“With Everyone Super, no one will be”
— Syndrome, “The Incredibles”
We believe in advice, not distribution
Last week, we submitted our response to the Quality of Advice Review Consultation Paper.
We think we took a balanced, constructive and data-driven approach to the proposals, but we appreciate that not everyone shares our cautious optimism for the emerging advice profession or our concerns that the proposals seem to prioritise product distribution over advice. Apparently, one cannot critically analyse proposed changes without being conservative and reactionary.
As an industry, we can, and should be, critical of reforms that we think represent a retrograde step for both consumers and the emerging advice profession.
Although we’ll highlight five extracts from our submission, we recommend that you read the full document which is available here.
Read our Submission
Our staring point
We unapologetically believe in the value of advice and unreservedly support Treasury’s ambition to make advice more accessible and more affordable. We know that good financial advice changes lives and that every Australian should have access to the affordable, expert financial advice that can significantly improve their circumstances. We’ve seen lives transformed by great advice, but, unfortunately, we’ve also seen others profoundly affected by conflicted advice, malicious compliance and misconduct.
We unequivocally support the reform and simplification of the relevant laws, and we recognise the pressing need to make advice more accessible and more affordable. However, we also believe that the Review, on occasion, seems to prioritise product distribution over advice and, in our view, suggests some proposals that represent a retrograde step for both consumers and the emerging advice profession. Further, we believe that the Review relies too heavily on anecdotal data and unsupported assertions to misdiagnose problems and propose solutions that are likely to lead to the re-emergence and dominance of the vertically-integrated licensees whose systemic misconduct was exposed by The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Furthermore, we believe that the accessibility and affordability of advice can be more effectively addressed, and significant reforms achieved, without introducing more uncertainty or causing consumer detriment.
Contrary to the QAR team we believe that advice can be made less expensive and more accessible without imposing more cost and complexity on a fatigued financial sector that has already implemented costly and complex regulatory changes. We’d suggest that Treasury should instead:
- Immediately remove the safe harbour steps (s961B(2)(a)-(g)) which are not only counter-productive but also the single largest contributor to the cost of providing advice (consistent with Commissioner Hayne’s suggestion); and
- Remove the prescribed form and content of advice documents (s947A, s947B, s947C and s947D); and
- Revise the statutory penalties for non-compliance and introduce a broader “safe harbour” for licensees and advisers whose contraventions occur despite their reasonable care and diligence.
Based on our review of over 16,629 client files, the data indicates that the classification of “personal advice”, and the practical effect of this classification, is well understood by advisers. In practice, most advisers default to providing personal advice; not because personal advice is necessarily required but rather because of the consequences of inadvertently contravening the law. In particular, many believe that providing general advice is a high-risk activity given that another party may retrospectively decide that personal advice was provided (and provided in contravention of the retail protection mechanisms).
Complexity, accessibility and affordability could be more practically improved by reducing the importance of “the information [the adviser has or holds] about the client’s objectives, needs or any aspect of their financial situation” in favour of emphasising the provider’s best interest duty and their obligations under the FASEA Code of Ethics to confirm their client’s consent, understanding and engagement (and be able to demonstrate the reasonableness of their reliance on that confirmation).
The misrepresentation of BID
We respectfully submit, based on our experience and our review of 16,629 client files, that it would be imprudent to replace the Best Interest Duty (s961B), The Client Priority Rule (s961J) and the obligation to provide Appropriate Advice (s961G) with a “duty to provide good advice”. We will address our reasoning in some detail but, in summary, we consider that this proposal will unwind significant progress, undermine the emerging advice profession and lead to consumer detriment.
With respect to “good advice”, it is our opinion that the loud opposition to the “Best Interest Duty” (BID) misrepresents or ignores relevant matters. The BID reflected in s961B(1) did not create a responsibility to provide the “best advice” but simply a fiduciary-like duty and an obligation for providers to consider their motivations and influences and the likely outcome of their recommendations. Further, the safe harbour steps (s961B(2)) were never identified as the only way to satisfy the BID but rather offered as a partial defence to alleged contraventions of the duty; unfortunately, they have over time, been transformed into mandatory procedural requirements by licensees seeking to industrialise their advice processes and minimise their liability.
