The future of financial advice 2.0? The Quality of Advice Review Final Report

Introduction

On 8 February 2023, the Government released the long-awaited Quality of Advice Review (Review) Final Report (Report). The Report finalises and updates the recommendations released in the Proposals Papers released in August and October 2022 (Proposals Papers). See our previous alert on the Proposals Papers link.

The Government has not commented on the Report and instead will consult further before it finalises a position on the recommendations.

The Report adopts the same views as the Proposals Papers on many key issues including:

• that more financial product advice should be personal advice (this is the foundation of all the other recommendations)
• the providers of personal advice should have a duty to give ‘good advice’
• the focus should be on internal records for personal advice, and not on disclosure to clients, and
• the regulation of ongoing fee arrangements should be streamlined.

However, there are some important changes to the Proposals Paper.  Notably:

• general advice should be retained as a regulated financial service
• a fiduciary best interests duty should apply to financial advisers with no safe harbour steps

The following are the key takeaways for different organisations and teams:

This alert highlights some issues that product issuers and financial advisers would need to consider if the recommendations in the Report are legislated.

Types of regulated advice

Personal advice

The Report recommends expanding the situations when financial product advice should be treated as personal advice.  Under the recommendations, financial product advice will be personal advice if it is given to a client in a personal interaction or personalised communication by a provider of advice who has (or whose related body corporate has) information about the client’s financial situation or one or more of their objectives or needs.  So advice could be personal advice even if the provider did not take into account the client’s financial situation, objectives or needs.

The definition now expressly states that advice will be personal advice only if it is ‘personal’ to the client or, expressed in another way, if it is individualised. Advice will be individualised if it is prepared or adjusted for or directed to a particular individual.  The Report provides the following examples of when advice would be personal advice or general advice:

• Marketing example: If an email is sent to a customer’s email address and the customer’s name is used, it will be directed to the customer. If the customer’s name is not used in the same email, it may not be directed to the customer (although it will depend on whether the content has been individualised).
• Client education example: financial product advice provided in seminars, on websites, in newsletters and research reports would not all be personal advice. If the advice is broadcast widely and is not individualised (by being directed to or adjusted for a particular customer), it will be general advice (see further below).

The following are potential consequences from the recommended changes to the definition of personal advice:

• One of the key concepts of the recommended definition is the holding of personal information, whether it is held by the provider of the advice or a related body corporate. This raises the question of whether it is appropriate for a product issuer to be deemed to provide personal advice because another entity in the group holds the relevant personal information about the client but the provider has no access to the information.  It also raises the question of whether the definition applies where a third party administrator holds the relevant personal information.
• One consequence of the new definition would likely be that much of the general advice that is provided by institutions today will be personal advice. Systems may need to be developed, staff may need to be trained and in some cases financial advisers may need to be recruited to give personal advice to customers.
• It is common for product issuers to hold an Australian financial services licence authorising them to provide general advice. Under the recommendations, they may need to apply to ASIC for an additional personal advice authorisation and satisfy the organisational competence requirements in Regulatory Guide 105 (including nominating responsible managers) for that new authorisation.
• The report notes that holding a person’s name, address and date of birth does not constitute holding information about a person’s objectives, financial situation and needs. Holding this information is not enough to fall within the definition of personal advice. This means that tailoring email communications based solely on a person’s age should not result in the communication containing personal advice.

General advice

One of the key changes from the Proposals paper is that general advice should be retained in the regulatory framework (in response to concerns expressed in the submissions that consumer harm could arise if financial product advice is provided by unlicensed providers (‘finfluencers’)). However, the requirement for a general advice warning to accompany general advice should be removed.

Therefore, there will still be circumstances in which a person will be able to provide general advice to a client. This will primarily be where they do not talk to the client on a one-to-one basis and where they do not hold information about the client. Therefore, widely broadcasted advertising of financial products will continue to be general advice (if it is financial product advice). Research reports, seminars and newsletters that are not individualised – i.e. directed to individual clients or adjusted or otherwise personalised for individual clients – will continue to be general advice.

