Better advice, better financial outcomes 12 min read
With no more than a pause for breath since it released its discussion paper on the retirement phase of superannuation (see more in our Insight), the Federal Government has provided its final response to the Quality of Advice review, as part of its 'Delivering Better Financial Outcomes' package of reforms (the Final Response).
The Final Response was announced by Financial Services Minister Stephen Jones in a speech at Parliament on 7 December 2023. It proposes that, in addition to reforms already being progressed, the Government will enact the majority of the remaining recommendations made in the Quality of Advice Review, which was delivered to Government late last year (see more in our Insight).
In this Insight we provide a short overview of the Final Response. Following a period of consultation over the coming months, it is expected that draft legislation will be progressed towards the end of 2024.
- In its final tranche of financial advice reforms, the Government will:
- introduce a 'modernised and flexible best interests' duty that will apply to all providers of personal advice;
- introduce a new class of financial advice provider—to be termed 'qualified advisers'—to increase the availability and affordability of simple personal advice;
- introduce more flexibility for superannuation trustees to provide advice; and
- replace Statements of Advice with a 'principles-based' advice record.
- The Final Response builds on the reforms the Government is already progressing as part of earlier tranches of its Delivering Better Financial Outcomes work.
- The Government has said it will consult industry and consumer stakeholders over coming months on the design of the draft legislation and that legislation will be developed to implement the changes in 2024.
Best interests duty
The Government will introduce a 'modernised and flexible' best interests duty that will apply to all providers of personal advice (in response to recommendations 4 and 5 of the Quality of Advice Review).
The Government proposes that the new duty will:
- maintain the existing obligations to act in the best interests of the client and to prioritise the interests of the client in the event of a conflict, but will provide clearer legislative support for scaled or limited scope advice or where the advice provider has limited, but relevant, information; and
- remove the 'safe harbour' steps.
The requirement to provide appropriate advice will otherwise be retained, as will the existing concessional treatment for personal advice provided by banks and general insurers on defined basic products.
It seems clear from the Minister's speech that the Government will not adopt the recommendation to replace the best interests duty with a 'good advice' duty, as recommended in the Quality of Advice Review, because in the words of the Minister, 'Australians deserve the best, not just good'.
However, the Government has said that advice providers will have more flexibility to give advice that is scaled or limited to specific topics, provided it is fit for purpose and appropriate in the circumstances.
The Minister said the revised duty would permit advisers to give advice on only one or a few topics where this meets the client’s objectives and needs and that advisers may base that advice on relevant information without the need to complete an exhaustive fact-find in every situation.
As we noted in our earlier Insight, the removal of the safe harbour may free up advisers to adopt different processes for satisfying the best interests duty in producing advice. This could make it more feasible to provide advice through digital and other channels where a detailed fact-find may not be appropriate or possible.
However, whether the reforms will in fact enable providers to give more simple personal advice to more people and reduce the complexity of complying with the obligations will ultimately depend on how the revised obligations are framed in the legislation and what they require of advisers. We will need to wait to see the draft legislation to know whether the good intentions are translated into law.
A new class of financial advice provider will be introduced to increase the availability and affordability of simple personal advice (in response to recommendation 3 of the Quality of Advice Review).
The Government proposes that the new class of adviser—to be termed ‘qualified advisers’—will provide advice on behalf of licensed financial institutions and will:
- be subject to minimum competency standards (likely a diploma);
- be able to provide personal advice on less complex matters; and
- not be able to charge a fee or receive a commission relating to the personal advice they provide—and so the advisers will likely need to be employees of the licensee.
As noted above, it is proposed that these 'qualified advisers' will also be subject to the updated best interests duty, so that all personal advice is provided under a single, uniform quality standard.
This advice model will be available to all financial institutions, including banks, insurers and superannuation funds.
Licensees will be wholly responsible for the advice provided by their qualified advisers and will have additional obligations in relation to advice provided in this way.
The Quality of Advice Review had recommended that personal advice given by an individual (in circumstances where the client does not pay an advice fee and the issuer does not pay a commission) should be able to be given by someone who is not a 'relevant provider' and does not satisfy the professional standards, but instead satisfied the education and training requirements as set by the AFS licensee on whose behalf they provide the advice.
Although this proposal has been adopted, the Government will still require all 'qualified advisers' to meet a minimum education standard. The exact level of education will be determined in time, but the Government suggests that a diploma may be the right balance to be less onerous than the requirements for professional advisers. That said, we can't help but think that calling this new class of advisers 'qualified advisers' is a curious and possibly confusing aspect of the proposal given they will be subject to a lower standard of education compared to relevant providers.
More generally, coupled with the removal of the safe harbour provisions (see above), this change could allow for more simple personal advice to be provided at key life stages. It may also enable scaled personal advice to be provided to support the provision of digital advice.
The package also includes further changes for superannuation advice (in response to recommendation 6 of the Quality of Advice Review).
