A proposals paper seeking feedback on 12 potential options for reform has been released for consultation.  We summarise the key points.  

Key takeouts

  • Following consultation, the final Terms of Reference (summarised) for the Quality of Advice Review were released on the 11 March 2022.  
  • The review is being conducted in response to three Hayne recommendations: Recommendations 2.3, 2.5 and 2.6.  In addition, the review has been asked to consider fee disclosure and consent requirements, including annual renewal for ongoing fee arrangements (Recommendation 2.1).
  • proposals paper setting out 12 potential options for reform was released for consultation on 29 August 2022.   The due date for submissions is 23 September 2022.  
  • Among the potential options put forward are: 
    • limiting regulation of financial advice as a financial service to 'personal advice' only (ie 'general advice' would no longer be regulated as a financial service)
    • reformulating and broadening of the definition of 'personal advice' to capture a broader spectrum of advice
    • replacing the existing 'best interests' duty in Chapter 7 of the Corporations Act 2001 (Cth) with a new statutory obligation to provide 'good advice' 
    • simplifying documentation requirements 
  • The initial response to the proposals paper is divided with consumer groups raising concerns about the potential impact of the proposed changes, and in particular the proposed repeal of the 'best interests' duty on consumers and the advice sector more supportive of the proposals.   
  • The Review is due to deliver its final report to the government by 16 December 2022

Overview

On 29 August 2022, Treasury released a proposals paper seeking feedback on 12 potential options for reform of the financial advice regulatory framework. According to the proposals paper, the proposed changes are aimed squarely at improving retail clients' access to high quality, accessible and affordable advice.

The due date for submissions is 23 September 2022.

Below is a high level overview of the proposed options put forward for comment and a brief summary of the initial response to these potential changes.

Time for a shift in approach?

Underpinning all of the proposals in the paper is the premise that the current thinking behind the regulation of advice is flawed because, in an effort to regulate adviser conduct and protect consumer interests, undue emphasis has been placed on process (imposing a substantial compliance burden on advisers and contributing to accessibility and affordability pressures). The proposals paper argues that this approach has not always led to better consumer outcomes.

In light of this, it's suggested that:

'a more direct and better way to regulate the provision of advice is to start precisely where the current regime does not - with the content of the advice. Consumers want good advice – not documents and processes. And advice can be more easily measured and assessed than conduct'.

12 Proposals for reform

Regulate 'personal advice' as a financial service (not general advice)

General advice should not be regulated as a financial service

It's proposed that:

[Proposal 2] '"General advice" should no longer be regulated as a financial service and the definition of "general advice" should be removed together with the obligation to give a general advice warning'.

In putting forward this proposal, the proposal paper makes clear that the change would not mean that general advice would be unregulated, only that it would not be regulated as a financial service – general consumer protections would still apply. This proposal paper states that the proposed change is aimed at 'reducing regulatory complexity and aligning the regulatory regime with customer expectations'.

The proposals paper opines that:

'it is difficult to see how the regulation of general advice (as a financial service of itself) provides any benefit to consumers. This does not mean that general advice would not exist – I accept that general advice (which might be provided in customer seminars or newsletters for example) can be valuable - but rather that general advice does not need a label or its own regulation'.

Reformulate the definition of 'personal advice'

It's also proposed [Proposal 1] that the 'the financial services regime should regulate the provision of "personal advice" and that the definition of 'personal advice' should be broadened and reformulated as follows:

[Proposal 1]'"Personal advice" is a recommendation or opinion provided to a client about a financial product (or class of financial product) and, at the time the advice is provided, the provider has or holds information about the client’s objectives, needs or any aspect of the client's financial situation'

The proposals paper suggests that this change would mean in practice that:

'all personal conversations and interactions between a customer and their bank, superannuation fund or insurer would be personal advice conversations and interactions if they include a recommendation or opinion which is intended to influence the customer to make a decision about a financial product or a class of financial product, or if they could reasonably be regarded as being intended to do so. The changes would not change conversations which merely provide information, even tailored information, into personal advice'.

The proposal paper states that these changes are 'aimed at reducing regulatory complexity and enabling advice providers to provide more helpful guidance and financial advice to their customers'.

Expanding on this, the proposals paper flags that presently customers may receive less helpful advice because (some) providers are seeking to 'shoehorn what would more naturally be personal advice conversations with customers into general advice' in order to avoid the consequences of giving 'personal advice'.

The proposals paper suggests that broadening the definition of personal advice as proposed would help address this issue because:

'This broader definition would mean that a financial institution could not seek to avoid giving personal advice to a customer by seeking to quarantine information they hold about the customer for the purposes of giving advice. It is doubtful whether such efforts are effective, but the changes I am thinking about would make it clear they are not available'.

