The Quality of Advice Review

In a nutshell

Following over 100 public submissions received from a broad cross section of industry participants, Michelle Levy has released her draft Proposals Paper for the Treasury’s Quality of Advice review. At its highest level a number of the proposals are focussed, on addressing the supply side issue of obtaining financial advice. While this comes as no surprise to many, considering the reduction of adviser numbers from approximately 23,000 in 2016, to less than 16,000 in 2022 on the financial adviser register (FAR), it is important to consider some of the practical implications of the proposals if they survive through to enacted legislation. 

Ms Levy has identified 12 preliminary proposals with formal responses sought from industry by 23 September. The proposals include some potentially significant changes, including:

• a much broader definition of Personal Financial Advice (which will include much advice given now as general advice);
• far less prescription in the provision of personal advice and who may provide it, with the notion of a continuum of complexity with reduced red tape for simpler personal advice including:
  • the ability for Non-Relevant Providers (including banks and digital advice providers for instance) to provide simple advice without being subject to the obligations currently imposed on financial advisers under the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics and education requirements;
  • removing the obligation to provide Statements of Advice (SOA) or Records of Advice (ROA); andremoval of the annual Fee Disclosure Statement (FDS) and replaced with annual written consent from their client to deduct the fees;
  • removal of the safe harbour steps and Best Interests Duty (BID) and replacement with an obligation to provide Good Advice;
• removing the concept and framework around General Advice; and
• clarification and removal of restrictions on super trustees collectively charging fees should be removed and trustees should have discretion to decide how to charge members for personal advice.

Since release of the proposals, there appears to be cautious optimism and support throughout the financial advice industry, noting that  some of the key suggested ideas were featured heavily in the industry submissions. However, it should also be noted that there is concern within some quarters, and in particular some financial advisers and consumer groups that the changes will have the impact of reducing consumer protections. 

Achieving increased access to quality and affordable advice while safeguarding appropriate consumer protections represents the biggest challenge in the proposals and resistance to them. As to consumer protections, the proposals place significant store in three areas:

• firstly in the underlying quality of most products in the market and ASIC’s ability to maintain appropriate guard rails via the more recently introduced Product Intervention Powers and Design and Distribution Obligations;
• the professionalism of advisers to maintain appropriate records and provide appropriate information to their clients supporting the provision of Good Advice; and,
• perhaps most importantly Australian Financial Services Licensees (AFSL) operating models  of Non-Relevant Providers will effectively identify and respond to the need for more complex advice and refer relevant customers to a Relevant Provider instead of achieving a product sale (even if it is otherwise a quality product). 

There isn’t space in this blog to dig deeply into each of the proposals so in this first blog we will focus on some of the key proposals and what they might mean (if enacted) for a qualified financial adviser in this context a Relevant Provider and in particular:

• the expansion of who can provide personal advice;
• the removal of Safe Harbour and Best Interest Duties (for all other than registered financial advisers to whom the FASEA code of ethics will continue to apply) and replacing it with an obligation to provide Good Advice.
• Reduction  of red-tape and in particular removing the obligation to provide an SOA or ROA and FDS

The Adviser

The question is frequently asked as to what the future of financial advice looks like which leads us to question who is the financial adviser of the future? This can be answered in two parts:

• who will provide advice; and
• what obligations will they have to a client. 

Whilst the current framework has assisted in lifting the quality of advice, the years of piled on regulation and associated compliance costs have driven up the cost of advice, while pushing affordability down. This in conjunction with the large corporates exiting the advice industry has contributed to the ever-growing unmet advice need.  

Relevant and non Relevant Provider

With Ms Levy’s proposal in the realm of expanding who can provide personal advice, at first read it appears that the provider of advice will not be required to be licensed or qualified to provide advice unless they are a Relevant Provider. However, Ms Levy reinforced the AFSL obligation around ‘Good Advice’ and that they will need to consider the competencies and scope of their providers.  This paves the way for a new breed of advisers, as well as corporates that have previously exited the industry, to provide simple advice based on their assessment of client needs (and having regard to what they know about the clients’ circumstances) regardless of whether they are licensed or even degree qualified. This has the potential to reintroduce providers of advice back into the market to fill the unmet advice gap for many Australians who would benefit from more simple advice and are currently receiving no advice or relying on General Advice which does not have regard to any of their relevant circumstances.  

