Major changes proposed to financial advice regime

Quality of Advice Review reforms would simplify obligations 17 min read

Treasury has released a further consultation paper as part of the Quality of Advice Review, seeking feedback on interim proposals for changes to the regulatory regime governing financial advice. The proposals are radical and, if accepted, would result in significant streamlining of obligations for advice providers. Key recommendations include broadening the definition of 'personal advice', abolishing 'general advice' as a financial service, replacing the 'best interests' and related duties with a new obligation to provide 'good advice', and doing away with statements of advice and records of advice altogether – advisers would instead be required to maintain complete records of advice and to give a written record of advice only on request. We explain the proposals and their implications for financial services providers.

Key takeaways

• The Quality of Advice Review (the Review) is considering whether changes should be made to the regulatory framework applying to financial advice, to improve its accessibility and affordability. The Consultation Paper says the answer is 'yes', and that the 'changes need to be substantial if financial advice is going to be widely accessible and truly affordable'.
• The interim proposals are intended to work together to provide a new framework for regulating financial advice. If implemented, they would make the regulatory regime simpler and less prescriptive. They would also remove a lot of regulatory uncertainty – although they pose new questions, such as what is 'good advice'?
• The changes could potentially make more feasible the delivery of personal advice through digital tools, which could make tailored advice more accessible and affordable.
• The closing date for submissions on the proposals is 23 September 2022. The Review's final report is due to the Federal Government on 16 December 2022.

Overview

Key proposed changes to the existing regulatory regime include to:

• Broaden the definition of 'personal advice' so it would cover any recommendation or opinion provided to a client about a financial product (or class of financial product) where the provider has or holds information about the client’s objectives, needs or any aspect of the client's financial situation.
• Abolish 'general advice' as a financial service by removing the definition, together with the obligation to give a general advice warning. General advice providers would not need to be licensed, but would still need to comply with the consumer law (including the prohibition on misleading and deceptive conduct), and would continue to be subject to conflicted remuneration restrictions and requirements under the Design and Distribution Obligations (DDO).
• Replace the 'best interests duty' and related obligations with an obligation to provide 'good advice', being advice that would be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time it is provided. 'Relevant providers' would remain subject to additional professional standards (education and training standards and the Code of Ethics), although the concept would be narrowed.
• Amend the superannuation legislation to put beyond doubt that trustees of superannuation funds can provide personal advice to members on their interests in the fund and use fund assets to pay for advice. Trustees would also be given discretion to decide how to charge members for personal advice, and the restrictions on collective charging of fees would be removed.
• Replace the requirement for advisers to provide fee disclosure statements, seek client agreement to renew fee arrangements and obtain their clients' signed consent to deduct fees from financial products with a requirement for providers of personal advice to obtain annual written consent from their clients to deduct advice fees from a financial product if there is an ongoing fee arrangement.
• Replace the requirement to provide a statement of advice or record of advice to clients with a requirement to maintain complete records of the advice provided and to give a written record of advice to a client on request.
• Simplify the reporting requirements under the DDO regime so that relevant providers are required to report to product issuers only where they receive complaints and not in relation to significant dealings outside the target market.

We look at these proposals in more detail below.

The Consultation Paper does not include proposals for life insurance and general insurance commissions or other benefits. The Review is still collecting information on these topics and they will be addressed in the final report.

Proposals

Proposal 1: Regulation of personal advice

The Consultation Paper proposes that the existing definition of 'personal advice' in section 766B of the Corporations Act 2001 (the Cth) (the Corporations Act) be broadened so 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'.

The new definition of 'personal advice' would cover a recommendation or opinion provided to a client about a financial product (or class of financial product) where, 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.

Personal advice could therefore be provided regardless of whether the provider has actually considered the client's objectives, financial situation or needs, or whether a reasonable person might expect the provider to have considered any of these matters.

The Consultation Paper acknowledges that this would mean that any personal conversation or interaction between a client and their bank, superannuation fund or insurer would be personal advice conversations and interactions if they include a recommendation or opinion that is intended to influence the client 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).

While on its own this proposal would have the effect of increasing regulation by broadening the definition of personal advice, it needs to be considered in the context of the other proposals that would reduce the regulatory burden on providers of personal advice. The Consultation Paper notes that the amended definition of personal advice would encourage providers to assume they are providing personal advice when they are in doubt, which will be of benefit to consumers.

Proposal 2: Deregulation of general advice

The Consultation Paper proposes that 'general advice' no longer be regulated as a financial service, and the definition be removed, together with the obligation to give a general advice warning.

It raises several issues with 'general advice': clients struggle to understand the meaning of the term general advice, they misunderstand or ignore general advice warnings, and general advice warnings are often misused.

The Consultation Paper argues that it is difficult to see how the regulation of general advice as a financial service provides any benefit to consumers. The proposal to remove it as a financial service would have the effect of removing the requirement to hold an Australian financial services licence (AFSL) authorising the provision of general advice.

