“So be careful what you wish for, ‘cause you just might get it
And if you get it, then you just might not know what to do with it”
— Eminem, “Careful what you wish for”
Forward to the past?
I had intended to write an article “dumb things compliance experts say” but, as cathartic and revealing as that article may have been, it’s a poor fit for a time of peace and goodwill.
Christmas is not the time to be making new enemies so, instead, I thought I’d focus on traditional enemies and address proposed regulatory reforms. In particular, I’d like to focus on the document titled “Delivering Better Financial Outcomes” and the Government’s proposed reforms of the financial advice sector.
If you’ve monitored the reasoned but rabid responses, you may believe that the Government will inevitably revise, reconsider or reject some controversial aspects of the proposed reforms. This may occur, but it’s far from certain. A week is a long time in politics, but we’ve yet to see any formal deviation from the high-level outline they published on 7 December 2023.
In case you missed it, the document proposes a modernised and flexible best interests duty, the introduction of a new class of “financial adviser” and guardrails for new advisers, the expansion of superannuation advice governed by consistent rules, and a shift to a principles-based advice record (away from a principles-based advice record). .
We’ll unpack the proposed legislation when it’s available but, in the interim, let’s acknowledge the key elements.
A modernised Best Interests Duty
This element of the proposal focuses on ensuring high-quality advice that meets consumer needs, suggesting clearer legislative support for scaled or limited scope advice and the removal of the best interests duty “safe harbour” steps.
Objective: To ensure that advice professionals act, and provide advice, in a manner that meets consumer needs.
Key Aspects:
- Retention of the core obligation to act in the client’s best interests.
- Clearer legislative support for scaled or limited scope advice.
- Removal of the existing best interests duty “safe harbour” steps.
- Maintenance of appropriate advice requirements.
- Continuation of concessional treatment for advice on basic products by banks and insurers.
Given that we extensively and relentlessly campaigned against the prescriptive “safe harbour steps” and institutional licensees embrace of process, we’re thrilled that common sense has finally prevailed. Of course, there’s still ample opportunity for formalism and bureaucracy to reassert itself, but we’re optimistic that advisers, licensees and consumer associations will push back against Product Distributors’ representations.
A New Class of Financial Adviser?
This element of the package introduces a new category of adviser, one prohibited from charging fees or receiving commissions for personal advice, but able to provide unbiased, client-focused advice under a single quality standard. Advice professionals may be worried about allowing banks and product manufacturers to return to advice but, as we know, past performance is no guarantee of future performance.
Objective: To increase the availability and affordability of simple personal advice/product recommendations.
Key Aspects:
- The introduction of a “house brand” advice option – “Qualified Advisers” – who can distribute product and provide product recommendations but are prohibited from charging fees or receiving commissions for personal advice.
- Qualified Advisers are required to adhere to the modernised best interests duty.
- The Government proposes the introduction of additional consumer protections, including obligations on licensees and minimum competency standards.
If you exclude the consumer confusion and likely detriment that will inevitably follow, this proposal is, in fact, a reasonable response to the unmet, and insatiable, demand for financial information and simple advice. The reality is that there are many Australians who for reasons of cost, complexity or conflict can not, or do not, access the advice and information they need to improve their circumstances. Good advice changes lives.
The Government, to its credit, appears to have learnt from history and chosen to yeah-nah aspects of Ms Levy’s recommendations. In addition to inviting the Banks and Product Manufacturers back to advice, the suggested controls and guardrails may not be enough to protect consumers and minimise the arbitrage opportunities presented by a two-tier regulatory model.
Expanding Superannuation Advice
The reform aims to broaden the scope of superannuation advice, allowing funds to consider a wider range of a member’s personal circumstances and provide personalised recommendations.
Objective: To establish consistent rules for advice funded through superannuation.
Key Aspects:
- Broader consideration of member’s personal circumstances in advice.
- Legal certainty for superannuation funds to provide personalised ‘nudges’ to members.
Principles-Based Advice Record
Replacing Statements of Advice, this approach focuses on the relevance, rationale, and benefits of advice to the client, requiring a balance between flexibility and thoroughness in record-keeping.
Objective: Statements of Advice with a more flexible advice record.
Key Aspects:
- Covering subject matter/scope, the advice itself, reasons for the advice, and cost/benefits to the client.
Although this is presented as a significant changes, it’s worth acknowledging that the relevant obligations were principles based and contemplated “clear, concise and effective advice”. Statements of Advice became immense and incomprehensible despite the law. It was fear of liability and conduct failures led to prescription and licensees’ fear of legal risk to its embrace. Significant penalties and formalism created an environment in which Licensees, and advisers, could not, or would not, prioritise understanding and engagement over disclosure.
In reality, the new advice record may not be significantly different to the structure of a good Statement of Advice but the proposal should achieve a number of beneficial outcomes; First, it signals a clear legislative intent to simplify advice documents and promote engagement. Second, it should significantly reduce advice costs (or, at least, production costs). Third, it may create more competition amongst advice software providers; and Fourth, it will drive advisers away from deifying form and format to prioritising consideration and communication.