There are a number of potential issues both for advisers and  consumers including:

• What does ‘simple’ advice mean and will AFSL’s who provide ‘simple advice’ stay within the guardrails? In particular it will be important to manage the risk that licensees who are not relevant providers, choose not to ask too many questions of a client lest they determine the client’s needs are complex, precluding the provision of advice and in turn the sale of a product.
• For advisers, will expanding the supply side impact their ability to attract and retain customers who have genuinely more complex needs and will benefit from holistic financial advice, albeit at a higher price point than simple advice?
• The opportunity for advisers and their licensee’s operating models evolves to a broader service offering for many more clients– perhaps with digital advice alliances to serve consumers with simple advice needs evolving into complex for fee advice as consumer needs and circumstances change with time.
• For ‘non relevant providers’ that are required to give Good Advice, how will this be measured and what guidance would be provided? To paraphrase  the classic Australian film, ‘The Castle’, Good Advice will need to be more than “the vibe”!
• Licensees will need to carefully consider how they demonstrate Good Advice provided from their non relevant providers ensuring that they have adequate training, and their advisers are competent in the advice areas the Licensee has determined they can provide advice in.  

We will write a separate blog with our thoughts on the opportunities and challenges for Non-Relevant Providers and their provision of personal advice.

Good Advice

A significant proposed change focusses on moving away from the Best Interests Duty (BID) and the safe harbour steps in s961 of the Corporations Act 2001 and replacing it with a broader obligation, imposed on both Relevant and Non-Relevant Providers to provide Good Advice.  As Ms Levy has observed, historically, the advice process has been focused on the process, rather than the outcome which is broadly at odds with how professional services are and have traditionally been delivered and critiqued. The implementation and interpretation of BID and Safe Harbour steps has always been a contentious issue for licensees due to their subjective nature and the heavy cost of demonstrating  compliance if challenged. In addition, how advisers navigate compliance with both the BID and the FASEA Code of Ethics (Code) given the lack of guidance regarding certain elements of the Code  has also been challenging. The hope is replacing the safe harbour steps with an obligation to provide Good Advice will focus on the outcome of the advice and accordingly reduce the red-tape and in turn cost of providing advice particularly for Non Relevant Providers. The challenge then will be how is Good Advice tested and evidenced and how much will the cost to provide advice by a Relevant Provider be reduced – noting it is generally accepted that it is not appropriate to assess advice (or whether it was ‘good’) simply by financial metrics since markets go up and down. This is plainly not what is meant by the outcome from Ms Levy’s perspective. How does one adequately document Good Advice? What benchmarks will the regulator use to define Good Advice and will “knowing” Good Advice when you see it, be adequate? Noting that typically the assessment of advice is done by reviewing the client file and records - record keeping has therefore been a focus.

Record keeping

Removing the obligation to provide a SOA or ROA and simplifying the disclosure of fees  has the potential to significantly reduce the cost to provide advice and simplify the advice process. The proposed change also recognises the widely held view that disclosure of itself does not improve the advice outcome or experience and is expensive. The devil is however in the detail. There are concerns that this would wind back consumer protection. In particular, in recent years ASIC’s focus (and correspondingly that of many licensees) has been in demonstrating compliance. One part of that has been improving record keeping of which the SOA and ROA are foundational pieces capturing the information received from the client and advice given. For larger licensees it is also an important control and evidence point to test the advice under the current regulatory framework.  On a practical level it will be interesting to see how some of those important functions, particularly in so far as they support consumer protections, are not lost. The role of professional indemnity insurers and their expectations to support coverage, should also not be overlooked. Almost inevitably therefore, for complex advice provided by a Relevant Provider it will mean there will remain some form of letter or record of advice even if it is not required by law to create an evidence base to support an assessment of Good Advice. Secondly, advisers who fail to maintain adequate records of the client engagement and advice will likely continue to be the subject of regulatory scrutiny. 

The way forward

For advisers and their licensees there is the opportunity to significantly reduce red-tape which does not currently support the customer outcome and save costs. There is however likely to be increased competition particularly in relation to clients who have simpler advice needs. In the event it is likely financial advisers will need to set themselves apart from the Non-Relevant Providers by demonstrating the value of their financial advice. Secondly, the savings from reduced red tape might either be applied to reduce the cost of advice or improve adviser profitability to support sustainability. 

Wherever the proposals land it will also be important that balance is achieved between access and affordability for everyday Australians on the one hand and appropriate consumer protections particularly for the vulnerable – which includes those who have lower levels of financial literacy. However, if one thing is clear, we are in for another momentous round of regulatory change.

While we await the responses to the draft proposals, not all parts of this industry are standing still, and we are seeing continued innovation and focus to improve consumer access to affordable quality advice. That needs to continue because although the Quality of Advice Review has the power to improve the model for the provision of affordable and accessible quality advice, the timeliness of the FOFA reforms in 2012 suggest it may be some time before there is legislated change to laws and regulations.  The challenges around affordability and access exist now and are the subject of continued work as evidenced by the work we are doing with licensees operating across the advice industry in relation to areas such as the client proposition, operating model and compliance.  

Finally, Ms Levy has also stated there is “more to come”, with special regards to life insurance commissions. The proposals have certainly landed, but we should only consider this “the first wave”

.Our next blog will focus on what the changes may mean for Non Relevant Providers. For a confidential discussion, please reach out to John Weaver or Mark Ryan.