly independent

You may already know that Section 923a of the Corporations Act makes the misuse of words such as “independent”, “impartial” and “unbiased” in promotional materials a criminal offence. But you may not realise that other words and phrases with a similar meaning are also forbidden.

Paul Derham, partner at Australian commercial and financial services law firm Holley Nethercote, says “independent” is the most widely misused of all the prohibited words.

“The law says you can’t use the word ‘independent’ unless you don’t receive any commission or benefit,” he explains. “And it’s a far wider test than common sense might suggest.”

Senior lawyer at Holley Nethercote, Jesse Vermiglio, says that trying to qualify “independent” by coupling it with another word won’t get you around the law.

“One of the common misuses of the word is in phrases such as ‘independently non-aligned’, or ‘independently owned’,” Vermiglio says.

The regulator takes a very wide interpretation of what “independent” and words of similar import mean.

Approach these words with care: “guaranteed”, “free” and “safe”

Financial services professionals should also be careful with the words “guaranteed”, “free” and “safe”. While not prohibited by Section 923a, such words can lead to promotional materials being deemed false or misleading by the regulator.

“Free” is a problematic word, Derham says. “For instance, if an accountant is offering a free part of an SMSF set-up, then it’s likely that there’s a cost built in elsewhere. If a document relies on other things that cost money, then it’s really not free.”

Financial professionals have also fallen foul of the law with words such as “guarantee”, where they create the impression of a level of safety that a financial product cannot actually provide.

Related: Angry, young accountants lead exodus from big firms (Sydney Morning Herald)

Vermiglio says the global financial crisis led to a series of significant court cases, where claims of capital guarantees in promotional materials were at odds with the strict meaning of product terms and conditions – something that only became clear to clients when those products failed.

“The whole phrase loses its meaning where there are exceptions,” Vermiglio says.

As well as choosing your words carefully, you need to ensure your advertising balances positive claims with a realistic representation of the risks.

While the law does permit some amount of self-promotion, it’s important not to give false impressions.

The penalties for misspeaking

Using prohibited words is a criminal offence with potentially serious penalties. ASIC has the power to initiate civil penalty proceedings that could result in fines worth hundreds of thousands of dollars.

However, Vermiglio says the regulator is more likely to use the provisions of the ASIC Act dealing with false and misleading statements or misleading and deceptive conduct. He points out that there could be penalties for licensees too, with ASIC imposing conditions on their licences or, in extreme conditions, suspending them.

Despite such potentially dire consequences, firms continue to infringe the rules.

“When you’re running a business there’s that inevitable tension of wanting to promote your business in the best possible light and gain some competitive edge in the marketplace,” Derham says.

“This may be what drives people to push the envelope.”

Staying on the right side of the ASIC Regulatory Guide 234

So how can you make sure you don’t end up in trouble as a result of a careless word or a misplaced phrase?

Derham recommends that financial professionals with an Australian Financial Services Licence (AFSL) or an Australian Credit Licence (ACL) start by consulting ASIC Regulatory Guide 234, on advertising financial products and services, followed by the Australian Competition and Consumer Commission’s (ACCC) Advertising and Selling guide.

It’s also important to balance benefits with the risks, he says. 

As a financial professional, you should:

  • Have a compliance framework in place, and follow an agreed process for reviewing promotional materials.
  • Assign a staff member who understands the legal requirements involved with using promotional materials to ensure they are compliant.
  • Document your compliance process carefully.
  • Ensure documents such as Statements of Advice are clear, concise and effective.
  • If you are using government-produced or publicly available research, reference it correctly and keep copies of your primary sources.
  • When using images as part of your materials, either pay for stock photographs or seek permission to use images produced by someone else.
Most importantly, according to Vermiglio, “you should be able to do what you say you’re going to do. Deviating from that principle is when people start getting in trouble with the regulator.”

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