The Quality of Advice Review (Review) has released its long-awaited proposals Paper (Paper).
The Paper makes proposals about:
- what types of advice should be regulated
- the duties of different types of advisers
- intra-fund advice
- advice fees and disclosure.
The Review proposes large scale changes to each of these areas which will have significant practical implications for all parts of the Australian financial services industry. This alert highlights some issues that the advice industry would need to consider if the proposals were adopted.
Types of advice to be regulated
Personal advice
The Review would essentially maintain the current definition of ‘personal advice’, but with an expanded scope so that the term would include any financial product advice given to a client by a person who holds information about the client’s objectives, needs or financial situation. The focus of the definition would change to whether the provider holds personal information, not whether it uses that information to provide the advice.
Presumably, the Review’s definition would still require a real-time personal communication or discussion to ensure that marketing materials and other mass mail outs and email outs containing financial product advice aren’t caught.
The effect of extending the definition of personal advice is that a wider range of interactions with members and investors would be subject to the proposed duty to give good advice (discussed below). For example, it appears that the extended definition would ensure that most outbound call campaigns would involve personal advice. The term could also extend to call centres which currently only provide general advice, and would appear to result in all intra-fund advice facilities involving the provision of personal advice.
General advice
The Review proposes to de-regulate general advice on the basis that the consumer protections contained in the Australian Securities and Investments Commission Act 2001 (Cth), such as prohibitions on engaging in misleading or deceptive conduct, will continue to apply. The Review would remove the requirement to be licensed to give general advice and the requirement to give a general advice warning.
General advice would still be subject to the conflicted remuneration rules, so that the scope of the conflicted remuneration rules should not change.
Some practical implications
Call centres
Where product issuers operate call centres, the proposal would mean that there may be few interactions between the call centre operator and the member or investor that are not a personal advice conversation. Practically, this would mean:
- call centre scripts would need to be reviewed, and “personal advice” interactions which contain a recommendation or opinion be clearly separated from “informational interactions”
- any personal advice interaction would need to satisfy the “good advice” obligation (which we discuss further below)
- call centre staff training manuals will need to be potentially amended and call centre staff retrained
- consideration would need to be given as to how the RG146 training obligations for personal advice apply in the context of call centres
- there would be a greater onus on records of call centre conversations.
Calculators and retirement estimates
The Review is silent on how calculators and retirement estimates would be regulated. However, ASIC instruments provide relief from all financial product advice requirements for generic calculators and retirement estimates as long as the conditions in the relevant relief are satisfied. Assuming there is no change to the ASIC instruments, it would appear that the proposals would not impact the operation of calculators and retirement estimates.
Marketing financial products
Marketing materials will no longer need to include general advice warnings and the general advice warnings often included in PDSs could be removed. Phone conversations would no longer need to have the general advice warning read out.
More broadly, the proposals could make it possible to market a financial product without holding an Australian financial services licence. There would also be no need for anyone in marketing teams to be RG146 compliant.
Corporate super
Super trustees should consider how the proposals could affect the scope and duties of relationship managers for corporate super products. Modifications may need to be made to both training, scripts, documentation and records for relationship managers. Relationship managers may also need to be RG146 compliant in order to give advice.
Duties of different types of advisers
Duty to give good advice
Currently, any individual or entity who provides personal advice to a retail client is subject to 4 duties in the FOFA provisions of the Corporations Act: the best interests duty, the duty to provide appropriate advice, the duty of priority and the duty to warn if advice is incomplete. Further, an individual who provides personal advice is also subject to education, training and ethical standards (including the duty in the Financial Planners and Advisers Code of Ethics (Code of Ethics) to act in the best interests of clients and not to advise a client if they have a conflict).
The Explanatory Memorandum for the best interests duty in the FOFA provisions explained that this requirement was intended to be about the process of providing advice, reflecting that good processes improve the quality of advice. The Review rejects this premise and raises concerns that the current law focuses on process rather than outcomes. While the current law regulates both process (best interests duty) and outcome (appropriate advice duty), it is the experience of the authors of this article that the focus of regulatory attention has certainly been on process rather than outcomes.
As a result, the Review proposes that the law impose only an outcomes focused duty, being a duty to give good advice. The only duty of an entity that provides personal advice and for certain individuals who provide personal advice would be to give good advice (noting that advice licensees would also be obliged to comply with their more general obligations, such as to provide the advice efficiently, honestly and fairly). It is proposed that certain individuals who provide personal advice for a fee or on an ongoing basis would be subject to:
- the duty to give good advice and,
- ASIC’s education and training standards, and the Code of Ethics.
'Good advice' would be 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.
There is no reference in the Paper to:
- a need for a fact find in relation to good advice, but the Paper does comment that all providers of advice would 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
- the need to consider alternative financial products before recommending a product, so that the good advice duty may not require an adviser to recommend the best product on the market provided that the recommended product will benefit the client. This is something that we hope the final recommendations paper considers in order to provide certainty on this key issue
- how the good advice duty (which is outcomes focused) would impact the approved product list (APL) mechanism. It is possible that APLs will still be needed given that advice licensees tend to research products on the APL to ensure that they are of sufficient quality, and so will assist in complying with the good advice duty. In any event, some professional indemnity policies may still require an advice licensee to have an APL. So it is possible that the use of APLs will not be impacted by the proposals.
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, it is possible that we see little change in the industry in the initial period after implementing any new laws due to cost and risk reasons.
It is also important to remember that the current duty to provide appropriate advice is directly concerned with the quality of advice. The differences between the duty to provide appropriate advice and the duty to provide good advice are not clear at this early stage.
