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The Quality of Advice Review

Non-Relevant Providers

We recently published a blog about how the draft proposals from Treasury’s Quality of Advice Review (QAR) led by Michelle Levy, might impact Relevant Providers – that is to say “traditional” financial advisers who provide personal advice to retail clients. At the time we foreshadowed another piece with thoughts on the potential impacts of the proposals for Non-Relevant Providers. Since that time Ms Levy has foreshadowed some potential changes to the proposal to entirely remove the concept of General Advice which will have implications for Non-Relevant Providers and remains to be clarified when her final report is published. 

So, what is a Non-Relevant Provider in Michelle Levy’s proposed construct? While the term “Non-Relevant Provider” is not explicitly defined, it refers to those providing personal advice (under an AFS licence) who do not fit the definition of Relevant Provider. At its highest level it can therefore be defined as someone who provides personal advice but neither they nor their authorising licensee receive a fee or commission in relation to the advice and there is not an ongoing advice relationship.

The implication is that if you are not a Relevant Provider but you are authorised to provide personal advice to retail clients in relation to relevant financial products, then you are a Non-Relevant Provider. 

Who can be a Non-Relevant Provider? The answer is not known yet, however, it may include Intra-fund advisers who charge advice fees on a collective basis and those providing general advice under the current framework such as insurers, banks, retail super funds as well as others.

Currently the Non-Relevant Provider treads carefully, to ensure they either give factual information or general advice only, along with the required general advice warnings. The line between general advice and personal advice is however sometimes problematic as determined by a recent high court decision1. In that instance it was found that the licensee had provided personal advice (rather than general advice) and notwithstanding the provision of a general advice warning were found to have provided personal advice (or that their customers may have mistakenly believed they were receiving personal advice) in breach of their obligations. The rationale for this was that the court concluded, based on the interaction with customers, that the customer would reasonably have expected the licensee had regard to one or more of their personal circumstances (collected in the engagement) in making the product recommendation.

Under the Quality of Advice Review (QAR) proposals and Ms Levy’s recent comments at the FPA Professional Congress, general advice would only exist for things like seminars and newsletters2 . Client interactions relating to financial products, regardless of whether conducted by a Relevant or Non-Relevant Provider, will otherwise fit into one of two categories:

  1. personal advice or
  2. no advice (information only).

The intention then is to broaden the definition of Personal Advice such that consumers receive actual guidance and direction (based on what is known about them) rather than information in general terms only. The challenge will be on the Non-Relevant Provider to demonstrate that the advice they give is “Good Advice” (as discussed in our previous blog). The framework supporting the provision of advice and monitoring and supervision of the advice to assess whether it is good will therefore evolve.

The licensee will need to ensure their staff that are designated as Non-Relevant Providers are adequately trained and competent to provide Personal Advice (which is also “Good Advice”). They may also need to limit the scope of advice their staff are able to provide in order to align to the proposals which envisage simple advice being provided by Non-Relevant Providers, and more complex advice being referred onto a Relevant Provider (a Financial Adviser). An interesting point then arises, as it will ultimately be up to each individual licensee to determine for their business model what constitutes simple advice.

This plays into the concept of an “advice continuum” where consumer advice needs range from simple to complex. When licensees look to service simple advice needs of their customers (via their Non-Relevant Provider staff) they will be able to leverage the existing customer data on hand as a starting point. This may also present a key triage point for customers, depending on the advice need, and therefore potential referral of the customer to a Relevant Provider to satisfy the client’s more complex needs. Critics of the proposals and in particular, those focussed on consumer outcomes are concerned that Non-Relevant providers may not adequately triage at this point.

Let’s look at an example to explore the potential challenge – a customer who wants to know whether they should make additional contributions to super or make additional repayments on their debt? Today, under general advice the merits of paying down debt vs. contributions to super could be discussed, however, not recommended to the customer specifically. If that engagement were to take place under a model envisaged by the draft proposals the licensee will have to decide to either provide no advice (and triage out) or provide personal advice to explicitly address the customer advice need as it is understood on the information available.

It will therefore be important that Non-Relevant Providers have effective systems in place throughout the value chain to identify customers who are raising more complex advice needs and should be referred on to a Relevant Provider. Another risk is that staff may limit engagement with customers to avoid becoming aware of potentially complex advice needs and accordingly the need to refer the customer to a Relevant Provider, rather than selling a product.  The management of potential conflicts of interest will therefore continue to be important. 

Interestingly, under the proposals someone who recommends a product but does not facilitate or deal in a financial product may not be required to hold an AFSL.

The below table summarises the different roles that might be considered Non-Relevant Providers, or considered exempt from licensing requirements.

For the above roles, the lines between exempt and Non-Relevant Providers may be blurry. Take ‘Finfluencers’ for example; they may receive remuneration from a product provider for their comments or may be associated with a licensee.

