The Final Report of the Quality of Advice Review

The proposed expansion of the definition of personal advice will make it more difficult for superannuation fund trustees to communicate with their members using general advice.  This is because trustees will often have information about their members’ financial situation and sometimes their objectives or needs.  The Final Report clarifies that trustees can generally continue to give general advice to their members in seminars, newsletters and on their websites, despite having that information.  The question will be whether the financial product advice is personalised (in which case it will be personal advice). The Final Report acknowledges that this "will always turn on what the trustee does and says". The Final Report gives an example of a trustee sending a letter, email or message on an app to a member about whom it has information about their financial situation.  If the letter, email or message looks and feels personal (e.g. because it is addressed to the individual member) and if it contains a recommendation to make a decision about the member’s superannuation, it will be personal advice and the "good advice" duty will attach.  The Final Report states that this is even if the trustee has chosen the member on nothing more than their age and even if the trustee has not as a matter of fact taken into account any of the information that they have about the individual member.  

Consequently, the recommendations will raise the bar compared to the current regulation of general advice.  Trustees will need to consider whether their current AFS license authorises them to give personal advice and may need to apply for a licence variation. Although a trustee could consider not addressing letters to individuals, this would detract from the member experience. 

We expect that banks and insurers will likely encounter similar obstacles to providing general advice to existing customers.  

Operators and managers of wholesale funds will likely be providing personal advice under the new expanded definition, particularly where advice is provided to a small number of repeat investors. These entities will need to think about what it means to provide “good” advice to wholesale investors.

Although the report recognises the capacity for fintech to provide valuable financial advice to under-advised groups, the recommendations do not make it any simpler for fintech and digital advisors to enter the market. General advice is still regulated, fintech advisors will still need an Australian financial services licence (or reliance on an exemption), and conduct and disclosure requirements will still apply.

Recommendation 1: The definition of personal advice is broadened - All financial product advice will be personal advice if it is given to a client in a personal interaction or personalised communication by an advice provider who has (or whose related entity has) information about the client’s financial situation or one or more of their objectives or needs.

If implemented, most advice provided directly to a person will be personal advice particularly if the provider or its related entities has an ongoing relationship with the client. This will likely require further training of representatives and an uplift of internal compliance processes.

Recommendation 2: General advice stays, but general advice warning gone  -General advice continues to be a financial service, but the requirement for a general advice warning to accompany general advice is removed.

The QAR noted that the general advice warning didn’t change client expectations. It is of course open to a provider to give the warning, but it is no longer a requirement. Put another way, providers can’t attempt to use the general advice warning to shoehorn advice that is personal into general advice territory.

Recommendation 3: Only certain advisers can charge a fee or receive a commission for personal advice - Any appropriately licensed or authorised person can provide personal advice, but only a “Relevant Provider” can charge a fee for or receive a commission in connection with such advice if the provider is an individual.

How to regulate personal advice

Recommendation 4: Personal advice must be, in all the circumstances, good - Personal advice must be good advice. This concept of “good” has been (perhaps strangely!) the subject of a lot of discussion, with the inference being that “good” is a lower standard than “best” and therefore the consumer outcomes of “good advice” are weakened where the duty replaces the best interests duty. In reality, the QAR noted that industry has observed a reduction in the number of advisers, a condensing in the diversity of adviser types and that overall consumers are under or unadvised due to (among other things) the onerous “best interests” standard.

The QAR therefore proposes the concept of “good advice” which to quote the report: does not mean ‘okay advice’ or ‘good enough’ advice - it means what it says.

More specifically, it means personal advice that is, at the time it is provided:

1. “fit for purpose” having regard to:

• if the advice is: 1) given in response to a client’s request, question or inquiry, the client’s purpose (that the provider is 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;

• the scope, content and nature of the advice; and

• the client’s likely relevant circumstances; and

1. in all the circumstances, good.

If the advice is provided by a financial adviser (a relevant provider), this duty applies to the financial adviser. In all other cases, it applies to the Australian financial services (AFS) licensee.

Recommendation 5: Where a best interests duty is owed, there is no safe harbour - Replace the existing best interests duty and related obligations with a new statutory best interests duty which would be a true fiduciary duty that reflects the general law and would not include a safe harbour. This duty will apply only to financial advisers (relevant providers, being those individuals who charge a fee or receive a commission for personal advice).