Providers will continue to have to turn their minds to whether they are complying with their general AFS licensee obligations when they provide general advice just as much as they must when providing any other financial service. An AFS licensee who provides general advice will continue to be required to comply with the obligations that apply to AFS licensees more broadly (e.g. the efficiently, honestly and fairly obligation), as well as the ban on conflicted remuneration.

Who can provide personal advice?

The Report recommends the Corporations Act be amended so that personal advice must be provided by a relevant provider – that is, a financial planner – where:

1. the provider is an individual; and
2. either:
   1. the client pays a fee for the advice; or
   2. the issuer of the product pays a commission for the sale of the product to which the personal advice relates.

In all other cases, personal advice can be provided by a person who is not a relevant provider.

Under the current requirements, a relevant provider must have an approved bachelor or higher degree, they must have passed an exam, have completed relevant work experience, comply with ongoing professional development requirements and the Code of Ethics. However, unlike the current requirements, where the personal advice is not provided by an individual (e.g. it is provided by an entity) these requirements will not apply. 

The Report touches in the issue of vertical integration and concludes that rather than stopping product issuers from selling their own products, that in fact vertical integration is part of the answer of making advice more accessible.  It will be a function of the law to make it possible for a product issuer to do so safely with respect to customer interests.

Some practical implications

We covered some of the practical implications of the Proposals Paper in our earlier alert link. They remain relevant in light of the Report, but with some changes given general advice will continue to be regulated as a financial service:

• Where product issuers operate call centres current training requirements, training manuals and scripts would all need to be reviewed given interactions will now more likely be personal advice interactions, rather than general advice or informational in nature. The types of information a product issuer holds about a client would also need to be reviewed to assess whether it is information about their financial situation or objectives, or something less.
• As the Report makes no changes to the regulation of calculators and retirement estimates we don’t see a need for any operational changes to those digital tools.
• Marketing material will continue to be either general advice or factual information but where there is general advice, the general advice warning can be removed.
• Our experience was that marketing teams re-considered call out campaigns following the Westpac v ASIC case. We think that they would need to review both call out and mail out campaigns under the recommended definition of personal advice.
• Given the widening of the scope of personal advice, the activities and documentation relating to relationship managers for corporate super products will need to be reviewed, especially if relationship managers are currently working under a general advice model.

Adviser duties

Duty to give good advice and best interests duty

Currently, any individual or entity who provides personal advice to a retail client has the following obligations in the FOFA provisions of the Corporations Act: the best interests duty (with the safe harbour steps), the duty to provide appropriate advice, the duty of priority and the duty to warn if advice is incomplete.

The Report recommends replacing these duties with a duty to give good advice (which would apply to all providers of personal advice) and a duty of best interests – with no safe harbour (which would apply only to financial planners and the like).

Duty to provide good advice

The Report provides that the duty to provide good advice would apply whether the advice is provided by an individual, an algorithm or a digital advice service. It would also apply whether the advice is provided by an employee of a bank, insurer or superannuation fund or a financial adviser.

However, in the event that personal advice is provided by a person that is not an advice provider (for example, a call centre employee of a super fund) the duty to provide good advice is ultimately imposed on the AFSL holder on whose behalf the person/employee is providing the personal advice. Similarly, the best interests duty would only apply to personal advice provided by a person who is a financial adviser (i.e. a relevant provider).

The Review took on board feedback from the Proposals Paper and has changed the formulation of the duty to give good advice.  The proposed definition is:

‘Good advice means personal advice that is, at the time the advice is provided:

1. fit for purpose having regard to:
   1. if the advice is:
      1. given in response to a request, question or inquiry from the client, the purpose of the client that the provider is aware of or should reasonably be aware of; or
      2. volunteered by the provider, the reason the provider reasonably considers the advice might be of use or benefit to the client;
   2. the scope, content and nature of the advice; and
   3. the likely relevant circumstances of the client; and
2. in all the circumstances, good.’