Educational Standards 

A key area for further debate is likely to relate to what education standards Non-Relevant Providers will be required to meet. Although the licensee will need to hold an AFSL (if they facilitate or deal in financial products), the review doesn’t impose or recommend any additional educational requirements for staff of Non-Relevant Providers. If that remains the case, there will be significant reliance on Licensee standards and training to ensure staff stay within the guard rails and in particular:

  • do not stray into providing complex advice (as determined by the licensee); and 
  • understand their obligation to refer on customers with complex advice needs.

With the draft proposals recommending an expansion of personal advice about a financial product (removing the concept of general advice save potentially in respect of seminars and newsletters) and intra-fund advice, one aim is to increase the pool of advice providers including potential re-engagement in the provision of simple advice by banks and other financial service firms. Licensees that currently provide say, general advice to their customers (and are currently excluded from the Best Interest Duty and FASEA code of ethics), would find they have to ensure they can demonstrate the advice they provide is good and they will also have to have appropriate systems in place to ensure they do not stray into providing complex advice (and potentially, do not have information in their possession that indicates complex advice needs exist) if they are only authorised to provide simple advice.  As we have noted, those changes would not be without difficulty. 

What will this mean for super funds providing personal advice (including intra-fund advice) to members? Will Non-Relevant Providers give advice to prospective customers, recommending they switch funds? The information a fund may have about a customer who has been a member for the last 10 years will likely differ greatly to the information on file of a prospective member. How will these Non-Relevant Providers manage the information asymmetry?

Another sector to watch will be the accounting/limited advice groups who historically offered advice around Self-Managed Super Fund (SMSF) set up and ongoing management. Their numbers have dropped on the Financial Adviser Register (FAR) by 75% since 2019, but they may see an opportunity to re-engage in a simplified regulatory environment. 3

The general advice warning as it currently stands relieves licensees of significant obligations, which won’t be avoided in a regime requiring Good Advice and therefore, the changes are likely to be of net benefit to customers. In the event, it is likely that general advice providers will find the changes the most substantive as they are likely to be moving into the personal advice world – there will at least be a requirement to focus on a renewal of internal policies, uplift in training, record keeping and redistribution of resources. While overall, it is likely the regulatory landscape will be less restrictive and the proposed changes enlarge the pool of potential advice providers, the obligation to provide Good Advice (and demonstrate it has been provided when challenged) will require careful consideration and adjustment.

The complexities exist in the market segmentation and advice itself.  A qualified financial adviser is required to consider a customer’s broader circumstances, whereas advice by a Non-Relevant Provider would only be required to address the subject matter in question.  In practicality, it potentially blurs the lines of what needs to be considered or rather, what should have been considered to ensure that the advice meets the provision of “Good Advice”.

While increasing the supply side is important, so is simplifying the general advice/personal advice construct (which was never well understood by customers). If enacted, these changes will not be without challenge and there will be important discussion around monitoring and the provision of Good Advice. Management of conflicts of interest relating to product recommendations should form part of the discussions and considerations. 

Additionally, as we have noted previously, the QAR places significant store in a range of other law reform which has been implemented post the Financial Services Royal Commission, in particular, the Design and Distribution Obligations and Product Intervention Powers. The underlying assumption is that the quality of products will generally be higher and the Regulator has power to intervene if products are either poorly designed or inappropriately targeted in their distribution. Interestingly however, the draft proposals do not reference the anti-hawking provisions. Currently, a financial adviser is able to recommend any product (including those not in the contemplation of the customer) because the customer’s relevant circumstances have been understood to identify the appropriate suite of products. It is unclear if Non-Relevant Providers will be restricted in the absence of that wider picture and depending on the information held by the Non-Relevant Provider it might be that the provision of Good Advice potentially requires suggesting products other than the one requested by a customer. 

Noting the scope of the proposed changes and their purpose, it seems likely that Non-Relevant Providers will see an expansion in the provision of advice as it becomes more accessible. Relevant Providers may be concerned that expansion will come at their expense. While that is a risk there is a basis to suppose it may not be the outcome. The cost of advice in recent years has seen a divide in those who could afford it and those who could not. The ABC reports that the cost of advice has increased by 41 per cent since 20184. It is unlikely that many of the cohort of consumers who currently benefit from intra-fund or general advice (particularly those in the early stages of building wealth) would have sought out holistic advice in the first place. Likewise, we don’t expect consumers who currently seek out holistic advice to instead decide to go to a Non-Relevant Provider if these proposals are passed.  

It is certainly a complex area with many factors to consider and there doesn’t appear to be one simple answer or solution for advice providers. What is clear is that there are 26 million Australians with diverse financial advice requirements, and reports are showing that approximately 61% of them have an unmet advice need5. The two-tiered system has merit in creating more accessibility; however, it will be the execution that matters.