Benefit
The proposed test is, ‘if my client follows my advice, are they likely to benefit?’. What will be required to show whether good advice has been provided will be entirely dependent on the advice provided. However, it is not entirely clear what ‘benefit’ is required for advice to be good advice. It will be important that it be considered akin to the current expectations in relation to the best interests duty when giving personal advice which is that the advice is likely to leave the client in a better position. This would mean that a ‘benefit’ under the good advice duty could include the wider range of benefits listed in ASIC Regulatory Guide 175.256:
- improving a client’s understanding of their financial position
- aligning their financial position with their appetite for risk
- reassuring them that that they do not need to change their strategy or product holdings as a result of a review
- increasing their confidence to spend or donate their money,
and not just improving the client’s financial position.
Conflicts
The Review concedes that the proposed ‘good advice’ standard does not address conflicts (which is particularly an issue for APLs that contain in-house products). Nonetheless, the Review argues that the proposal is in consumer interests as advisers will focus on the content of the advice. In this regard, it should also be noted that advice licensees will still have the obligation in section 912A to manage conflicts and there are conflicts obligations in the Code of Ethics.
Limiting the application of the education, training and ethical standards
Currently, any individual who provides personal advice to retail clients must comply with education and training standards and the Code of Ethics.
The Review recommends limiting the application of the education and training standards and the Code of Ethics to those advisers who are in a fiduciary-like situation with their client. For example, the Review argues that the education and training standards and the Code of Ethics should only apply where an individual provides personal advice to clients who pay a fee, commissions, there is an ongoing relationship or the client has a reasonable expectation that such a relationship exists.
There may be few practical changes arising from this proposal. Essentially, it means that advisers who only provide one-off advice and don’t receive commissions will no longer need to comply with the education and training standards and the Code of Ethics. However, most advisers will provide both one-off advice and ongoing advice and / or receive commissions and so still be subject to the wider range of requirements.
Intra-fund advice
The Review proposes to remove the limits on what types of intra-fund advice can be provided through a collective charging mechanism found in section of 99F of the SIS Act. This could result in trustees providing intra-fund advice on a greater number of product features, subject to them being able to be satisfied that the advice given is good advice.
The following is a summary of the potential impacts of the proposals on intra-fund advice:
- digital intra-fund advice will no longer be subject to the best interests duty that applies when giving personal advice, which may impact some of the mechanics of the robo-advice tool such as the “off-ramps” and disclaimers which are currently designed to comply with the best interests duty and possibly changes to how the advice is provided to the user
- general intra-fund advice facilities will likely become personal intra-fund advice facilities and be subject to the duty to give good advice with appropriate record keeping
- personal intra-fund advice facilities will need to be reviewed to ensure that they provide ‘good advice’ and advice licensees may wish to review and update the advice process, adviser standards and advice disclosure.
Advice fees and disclosure
Advice fees in superannuation
The Review considers that it is appropriate for advice fees to be deducted from superannuation, but only to the extent that the fees relate to advice about superannuation. Accordingly, the governance arrangements that trustees currently have in place to comply with the sole purpose test this would need to remain.
However, 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 is flawed and should be repealed.
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.
Ongoing advice fee arrangements
There are currently a variety of obligations imposed on advisers which attach to ongoing advice fee arrangements, being the requirement to obtain member consent to advice fees in the prescribed form, providing fee disclosure statements and renewals.
The Review considers this regime to result in significant red tape for advisers with no benefit to members. As a result, it recommends amalgamating these requirements so that a client signs one standardised consent form which contains a fee estimate for the upcoming 12 months.
Advice disclosure
The Paper notes that the Review received submissions that the disclosure documentation related to the provision of advice, namely Fee Disclosure Statements (FDS), Statements of Advice (SOA) and Financial Services Guides (FSG), imposed a high regulatory burden on providers of personal advice.
The Paper argues that advisers should have flexibility about how they provide advice – it does not necessarily need to be in writing, and could be given in a meeting, by telephone or in digital form.
As such, the Paper finds that SOAs do not offer significant consumer protection and recommends removing the requirement that a SOA be provided. 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.
The proposal 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.
However, cost of advice may not change significantly initially, but may increase due to transition costs as follows:
- even though an SOA will not be required, advisers should as a commercial matter still consider what are the client’s expectations in the relevant situation. Would the client still expect to receive written advice? Advice licensees should also consider the risks involved in giving financial advice orally
- it is important for an adviser to keep a record of advice (e.g. in file notes, call recordings) to support the ongoing provision of financial advice to their clients and if an adviser needs to explain their past advice (e.g. internal dispute resolution, external dispute resolution, court action or investigations by ASIC)
- authorities to proceed are often attached to Statements of Advice. If there is no written advice, advisers will need to consider its arrangements for the provision and execution of authorities to proceed
- if all advice must be able to be provided in writing on request, industry standards may need to be developed about the form of written advice. In addition, record keeping practices, will likely need to be modified, together with training at both the advice licensee and authorised representative level
- advice licensees have an obligation under the Corporations Act to take reasonable steps to ensure that their representatives comply with financial services laws. Therefore advice licensees will nevertheless likely require that their authorised representatives produce written advice so that the licensee can audit the advice
- there may also be a need to review current systems (paper and electronic) under which licensees access client files and records, and changes may need to be made to Authorised Representative Agreements which could be a substantial task.
If less advice disclosure will be 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.
What now?
Submissions responding to the proposals in the Paper closed on 23 September 2022 and the final report is due to be handed down on 16 December 2022.