To simplify, the proposed good advice test now has two main limbs:

1. the advice is ‘fit for purpose’ and
2. in all circumstances, ‘good’.

The purpose of this formulation is to focus attention directly on what the client needs and wants, but the duty is to be assessed objectively.

The Report confirms that the duty would require the provider to ask what information is relevant to the advice and, if they do not hold that information, they would need to conduct an investigation or not provide the advice.  This is because they could not satisfy themselves that advice is good advice unless they have taken into account the client’s objectives, needs and financial situation (or likely objectives, needs and financial situation) to the extent relevant to the advice.  This indicates that financial planners will need to continue to conduct fact finds.  It also confirms the continuing need to consider the client’s objectives, needs and financial situation even if that is no longer a factor in the definition of personal advice.

As noted in our previous alert, the existing obligation to provide ‘appropriate’ personal advice is similar to the good advice duty in that it concerns the quality of the advice provided. ASIC provides in Regulatory Guide 175 (RG 175) that advice is ‘appropriate’ if it is fit for purpose and is likely to put the client in a better position. Accordingly, the shift in the good advice definition from ‘likely to benefit’ to ‘fit for purpose’ is, in our view, a welcome clarification.

Further, the Report has not limited ‘fit for purpose’ to an improvement in financial position. If it were limited in this way, then there could be a substantive difference between the appropriate and good advice duties. However, the Report clarifies that the intention of the duty is that the attention is focused on what the client needs and wants, rather than what the provider has done. This is evident in the requirement to have regard to the scope content and nature of the advice and likely relevant circumstances of the client when providing advice that is fit for purpose:

• scope: goes to looking at the intended purpose of the advice (which could be narrow or broad)
• content: goes to looking at the opinions or recommendations provided for their suitability for the client, having regard to the scope and the client’s relevant circumstances
• nature: goes to the circumstances in which the advice is provided – that is, the requirements will be influenced by whether the advice is unprompted or sought directly by the client and the context.

The Report actively steers clear of providing a definition of ‘fit for purpose’, but does refer to the use of that term in Australian Consumer Law in the context of guarantees relating to goods.  We recommend that greater attention be given to this formulation as consultation progresses as it may not be easy to translate a fit for purpose guarantee relating to goods into an obligation which relates to services.  Instead, it may be better to adopt a more general and common sense approach to working out when personal advice is fit for purpose.

Based on the descriptions in the Report, the good advice and appropriate advice duties appear to be similar in substance, so it is possible that we see little change in the industry for traditional advice formats in the initial period after implementing any new laws. However, the expanded scope for what constitutes personal advice means that there is a broader scope for what communications with retail clients constitute personal advice and therefore attract the good advice obligation. Further consideration will need to be given to determine whether the new formulation will have a practical impact for financial advisers.  AFS licensees may wish to consider what steps would be required to train retail client facing staff and whether any developmental changes or off-ramps will need to be implemented in digital advice tools, alerts and marketing materials to ensure that any personal advice is ‘good’.

Best interests duty

The existing best interests duty is an obligation to follow an appropriate ` that is designed to produce advice that will likely leave the client in a better position. It can be satisfied by following the “safe harbour” steps. The current formulation has been criticised as creating a ‘tick a box’ approach to compliance.

As a result, the Report recommends imposing a fiduciary duty on financial planners to act in the client’s best interests which would have no safe harbour steps.  There have been a variety of cases on what it means for a superannuation trustee and a responsible entity to act in the best interests of members which could inform a financial planner’s views on what is required to satisfy this formulation.  Some comments from these cases include:

• a duty to act in best interests is often a duty to act in the best financial interests
• the duty requires doing the best that can be done for the benefit of the client and not merely avoiding harming them
• it can involve a duty of loyalty, but this does not prevent the person from acting in self interest in certain circumstances provided the client’s interests are paramount
• in many cases, there will be more than one course of action which may be regarded as being in the best interests.

