- Treasury has announced proposals to improve the quality of financial advice.
- ‘General advice’ is proposed to no longer be considered a financial service.
- The definition of ‘personal advice’ is suggested to be broadened, and obligation imposed for personal advice to be ‘good advice’.
- These are proposed changes to disclosure documents, including removing the need for SOAs and FSGs.
On 29 August 2022, Treasury released a consultation paper for the ‘Quality of Advice Review’ (Review) (Consultation Paper). The Consultation Paper is designed to improve the current financial advice framework. The proposals that have been put forward appear to shift the focus of the regulatory framework away from the provider.
Quality of Advice Review
The Review was initiated by the Morrison Government in 2021 following recommendations 2.3, 2.5 and 2.6 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The aim of the Review is to ensure that Australians have access to financial advice that is affordable and of a high quality.
Treasury notes that, amongst other things, the Review will investigate the following:
- opportunities to streamline and simplify regulatory compliance to reduce costs and duplication;
- ways to improve the clarity and availability of documents provided to consumers; and
- whether parts of the regulatory framework have created unintended consequences.
The proposals noted in the Consultation Paper follow the issues that were put forward by Treasury in its Issues Paper on 25 March 2022.
Proposal: ‘general advice’ to no longer be regulated
It has been proposed in the Consultation Paper that ‘general advice’ will no longer be regulated under Chapter 7 of the Corporations Act (Act) and for the definition of ‘general advice’ to be removed altogether.
In its considerations, Treasury says that the term ‘general advice’ is currently used for two purposes:
- to regulate a financial service; and
- to warn consumers of the limitations of general advice.
Treasury says that research has found that consumers struggle to understand the concept of general advice and further misunderstand or ignore general advice warnings and therefore negating any benefit that the term ‘general advice’ brings to consumers.
If this proposal was to be implemented, general advice would no longer be considered a financial service. Whilst this would mean that the licensee obligations under Chapter 7 of the Act will no longer apply to AFSL holders that only provide general advice, what is now considered general advice will still be regulated under consumer protection laws such as the Competition and Consumer Act including the requirement to not engage in misleading and deceptive conduct.
Proposal: ‘personal advice’ definition to be broadened and required to be ‘good advice’
Broadening the definition
Together with the removal of the concept of general advice, Treasury has proposed to broaden the definition of personal advice.
The proposed changes to the definition are:
Definition of ‘personal advice’
The current definition
‘Financial product advice’ that is given or directed to a person (including by electronic means) in circumstances where:
- the provider of the advice has considered one or more of the person’s objectives, financial situation and needs; or
- a reasonable person might expect the provider to have considered one or more of those matters.
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 aspects of the client’s financial situation.
Summary: main change
Advice will be considered to be ‘personal advice’ if at the time the advice is provided, the financial advice provider has or holds information relating to the consumer’s circumstances rather than only in situations where financial advice provider considers the consumer’s circumstance.
The majority of consumer interactions with consumers by banks, superannuation funds or insurers will likely be considered to be personal advice under this proposal.
The Consultation Paper notes this issue and suggests that these interactions will only be considered personal advice if they include a recommendation or opinion which is intended to influence the customer to make a decision about a financial product. However, Treasury also notes that there may be difficulty in determining whether information provided to the consumer contains an opinion or recommendation.
Personal advice is to be ‘good advice’
Treasury is proposing to introduce the concept of ‘good advice’ which will replace the best interests duty, the appropriate advice duty, the duty to warn the client and the duty of priority in Chapter 7 of the Act.
‘Good advice’ is proposed to be defined 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.’
In relation to the current duties mentioned above, Treasury says:
Personal advice provider duties
Best Interest Duty
Intended to be a fiduciary-like duty but is not a fiduciary duty as it does not (and does not intend to) prohibit advisers from acting in their own interests.
Safe harbour steps, which if followed, discharge advisers from their duties that are owed to the client, were noted in their research to be considered highly prescriptive and a significant regulatory burden. Commissioner Hayne in the Royal Commission also noted that it encouraged a checklist approach.
Duty of Priority
Particularly perplexing duty and that the few cases that have considered this duty is contrary and inconsistent with the plain words of the section.
From submissions received and discussions about best interest duty and safe harbour steps, the duty of priority was not mentioned. Reflects practically that this duty is largely ignored.
As a result, Treasury says the current regime does not work well even for those for whom it has been designed for. It is designed to regulate the conduct of the adviser rather than the advice itself to protect consumers from poor advice. The proposal for personal advice to be good advice is intended to be simpler and a more direct approach to regulatory advice.
Proposal: superannuation trustees to be allowed to provide intra-fund advice and paying for advice through superannuation
Treasury proposes to allow superannuation fund trustees to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement. Treasury considers superannuation trustees to be able to provide important financial information and financial advice for their members and in doing so, would need to take into account the member’s personal circumstances.
In order to facilitate this, it is also proposed to amend the SIS Act to allow superannuation trustees to pay for personal advice fees through the member’s superannuation account.
Proposal: removing the requirement for SOAs and FSGs
Treasury is also proposing to replace the current requirements for an adviser to give a client an annual fee disclosure statement with a requirement for personal advice providers to obtain annual written consent from their clients to deduct ongoing advice fees from a financial product. This consent form is intended to explain to the client the fees and the services that adviser will provide over the next year.
The requirement to provide a Statement of Advice (SOA) is also proposed to be removed. Rather, personal advice providers will be required to maintain complete records of their advice and provide a written record of the advice to the client if requested.
Treasury considers that it is doubtful whether a SOA is actually beneficial to the customer, particularly as SOAs prepared by advisers are not necessarily reliable records of advice. Therefore by removing the need for SOAs, Treasury is hoping that it will reduce the cost of providing advice the regulatory burden.
Similarly, Treasury considers Financial Service Guides (FSG) to be a regulatory burden. Treasury acknowledges that some of the information provided in FSGs are important to consumers and therefore proposes that advisers can either continue to provide a FSG or instead are required to make important information such as remuneration, benefits that the adviser receives and internal dispute resolution, publically available. This proposal is intended to provide advisers with more flexibility in the way they provide their advice.
Proposal: Design and Distribution Obligations to be simplified for advisers
Under the current design and distribution obligations (DDO) advisers are required to provide reports to product issuers with respect to complaints and significant dealings outside of the target market for a products. Treasury notes that advisers have considered this again to be another significant burden.
Treasury recognises that advisers are able to recommend a product despite the client not being in the target market, provided that it is in their best interests and therefore do not see the benefit to the consumer on requiring the adviser to report on significant dealings outside of a target market determination. As such, it is proposed that the DDO obligations be simplified to only require relevant providers to report to product issuers if they receive a complaint in relation to a product.
What is next?
Treasury has noted that a further proposal paper will unlikely to be released.
However, the proposals set out in the Consultation Paper are open for further discussion with the Treasury accepting feedback up until 23 September 2022.
The final report is anticipated to be released in December 2022.
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