The provision of some recommendations and opinions that are currently general advice would, under the proposals, come within the new definition of personal advice. The rest would not be entirely unregulated – they would be subject to the consumer protection provisions in Division 2 of Part 2 of the Australian Securities and Investments Commission Act 2001 (Cth), such as the prohibition against misleading or deceptive conduct in connection to the supply of financial services. These obligations apply and provide protection to consumers regardless of whether the advice provider holds an AFSL.

In order to ensure that the conflicted remuneration restrictions continue to operate as intended, the Consultation Paper proposes that consequential changes be made so that the application of those provisions is linked to the provision of personal advice or the provision of information about a financial product (consistently with the way the provisions currently apply to life insurance). Similar changes would also need to be made to the DDO (see below).

Proposal 3 – Obligation to provide good advice

The Consultation Paper observes that the current regulation of the provision of personal advice to retail clients is complex, difficult to understand, and largely inflexible. It 'purports to protect consumers from poor and harmful advice by regulating the conduct of the adviser giving the advice rather than regulating the content of the advice'.

The key proposal here is to replace the existing best interests duty and related obligations in Chapter 7 with an obligation that any person who provides personal advice to a retail client must provide 'good advice'. The proposal 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'. The Consultation Paper states that the obligation to provide 'good advice' is not a 'best advice test and it is not a test which requires comparison with any other financial products'. The relevant question will be: 'if my client follows my advice, are they likely to benefit?' This echoes ASIC's view about what is required to meet the best interests duty, which is that advisers need to believe 'the client is likely to be in a better position if the client follows the advice'.

The obligation to provide 'good advice' would replace the best interests duty, the appropriateness duty, the duty to warn the client, the duty of priority and the advice disclosure obligations under Chapter 7 of the Corporations Act.

The Consultation Paper argues that an obligation to provide good advice would be a 'simpler and more direct' approach to regulating advice. It would apply regardless of whether the advice is provided by an individual, an algorithm or a digital advice service. The new duty 'is intended to provide a much clearer articulation of what the intended outcome of their advice should be for their client'.

The Consultation Paper notes it is possible that in order to give good advice on more complex matters or to more vulnerable consumers, a licensee might decide that the advice can only be given by a relevant provider (ie an individual who is subject to the professional standards). On the other hand, simple advice could be provided by a staff member who is not a relevant provider, but is required to follow a set of guidelines or rules provided by the employer. With no prescribed processes, the onus would shift to the provider to ensure its staff are competent, appropriately trained and supervised, so that clients receive 'good advice'. Providers will need to consider the 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.

This is likely to be the most controversial proposal. There was a lot of discussion at the time the FOFA reforms were being considered about the need for a best interests duty to be imposed on providers of personal advice to retail clients. But this duty and the related obligations have continued to be a source of regulatory uncertainty, and the risks of non-compliance have made many providers reluctant to offer advice through digital tools and through advice channels other than comprehensive advice. This has limited the availability of inexpensive personal or tailored advice for most clients.

The best interests duty would not disappear altogether. It would continue to apply where personal advice is given by a 'relevant provider' to a retail client under the professional standards that currently apply to relevant providers (see below). The key questions that will need to be asked from a policy perspective are whether requiring 'good advice' is good enough for personal advice given by providers other than relevant providers, and whether it is justified to treat relevant providers differently from other providers of personal advice, so that financial institutions providing personal advice through digital tools would not be subject to the best interests duty under the Code of Ethics but would be subject to the 'good advice' obligation. The Consultation Paper argues that this would not expose consumers to the risk of poorer quality of advice but would make personal advice more accessible and more affordable.

Proposal 4 – Requirement to be a relevant provider

The existing regime imposes higher professional standards on personal advice providers who are 'relevant providers'. The Consultation Paper proposes that these standards remain, but a provider of personal advice would be a ‘relevant provider’ only where the provider is an individual and either:

• the client pays a fee for the advice;
• the provider (or the provider’s authorising licensee) receives a commission in connection with the advice; or
• there is an ongoing advice relationship between the adviser and the client, or the client has a reasonable expectation that such a relationship exists.

A 'relevant provider' would continue to be required to comply with the applicable professional standards, which include education and training requirements and an obligation to comply with the Code of Ethics. There is overlap between the Code of Ethics and the Chapter 7 best interests duty (and related obligations), so that the replacement of these duties with a 'good advice' obligation will not do away with them entirely. Additionally, under general law, a relevant provider may be subject to fiduciary obligations. The professional standards would not apply to a body corporate or to an individual who is not a relevant provider.

Proposal 5 – Personal advice to superannuation fund members

The Consultation Paper proposes that the sole purpose test in s62 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) be amended to expressly provide trustees with permission to:

• provide personal advice to members about their interests in the fund; and
• to apply fund assets to meet the cost of providing personal advice to members about their interests in the fund.