Financial planners and advice licensees would need to consider this case law when determining how to satisfy this duty.

However, the new duty of best interests would not apply to those who provide personal advice who are not financial planners.  So providers of personal advice through call centres, in marketing campaigns, by branch staff and through intra-fund advice would not be subject to a best interests duty.  That said, it should be remembered that a trustee who itself provides intra-fund advice (as opposed to appointing a third party to do so) must still comply with the best financial interests duty in the Superannuation Industry (Supervision) Act when giving that advice.

Conflicts

The Proposal Paper previously conceded that the proposed ‘good advice’ standard did not address conflicts (which is particularly an issue for approved product lists (APLs) that contain in-house products). The Report addresses conflicts and the duty of priority, providing that the fiduciary duty now imposed on advisers is a stringent duty – unless the adviser has the client’s informed consent, they cannot provide advice where there is a conflicting duty or interest. However, the case law on the duty of best interests is more nuanced, so further consideration would need to be given as to when a financial planner would need client consent – for example, they would presumably not need consider to recommend a related product issuer’s products if the advice is good and they have otherwise acted in the client’s best interests.

The Report does not expressly deal with whether the adviser would need to consider alternative financial products before recommending a product or what impact this obligation would have on the APL mechanism. However, the requirement that the adviser only recommend the product they honestly think is the best product available to meet the client’s needs and objectives at the time the advice is provided, suggests that if an adviser has a limited APL or narrow list of products it can recommend from, they may not be able to comply with the new duty of best interests.  The Report also states that the best interests duty may not be able to be satisfied by a financial planner who is not able to provide advice on or recommend a wide range of financial products.

In summary, the removal from the Corporations Act of the best interests duty and the safe harbour steps when giving personal advice would free advice licensees to develop their own processes for the provision of personal advice. However, the requirement to not provide advice in the case of conflict may increase need to introduce template consent forms and additional disclosure to provide clients if there is the possibility of a conflict or if the adviser has limited products it can recommend from.

Superannuation

Intra-fund advice

The Report recommends the removal of section 99F of the SIS Act, which provides a collective charging mechanism commonly used for intra-fund advice. This recommendation will likely result in trustees providing intra-fund advice on a greater number of product features, including transition to retirement, subject to them being able to be satisfied that the advice given is good advice. In providing advice, trustees will be required to take into account the member's personal circumstances, including their family situation and social security entitlements if relevant. Where trustees employ a financial adviser to give this advice, the financial adviser will have a duty to act in the best interest of the member as well.

Digital intra-fund advice will no longer be subject to the best interests duty that applies when giving personal advice, but intra-fund advice will be subject to the duty to give good advice.

In addition, the Report recommends amending the SIS Act so that trustees are expressly given permission to apply fund resources for the purposes of providing personal advice to members about their interests in the fund. The Report suggests that trustees should determine how to allocate the costs of providing advice according to the specific circumstances of the fund and their members.

If the recommendations were adopted, trustees would need to carefully consider how costs are allocated to comply with the existing duties the exercise their powers in the best financial interests of members, to promote their interests, to treat members of different classes fairly and the allocate expenses between members on a fair and reasonable basis.

Advice fees and disclosure

Advice fees in superannuation

The Review considers that the obligation in section 99FA of the SIS Act for trustees to obtain express consent from members to the deduction of advice fees from superannuation be repealed and replaced with a provision stipulating that trustee are allowed, on direction of the member, to deduct advice fees (including ongoing advice fees) from a member's superannuation account and pay the advice fees to an adviser. This is limited to personal advice provided to the member about the member's interest in the fund. Accordingly, the governance arrangements that trustees currently have in place to comply with the sole purpose test would need to remain.

This change would effectively still require member consent to the deduction of advice fees, but would remove the prescription regarding the form of consent.  This could mean that such consents could transfer upon the member moving to pension phase and potentially even if their account is successor fund transferred to another fund.

