Proposed reforms for financial advice in Australia
As part of the Government’s Quality of Advice Review (the Review), a Proposals Paper was recently released for consultation, detailing the proposals for reform to the financial advice industry in Australia. The Review is being undertaken in response to recommendations 2.3, 2.5 and 2.6 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
The purpose of the reforms stemming from the Review is to simplify the regulatory framework to better enable to provision of high-quality, accessible and affordable financial advice for retail clients.
The Proposals Paper considers feedback on the Issues Paper released in March 2022 and seeks feedback from the public. Together with input from stakeholders such as consumers, the industry and regulators, this feedback will inform the final report to be issued in December 2022.
This blog provides a summary of the proposals for reform, the intent of the proposals and impact on providers of financial advice.
The Quality of Advice Review Proposals Paper (the Paper) puts forward several proposals on the principle that the law does not need to regulate or prescribe inputs but rather focus on the quality of advice given to consumers. These proposals are intended to apply in addition to the other consumer protections under existing regulatory requirements.
The Paper does not include any proposals for life insurance and general insurance commissions nor other forms of benefits as Treasury is still collecting information on these topics.
The question of what should be regulated
The Paper proposes the following in terms of the type of advice the financial services regime should regulate:
The regime should regulate the provision of ‘personal advice’. It is also proposed that the definition of personal advice should be broadened to apply whenever a recommendation or opinion is provided to a client about a financial product and at that time, the provider has or holds information about the client’s objectives, needs or any aspect of their financial situation. This is to reduce the ability of providers seeking to avoid giving personal advice by attempting to separate information they hold about the customer for the purposes of giving advice.
It should no longer regulate ‘general advice’ as a financial service, with no obligation to give a general advice warning. It is proposed that general advice should continue to be covered by general consumer protections such as prohibiting misleading and deceptive conduct in relation to the supply of financial services. Further consumer protections are offered under the design and distribution obligations and the enhanced anti-hawking legislation. However, conflicted remuneration provisions should continue to apply to conduct currently referred to as general advice and would need to be adjusted accordingly. This proposal is aimed at reducing regulatory complexity and aligning the regulatory regime with customer expectations.
The approach to regulating personal advice
In relation to the provision of personal advice, the Paper proposes to replace the following duties with the obligation for a person providing personal advice to provide ‘good advice’:
Best interests duty
Appropriate advice duty
Duty to warn the client
Duty of priority
The proposed definition of ‘good advice’ is 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. However, this doesn’t remove the obligation under current law for a relevant provider to act in the best interests of their client when providing personal advice. The intent of the proposal is to make it easier for banks, insurers and superannuation fund trustees to give simple advice to their customers by removing the need for a prescribed process.
The Paper also proposes the replacement of the existing requirement that any individual who provides personal advice to a retail client be a ‘relevant provider’. Instead, a provider of personal advice should be a relevant provider where:
the provider is an individual and the client pays a fee for the advice,
the provider (or the provider’s authorising licensee) receives a commission in connection with the advice,
there is an ongoing advice relationship between the adviser and the client, or
the client has a reasonable expectation that such a relationship exists.
A relevant provider must continue to comply with the professional standards (education and training standards and the Code of Ethics).
Intra-fund advice and paying for advice through superannuation
Currently, Section 99F of the SIS Act does not give superannuation fund trustees permission to provide personal advice or to meet the cost of providing personal advice to members from the assets of the fund.
In response to feedback from trustees, the Paper proposes that superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund. When providing such advice, trustees would be required to consider the member’s personal circumstances. This is to improve access to personal advice for superannuation fund members.
It is also proposed that trustees should have the discretion to decide how to charge members for personal advice, removing the restrictions on collective charging of fees. This includes allowing trustees to pay fees from a member’s superannuation account to an adviser for personal advice about the member’s interest in the fund, upon approval by the member.
The Paper proposes the following in terms of disclosure documents:
For ongoing advice fees, advisers are currently required to annually give clients a fee disclosure statement, seek their agreement to renew fee arrangements and obtain their clients' signed consent to deduct fees from financial products. It is proposed that providers of personal advice should obtain annual written consent from their client to deduct ongoing advice fees from a financial product. The consent form should explain the services that will be provided and the fee the adviser proposes to charge over the course of the upcoming 12 months. Only a single consent would be required for advice fees deducted from all relevant financial products.
Currently, advisers are required to provide a statement of advice or record of advice when providing personal advice to a client. It is proposed that providers of personal advice should be able to determine the form of advice that would best suit their clients. Such advice should be completely recorded and the written record of advice given to the client upon request.
To offer advisers increased flexibility in how they provide information to clients, it is proposed that providers of personal advice should be given the discretion regarding whether to give their clients a copy of the financial services guide or make information available to clients on their website at the time the advice is provided. This information would cover their remuneration and other benefits they receive, their internal dispute resolution procedures and the Australian Financial Complaints Authority.
The above proposals are intended to reduce the cost of providing advice and subsequently increase the accessibility and affordability of financial advice without consumer detriment.
Design and distribution obligations
The Paper proposes that the reporting requirements under the design and distribution obligations regime should be simplified by requiring relevant providers (as distributors) to only report to the product issuer where they have received a complaint in relation to a financial product. This does not apply to providers of personal advice who are no longer ‘relevant providers’ under the proposed definition.
To ensure that the implementation of the proposed reforms is workable and sustainable, Treasury has indicated an adequate transition period would be provided. The election to opt in early to the changes may also be offered to providers of personal advice.
To read more about how to provide good quality financial advice and get a step ahead of the industry before the reforms take effect, read our blog on the essential elements of providing good quality advice.
How we can help
If you require support in reviewing your existing financial advice practices, including record-keeping, disclosure and reporting, Hall Advisory can assist you with:
Conducting file reviews to complement your monitoring and supervision obligations.
Reviewing your procedures, processes, templates used in the delivery of advice to ensure they are fit for purpose and assist you in complying with the regulatory environment.
Providing tailored coaching sessions with staff.
Developing and facilitating workshops to support better practices.
Uplifting operational processes, procedures and templates to meet requirements, appropriate to the size and nature of your business.
Following the finalisation of the proposed reforms, we can also assist with the uplift of your financial advice compliance framework to meet regulatory and business requirements.
Contact us today and let’s start with a confidential, no-obligation conversation about how we can help you comply with financial advice law and regulations.