Further, the proposals paper argues that a simpler, principles-based approach to the regulation of advice targeted at regulating 'personal advice' is preferable to the introduction of yet more complexity through, for example, the introduction of more categories and definitions of advice. The proposals paper states:

'In my view, a principles based approach to regulation would encourage providers to give personal advice by making it easier to do so, where that is appropriate, rather than by narrowing defined terms, creating new categories of advice and adopting different rules for those different categories. If providers can be more confident about providing personal advice in a way which complies with the law, they should be more willing to assume they are providing personal advice when there is any doubt. In that way, they can have more natural and helpful conversations and other interactions with their customers and less effort and cost can be spent on avoiding crossing over the personal advice line'.

The proposals paper acknowledges that this approach (if adopted) may mean there are cases where uncertainty arises as to whether information that is tailored to the customer might contain a recommendation or opinion and therefore whether it might meet the definition of personal advice, though the proposals paper states that 'it is hoped the changes will encourage providers to assume they are providing personal advice when they are in doubt'.

Introduce a new obligation to provide 'good advice'

The proposals paper proposes introducing a new statutory obligation for anyone who provides 'personal advice' to a retail client to provide 'good advice' [Proposal 3].

This is proposed to replace the existing the existing best interests duty, the appropriate advice duty, the duty to warn the client and the duty of priority in Chapter 7 of the Corporations Act 2001 (Cth).

The proposals paper defines 'good advice' as:

'advice that would be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided'.

It's envisioned that, if this new obligation were adopted:

'All providers of advice will need to turn their minds to what investigations and inquiries they need to make before they can form the view that the personal advice they are minded to give will be good advice – that it is reasonably likely to be to the benefit of the client'.

The proposals paper suggests that the proposed change would have several benefits including:

  • lightening the compliance burden on advisers: The proposal paper makes clear that the steps the provider would need to take in order to satisfy themselves of this, would be dependent on the 'nature of the advice' being given, but would likely require fewer steps than is currently required in order to demonstrate compliance with the best interests obligations.
  • making 'good advice' more accessible: The proposal paper opines that the proposed new obligation to provide 'good advice' should:

'make it easier for banks, insurers and superannuation fund trustees to give simple advice to their customers. This is because there would be no prescribed process and because the advice could be provided by a staff member who is not a relevant provider.'

  • making it 'simpler for digital advice providers to give personal advice'
  • retaining a 'strong' level of consumer protection – the proposal paper opines that:

'an obligation to give personal advice that is 'good advice' is itself a strong obligation which can provide critical protection for consumers. It will be a breach of the law to give poor advice or harmful advice'.

'Relevant providers' would continue to have a best interests duty under the Code of Ethics

Currently, a 'relevant provider' is required to meet prescribed education and training standards, comply with the Financial Planners and Advisers Code of Ethics 2019 (Code of Ethics) and be registered with ASIC (from 1 January 2023).

The Code of Ethics imposes a duty for a 'relevant provider' to act in the best interests of their client and not have a conflict of interest (overlapping with existing Chapter 7 obligations). The proposal paper suggests there is value in retaining this duty in the Code of Ethics for 'relevant providers'.

The proposal paper suggests that in certain limited circumstances, it may be appropriate for 'advice to be provided by a professional financial adviser with a duty to act in the best interests of their client'. For example where:

  • a client enters into an agreement with an adviser for the provision of ongoing financial advice
  • an adviser is paid a fee by the client for 'personal advice'
  • an individual adviser receives a commission 'in relation to their financial advice'.

It's also suggested that licensees may determine that where more complex advice is being provided, meeting the proposed new 'good advice' obligation requires that this is provided by a 'relevant provider' – though this decision is proposed to be left to the discretion of the licensee.

Accordingly, the proposals paper proposes that:

[Proposal 4] 'A provider of personal advice should be a "relevant provider" where the provider is an individual and the client pays a fee for the advice, the provider (or the provider’s authorising licensee) receives a commission in connection with the advice, there is an ongoing advice relationship between the adviser and the client or the client has a reasonable expectation that such a relationship exists'.

In putting forward this proposal, the consultation paper acknowledges the shift away from the current approach to regulation of advice, but opines that the change is both unlikely to expose clients to greater risk and likely to enable more retail clients to access 'good advice'. The consultation paper states:

'I acknowledge that this formulation of when advice must be provided by a person with a best interests duty focuses on the undertaking of the adviser to act in the interests of their client rather than the exposure of the consumer to potential harm. However, I do not think this relaxation of the existing law (which currently requires anyone who gives personal advice to act in the best interests of the customer) would create a greater risk of consumer harm – anyone who gives personal advice to a retail client would have to give good advice. The greater the risk of harm, the more work a provider will need to do to be satisfied they are in fact providing good advice. It would, in my view, make personal advice more accessible and more affordable'.