Furthermore, the risk of a trustee being implicated in a fee for no service arrangement, highlighted by the Royal Commission, would remain. So trustees would still need to consider what governance arrangements that they would have in place to manage this risk.

While the Report considers there may be merit in setting limits on how much and how frequently advice fees can be deducted from a member's account, it suggests that trustee determine this based on the characteristics of their members rather than have this prescribed by legislation.

Finally, the report recommends removing the restrictions on collective charging of fees, with a view to expanding the range of topics that could be provided under an intra-fund advice facility.

Ongoing advice fee arrangements

The Report confirmed its view in the Proposals Paper that member consent to advice fees in the prescribed form, providing fee disclosure statements and renewals be amalgamated so that a client signs one prescribed consent form, which contains an explanation of the services provided and the fee proposed to be charged over the following 12 months. The consent form should also authorise the deduction of advice fees from the client's financial product and should be able to be relied on by the product issuer. Consent is still required to be obtained on an annual basis. With respect to Financial Services Guides, personal advice providers should have the option to provide that information on their website.

Advice disclosure documentation

Consistent with its findings in the Proposals Paper, the Report finds that Statements of Advice (SOAs) do not offer significant consumer protection and recommends removing the requirement that a SOA be provided. Instead, advisers will be required to keep a complete record of advice given and provide a written record of advice provided on a client’s request. Clients should be asked whether they would like the written advice either before or at the time advice is provided and a request for written advice needs to be made at those same points in time. The Final Report also recommends that ASIC guidance is provided on how advice providers may comply with their record-keeping obligations.

The recommendation to remove SOAs from the regulatory framework is far-reaching and will have major effects on the compliance and other processes adopted by advice practices and advice licensees.

As we set out in our previous alert, the cost of advice may not change significantly initially, but may increase due to transition costs given clients will have a say on whether they want written advice and depending on ASIC’s guidance on record-keeping obligations. The far-reaching changes arising from this recommendation means advice practices will need to conduct a broad review of many of their processes and controls in order to comply with new requirements.

If less advice disclosure is permitted, super trustees will need to consider how they will satisfy their evidentiary onus of proof for the best financial interests duty if it is accused of breaching that duty by a regulator within the context of giving advice.

Other consent changes

The Review considered whether the consent arrangements for wholesale and sophisticated investors are operating effectively for the purposes of financial advice. The Report considers that certain obligations should be changed so that the difference between retail and wholesale clients are not as distinct.

It recommends the Corporations Act be amended to require a client who meets the assets and income threshold and has an accountant's certificate to provide consent to being treated as a wholesale client. Additionally, existing consent requirements for sophisticated investors should be amended to require written acknowledgement on the same terms.

Conflicted remuneration

The Report contains several recommendations about the remaining exceptions of the ban on conflicted remuneration. The Report recommends the following changes to the law:

• The Corporations Act be amended to clarify that benefits (eg payments) given by a client to an AFS licensee or representative of a licensee are not conflicted remuneration. This means that the prohibition on AFS licensees, or their representatives accepting monetary and non-monetary benefits would only apply to benefits given by a product issuer, not to benefits given by a client.
• The exception for benefits given by the client for financial product advice in the Corporations Act be replaced with a specific exception to allow a superannuation fund trustee to pay an AFS licensee or its representative a fee for personal advice where the client directs the trustee to pay the advice fee from their superannuation accounts.

The Final Report also recommends that current exceptions to the ban on conflicted remuneration should be retained in relation to life insurance, general insurance and consumer credit insurance, but with certain new conditions imposed about obtaining the client’s informed consent before the adviser accepts the commission.

What now?

It is now up to the government to consider whether any or all of the recommendations will be implemented. Financial services minister, Stephen Jones, has indicated that expert analysis and a potential further round of public consultation will be undertaken before the government responds to the Report.