If adopted, the new statutory duty  will be similar to the fiduciary duty between a financial adviser and their client under the Code of Ethics, rather than the focus being on process. This point was a subject of public debate, with overwhelming support for the safe harbour “box ticking” steps to be removed.

Recommendation 6: Superannuation advice is back in - Superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement.

Superannuation fund trustees should have the power to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed.

In consultation, stakeholders reported an increasing number of people who were unable to access financial advice about retirement even though that advice could lead to a higher income in retirement. Superannuation trustees can continue to provide general advice in seminars, newsletters and on their websites, so long as it is not personalised for the individual member.  In considering whether to provide personal advice to members, a trustee should have regard to the sole purpose test and comply with existing obligations regarding best financial interests, treating members fairly and allocating costs.

Recommendation 7: Deduction of adviser fees from superannuation - On the member’s direction, superannuation trustees should be able to pay a fee from a member’s superannuation account to an adviser for personal advice provided to the member about the member’s interest in the fund

Recommendation 8: Ongoing fee arrangements and consent requirements streamlined - Replace current provisions which require an advice provider to give a client a fee disclosure statement to obtain their agreement to renew an ongoing fee arrangement their consent to deduct advice fees. Providers should still be required to obtain their client's consent to renew an ongoing fee arrangement annually, albeit through a single 'consent form'.

• explain the services that will be provided and the fee the adviser proposes to charge over the following 12 months;

• authorise the deduction of advice fees from the client's financial product;

• be able to be relied on by the product issuer; and

• be prescribed.

Industry discussion and responses to the consultation supported the simplification of disclosure obligations for ongoing fee arrangements, and we expect that any steps that can be taken to minimise the compliance burdens on financial advisers are likely to be well received.

Recommendation 9: Statement of advice is out - Preparing a statement of advice is time consuming and costly for advisers, another requirement that drives up costs to consumers and harms the overall quality and diversity of advisers in the market. The QAR proposes replacing the statement of advice requirement with a requirement for providers of personal advice to retail clients to maintain complete records of the advice provided and provide written advice to clients if requested. 

Recommendation 10: Financial services guides or website disclosure -  Providers of personal advice should continue to give their clients a FSG or make information about their remuneration and any other benefits in connection with the financial services, as well as dispute resolution procedures publicly available on their websites.

This recommendation provides greater flexibility for an advice provider to choose how they disclose the information included in the FSG and we expect that many will opt to disclose the necessary information on their website.

Recommendation 11: Wholesale clients to consent to wholesale treatment - It is proposed that the Act is amended to require a client who meets the assets and income threshold and who has an accountant’s certificate to provide written consent to being treated as a wholesale client before they are provided with a financial product or service. The written consent should contain acknowledgments that the advice provider is not required to meet relevant standards or requirements (eg, disclosure) that would apply if advice were provided to retail clients, and the client is not entitled to make a complaint about the advice under the licensee’s internal or external dispute resolution procedures.

We expect this requirement has arisen due to the unintended reach of certain wholesale client categories, where monetary thresholds have not increased with inflation. However we expect this may introduce a new point of friction into the ordinarily “light touch” approach to advising the wholesale market.

Recommendations 12.1 and 12.2: Amendments to the Design and Distribution Obligations - Amendments to bring personal advice that is not provided by a relevant provider into the regime, and to ensure the regime mostly does not apply to relevant providers.

Recommendation 13.1: Benefits given by a client - amendments to explicitly provide that both monetary and non-monetary benefits given by a client to an AFS licensee (or their representatives) are not conflicted remuneration. This means the prohibition on AFS licensees (or their representatives) from accepting monetary and non-monetary benefits would only apply to benefits given by a product issuer, not a client.

We expect this to be a welcome amendment which better aligns with the intention of the conflicted remuneration provisions.