The Government proposes to:
- legislate consistent rules on what advice topics can be paid for from superannuation money, and the same list of advice topics will apply to collectively charged advice and advice that is charged directly to the individual member’s superannuation account;
- specifically allow trustees to consider a broader range of a member’s personal and household circumstances such as debt, spouse’s income or age pension eligibility; and
- give legal certainty to trustees that they may provide members with personalised ‘nudges’, such as prompting members approaching retirement to consider options for how they may wish to draw down on their super.
Although it is not clear from the Final Response, the Minister (in his speech announcing the reforms) has suggested that the Government will give certainty to trustees that they are permitted to charge members for advice from their superannuation account by making amendments to the sole purpose test. These amendments will take the form of the Government setting out a broad list of advice topics that can be charged to a member's account, which will include advice on investment decisions (such as the appropriate investment options within a fund and contribution strategies) and retirement incomes (such as retirement projections, a drawdown strategy and recommendations about retirement products).
There is currently a real question about the extent to which trustees are able to support members in understanding the retirement income system, their options and the best way to obtain an income in retirement while complying with the sole purpose test. This was one of our key concerns in relation to the ideas proposed in the Government's discussion paper on the retirement phase of superannuation, which suggests trustees should be doing much more in this area. We are hopeful that these advice reforms will go some way to addressing these concerns and clarifying what trustees can do within the restrictions of the sole purpose test.
The reforms allowing 'personalised nudges' are intended to be given effect by creating a specific permission for superannuation trustees within the current general advice framework. This will allow trustees to be more proactive and to avoid the risk (and compliance burden) that would otherwise apply if such advice was given as personal advice. The 'nudges' proposal appears to be fairly simplistic (the Minister in his speech gives examples of funds sending personalised messages to a member at important life stages, such as proactively setting out the benefits of switching to the tax-free pension phase to a member who has reached their preservation age) but at the very least will, along with these proposals for a new framework for advice by super trustees more generally, likely assist trustees to meet their retirement income covenant obligations as members move into the retirement phase.
The Government has also announced that Statements of Advice will be replaced with a principles-based, advice record (in response to recommendation 9 of the Quality of Advice Review).
The advice record will be required to be given to the client, and it must address four principles:
- the subject matter/scope of the advice
- the advice (such as product recommendations or strategies)
- the reasons for the advice (such as the information about the client that the adviser considered)
- the costs of the advice to the client and/or benefits received by the adviser.
The Government will also update the record-keeping obligations to ensure key information that informs the advice is appropriately recorded.
These proposals are likely to allow greater freedom for advisers to consider a suitable format of the advice they provide, while removing the unnecessary cost and administrative burden associated with Statements of Advice.
In addition to the proposals outlined above, the Final Response notes that the Financial Planners and Advisers Code of Ethics 2019 will be reviewed following the implementation of the Delivering Better Financial Outcomes package, to ensure it aligns appropriately with the Government’s reforms and remains fit-for-purpose as the financial advice industry continues to professionalise.
In addition, while it has not provided feedback on its reasoning, the Government has confirmed it will not proceed with recommendations 1, 2, 12.1 and 12.2 of the Quality of Advice Review.
These included recommendations to:
- broaden the definition of personal advice so it captures more of what is currently categorised as general advice (recommendation 1);
- remove the requirement for a general advice warning (recommendation 2);
- limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers only (recommendation 12.1); and
- remove the requirement for relevant providers to report significant dealings outside the target market, comply with the additional reporting obligations specified by a product issuer in the TMD, and report to the product issuer where there have been no complaints (recommendation 12.2).
The Government first responded to the Quality of Advice Review on 13 June 2023 to announce it would deliver—in three streams—its Delivering Better Financial Outcomes package.
Alongside the delivery of the first stream of the Delivering Better Financial Outcomes package of reforms on 14 November 2023 (the 'reducing red tape' measures1), the Final Response marks the beginning of the Government's remaining work on the Quality of Advice Review (ie the second and third streams) and we now have a complete picture of the proposals the Government intends to adopt.
The consultation period for the Exposure Draft legislation on the 'reducing red tape' measures closed on 6 December 2023 and we are hopeful this will be introduced before Parliament in the earlier part of 2024.
On the Final Response, the Government has said it will consult industry and consumer stakeholders over coming months on the design of the draft legislation. Legislation is then expected to be progressed to the Parliament for consideration before the end of 2024, pending other government priorities.
The reforms now remain subject to detailed drafting and the passage of the legislation. We wait to see whether the proposed changes to the best interests duty will, in fact, enable licensees to give more simple advice to more Australians, which is a key objective of the changes.
However, if passed in a form that gives effect to what the Government proposes, they will be the most radical overhaul of the financial advice laws since FoFA and will simplify and clarify the legal obligations of advice providers, expand the supply of personal advice to Australians and reduce some of the unnecessary restrictions and administrative burdens on advice providers.
Government consultation on Delivering Better Financial Outcomes – reducing red tape and other measures.