Simplifying DDO reporting

Proposal 11 proposes that:

'The reporting requirements under the design and distribution obligations regime should be simplified by requiring relevant providers to only report to the product issuer where they have received a complaint in relation to a product'.

The proposals paper flags that:

  • It may be appropriate for relevant providers not to have to report significant dealings outside the target market
  • It may be appropriate to remove the obligation for relevant providers to report 'no complaints'
  • It's further suggested that if the proposed reformulation of the definition of 'personal advice' is adopted:

'it would also be appropriate for the DDO rules to be amended so that only those providers who are relevant providers are exempt from the obligation to take reasonable steps to ensure financial products are issued to consumers in the relevant target markets. This is because only relevant providers will continue to have a best interests duty under the Code of Ethics…All other providers of personal advice would continue to be subject to the full range of obligations applying to a distributor of financial products.

Other proposals

Simplifying documentation requirements

The consultation paper proposes that:

  • [Proposal 8] 'Fee disclosure statements should not be required. Providers of personal advice should obtain annual written consent from their client to deduct advice fees from a financial product if there is an ongoing fee arrangement. The consent form should explain the services that will be provided and the fee the adviser proposes to charge over the course of the following 12 months. Where advice fees are deducted from more than one product, a single consent form should cover each of the products issued by a product issuer'.
  • [Proposal 9] 'Providers of personal advice to retail clients would be required to maintain complete records of the advice they provide and to provide a written record of advice to a client on request. This would replace the existing requirement for advisers to provide a statement of advice or record of advice'.
  • [Proposal 10] 'Providers of personal advice should either continue to give their clients a copy of the financial services guide or make information available to their clients on their website about their remuneration and other benefits they receive, their internal dispute resolution procedures and AFCA. This information should be available at the time the advice is provided'.

Intrafund advice

The proposal paper proposes that:

  • [Proposal 5] 'Superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement. In doing so, trustees would be required to take into account the member's personal circumstances, including their family situation and social security entitlements if that is relevant to the provision of the advice'.
  • [Proposal 6] 'Superannuation fund trustees should have discretion to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed'.

Advice Fees

Proposal 7 proposes that: 'Superannuation trustees should be able to pay a fee from a member's superannuation account to an adviser for personal advice provided to the member about the member's interest in the fund on the direction of the member'.

Time to implement the proposed changes

Proposal 12 proposes that: 'There should be an adequate transition period for implementing these changes. Consideration should also be given to allowing providers to "opt in" early'.

The initial response to the proposed changes has been mixed

In a statement, consumer groups CHOICE, the Consumer Action Law Centre (CALC), the Financial Rights Legal Centre (FRLC) and Financial Counselling Australia raised concerns that the proposed changes will significantly weaken 'core consumer protections'. In particular, the group raises concerns about the proposed repeal of the best interests obligation. CHOICE CEO Alan Kirkland commented:

'If the government removes the best interest duty as proposed in this report, we’ll go back to the bad old days that allowed scandals like those involving Commonwealth Financial Planning and Storm Financial to occur. This would be an incredible disappointment to the victims of financial advice scandals who gave evidence to the Royal Commission…These changes would set consumer protections back 15 years. It’s as if the Banking Royal Commission has already been forgotten.'

Adding to this, Consumer Action Law Centre CEO Gerard Brody commented:

'One of the six principles coming out of the Financial Services Royal Commission was "when acting for another, act in the best interest of the other". With a history of mis-selling, upselling, and inappropriate cross-selling in the finance sector, we should not be walking back this important principle. Recent reforms to prevent mis-selling and inappropriate cross-selling, such as the deferred sales model for add-on insurance or the ban on unsolicited selling financial products, addressed problems that cost Australians hundreds of millions of dollars. Any reform to advice laws need to embed these reforms, to ensure people are only sold products that are in their best interests.'

Conversely a joint statement by 12 industry associations – Association of Financial Advisers (AFA), Boutique Financial Planning Principals Association Inc. (BFP), Chartered Accountants Australia and New Zealand (CA ANZ) CPA Australia, Financial Planning Association (FPA), Financial Services Council (FSC), Financial Services Institute of Australasia (FINSIA), Institute of Public Accountants (IPA), Licensee Leadership Forum (LLF), Self Managed Super Fund Association (SMSFA), Stockbrokers and Investment Advisers Association (SIAA), The Advisers Association Ltd (TAA) – was more supportive. The joint statement states:

'The Paper sets out proposals to make it easier for consumers to have meaningful, fit-for-purpose conversations with their advice provider about all or part of their financial and lifestyle objectives while maintaining robust consumer protections — an objective the JAWG [ie the Joint Association Working Group - all 12 industry associations are members] supports'.

[Source: Quality of Advice Review: Proposals Paper]