Recommendation 13.2: Client directed payments from superannuation funds - Remove the exception in section 963B(1)(d)(ii) and 963C(1)(e)(ii) of the Act and replace it with a specific exception permitting a superannuation fund trustee to pay an AFS licensee or its representative a personal advice fee from a client’s superannuation account, on the client’s direction

Recommendation 13.3: Removing exceptions for benefits given by clients for issue, sales or dealings in financial products - If recommendation 13.1 is accepted, amendments will be required to remove the following exceptions in the Act:

• monetary benefits given by the client for the issue or sale of a financial product (s 963B(1)(d)(i) of the Act);

• non-monetary benefits given by the client for the issue or sale of a financial product (s 963C(1)(e)(i) of the Act); and

• monetary benefits given to the provider by a retail client in relation to the provider dealing in a financial product on behalf of the client (regulation 7.7A.12E of the Regulations).

Recommendation 13.4: Removing the exception for the issue of financial products where advice has not been provided in the previous 12 months - Remove the exception which provides for monetary benefits given for the issue or sale of a financial product where the AFS licensee or representative has not given financial product advice about the product (or class of product) for at least 12 months prior to the date the benefit is given.

This will remove an exception that, in our experience, has been relied upon by many industry participants, and about which we expect there to be mixed opinions.

Recommendation 13.5: Exception for agents or employees of Australian authorised deposit-taking institutions (ADIs) - Remove exceptions relating to benefits given to an agent or employee of an ADI for financial product advice about basic banking products, general insurance products or consumer credit insurance.

Commentary in the Final Report provides a view that this exception resulted from lobbying at the time the legal provisions were drafted, but that it does otherwise align with the intent of the conflicted remuneration provisions. This recommendation will only prevent benefits being given by an ADI in relation to basic deposit products (due to operation of other exceptions), and will in our view, create greater consistency on the intent of the provisions.

Recommendation 13.6: Time-sharing schemes review - The Government should undertake a separate review of time-sharing schemes and their distribution to determine whether the regulatory framework under the Act is appropriate, including considering removal of the exception to the ban on conflicted remuneration for time-sharing schemes.

The Final Report notes that time sharing schemes fell outside the terms of reference, resulting from concerns for consumer harm identified during the QAR.

Recommendation 13.7: Life insurance related advice updated - Retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product (LRIP). Commission and clawback rates should be maintained at the current levels (60% upfront commissions and 20% trailing commissions, with a 2-year clawback). A person providing personal advice to retail clients on LRIPs, who receives a commission in connection with the issue or sale of the LRIP, must obtain the client’s informed consent before accepting a commission. The consent should be recorded in writing and obtained prior to the issue or sale of the LRIP. For the client to make an informed decision, the advice provider must disclose:

• their commissions (upfront and trail commissions) as a percentage of the premium; and

• the nature of any services they will provide to the client (if any) in relation to the LRIP (such as claims assistance).

Consent will be one-off and apply for the duration of the policy. This will only apply to LRIPs purchased after this recommendation commences.

This relates to recommendation 2.5 of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, in which it was suggested that the existing commission arrangements should be abolished unless there was a clear justification for them to be retained. Commentary in the Final Report suggests that to ban the existing cap would make it more costly for financial advisers to provide advice on life insurance.

Recommendation 13.8: General insurance - Retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a general insurance product. A person who provides personal advice to retail clients in relation to a general insurance product and who receives a commission in connection with the issue or sale of the general insurance product, must obtain the client’s informed consent before accepting a commission. This consent should be recorded in writing and be obtained prior to the issue or sale of the general insurance product. Consent is not required for any renewals of the same type of cover if the client’s original consent applies to the commission payable on such cover. The advice provider must disclose details of the commission the provider will receive for the issue or sale of the general insurance product (including for subsequent renewals) and any services the provider will provide to the client (if any).

If adopted, this will introduce another layer of administrative requirements, but will enable benefits to remain and managed in a similar manner to other conflicts of interest, via disclosure and client consent.

Recommendation 13.9: Consumer credit insurance - Retain the exception to the ban on conflicted remuneration for benefits given in relation to consumer credit insurance. The current cap on commissions in relation to consumer credit insurance (of 20%) should continue to apply. A person who provides personal advice to retail clients in relation to consumer credit insurance and receives a commission must obtain the client’s informed consent before accepting a commission.

This recommendation will increase transparency and create greater alignment on disclosure requirements in the conflicted remuneration provisions.