This would put beyond any doubt that trustees of superannuation funds are able to do these things. The Consultation Paper notes that, in giving advice, trustees of superannuation funds 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 – Collective charging of advice fees

The Consultation Paper proposes that trustees of superannuation funds have discretion to decide how to charge members for personal advice they provide to members, and the restrictions on collective charging of fees under s99F of the SIS Act be removed.

Under s99F of the SIS Act, a trustee of a superannuation fund is prohibited from passing the cost of providing personal advice in relation to a member of a fund on to any other member if certain prescribed circumstances apply. The Consultation Paper notes that, in considering how the cost of providing advice should be allocated to members, trustees of superannuation funds must act in the best financial interests of members, treat members fairly, promote members' financial interests, allocate costs between members fairly and reasonably, comply with fees and costs rules, and comply with obligations about fund expenditure in Prudential Standard SPS 515: Strategic Planning and Member Outcomes. The Consultation Paper argues that these obligations are more than adequate and, consequently, s99F of the SIS Act is not required.

Proposal 7 – Fees for advice provided to members about their superannuation

The Consultation Paper proposes that s99FA of the SIS Act be replaced with a provision giving trustees of superannuation funds express permission to pay an advice fee incurred by a member who has sought advice from an adviser about their interest in the fund. Rather than requiring the consent of the member to the deduction of an advice fee from their account, the SIS Act would authorise trustees of superannuation funds to pay an advice fee, including an ongoing advice fee, on the direction of the member.

Under this model, trustees of superannuation funds would still need mechanisms in place to confirm that the advice provided related to the member's interest in the fund, but the trustee would not have to be a party to the arrangement between the member and the adviser. Importantly, the Consultation Paper does not propose that superannuation savings be available to pay for broader financial advice.

Proposal 8 – Ongoing fee arrangements and consent requirements

Advisers who enter into an ongoing fee arrangement with their clients must currently give them an annual fee disclosure statement, seek their clients' agreement to renew fee arrangements and obtain their signed consent to deduct fees from each financial product from which fees are to be deducted.

The Consultation Paper proposes that this complicated regime be replaced. Fee disclosure statements would be done away with. Instead, the providers of personal advice would be required to obtain annual written consent from their client to deduct advice fees from a financial product if there is an ongoing fee arrangement. The consent would be required to explain the services that will be provided and the fee the adviser proposes to charge over the coming 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: Statement of advice

The Consultation Paper proposes that the requirement to give clients a statement of advice or record of advice be abolished. The Review is convinced that they are long documents, often full of templated text, that provide little benefit to clients.

Instead, providers of personal advice to retail clients would be required to maintain complete records of the advice they provide, and then to provide a written record of advice to a client but only on request. The premise of this proposal is that providers of advice should be able to provide advice in the way that best suits their clients. Clients do not want lengthy documents and templated text that is designed to demonstrate that the adviser has complied with the safe harbour provisions. To the extent that evidence is required for the basis of advice given, this should be contained in records maintained by the provider, which can provide the basis for written advice if requested by a client or be accessed by the regulator in an investigation.

Proposal 10: Financial Services Guide

The Consultation Paper proposes that providers of personal advice either continue to give their clients a copy of the Financial Services Guide or make information available to them on their websites about remuneration and other benefits they receive, their internal dispute resolution procedures and the Australian Financial Complaints Authority. The Consultation Paper notes that the information contained in Financial Services Guides is important, but imposes a compliance burden on advice providers insofar as they need to consider whether clients have an up-to-date version each time they provide them with a financial service; and, if they do not, must provide them with a new version before giving advice. This proposal is aimed at allowing advice providers more flexibility in the way they provide information to their clients.

Proposal 11: DDO reporting requirements

The Consultation Paper proposes that the reporting requirements under the DDO regime be simplified by requiring relevant providers to report to the product issuer only where they have received a complaint in relation to a product. The proposal would remove the obligations on relevant providers to report significant dealings outside the target market, and any other reporting obligations imposed by issuers through the target market determination for the product.

The Consultation Paper notes that if the proposed definition of personal advice is adopted, it would also be appropriate to amend the DDO regime 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 clients in the relevant target markets. This is because only relevant providers will continue to have a best interests duty under the Code of Ethics.

Proposal 12: Transition arrangements

The Consultation Paper proposes there be an adequate transition period for implementing these changes, during which time providers can opt in early. The Consultation Paper notes that this could be assisted by a facilitative approach to enforcement, by guidance in the form of examples from ASIC and by regular discussion between industry and the regulator. However, a consumer who receives advice that is in breach of the applicable requirements would not be prevented from taking action. 

Next steps

Providers of financial advice, and especially personal advice, will be considering the proposals and their implications both for their existing business and in terms of the opportunities they create for new ways of delivering personal advice.

If you wish to make a submission, or have questions about the issues raised in this Insight, please get in touch with any of the people below.