We agree with Treasury’s observation that complying with the prescriptive safe harbour steps (s961B(2)(a)-(g)) has led to significant costs and inconvenience. However, based on our data, it has only done so for those licensees and advisers who failed to recognise that compliance with s961B(2) is neither essential nor sufficient. Those that focused on the duty itself, rather than the safe harbour steps, easily navigated the transition to the higher standard.
We submit that s961B(2) should be repealed to reframe focus on the broad professional duty. In contrast to the prescriptive safe-harbour steps, it should be made clear that compliance with duty is a matter of professional judgment that can be confirmed or validated by a contextual and objective consideration of the provider’s intent, process and the likely outcomes of the recommendation.
The problem with “good advice”
We appreciate that the duty to provide “good advice” is another approach to reconciling providers’ obligations in respect to conflicts, processes and appropriateness, but we believe it is an unnecessary (and undesirable) change. While it may not be intended “to permit poorer quality of advice”, that will be the outcome and we are already seeing advisers providing less-tailored personal advice in anticipation of the proposed changes.
While a duty to provide “good advice” might not appear to be substantively different from the duty to act in a client’s best interest, we recommend against the change for the following reasons:
- The Duty to act in a client’s best interest is not limited to the advice but extends to the provider’s conduct and activity “in relation to the advice”;
- The creation of a fiduciary-like obligation was, and based on our data is, critical to the idea of an advice profession divorced from product-distribution and institutional conflicts;
- Returning to lesser standard, more aligned to the pre-FOFA obligation that consumers should be “no worse off” after receiving financial advice, will allow a diminution of standards that will disadvantage those who would most benefit from advice (and who are often most vulnerable to the provider’s advice and conduct).
The value of advice documents
Based on our experience and data, we strongly reject the assertion that the Statement of Advice has no utility and does not “provide any real consumer benefit”. Notwithstanding the deficiencies of these documents, Statements of Advice (and to a lesser degree Financial Services Guides) are important consumer warranty documents; file-notes are useful as contemporaneous accounts from the provider’s perspective but, since they are not generally provided to clients, they do not assist a consumer to understand, or confirm, what they were told, what they can expect or what the advice or services will cost.
For these reasons, while we recommend the amendment or removal of the more prescriptive requirements of s947A, s947B, s947C and s947D, we strongly recommend that the requirement to confirm advice in writing is maintained.
As acknowledged by ASIC in Regulatory Guide 90 “The purpose of an SOA is to communicate to the client important and relevant information about the advice being provided to enable the client to make an informed decision about whether to act on the advice”. Although always intended to be a consumer-friendly warranty and engagement tool, risk-aversion and increasingly prescriptive conventions transformed the SOA into an expensive, inaccessible and occasionally incomprehensible risk-management device. This Review should address these deficiencies by removing the prescriptive elements that drove providers to this end.
Regardless of the format, they must contain “the level of detail .. a …. client would reasonably require to make a decision about whether to act on the advice.” (consistent with s947B(3) and s947C(3)). Indeed, irrespective of the form, content and format of the advice, the provider must still be “reasonably satisfied” that the client understands the advice and the benefits, costs and risks of the recommended products (Standard 6).
To be clear, we strongly support those recommendations that we are confident will simplify the provision of advice without compromising consumer interests; we wholeheartedly concur with the proposal to remove the prescriptive elements of s947A, s947B, s947C and s947D with a principles-based approach that focuses on consideration and understanding. As it stands, the current Statement of Advice spectacularly fails to satisfy either goal; documents are bloated, generic and largely incomprehensible disclosure documents that are also expensive and time consuming to produce.
Endnote: The advice relationship
Although we agree that advice should be more accessible and more affordable, we believe that anyone that provides financial advice on which another may rely to their detriment is a relevant provider who has an obligation to act in their clients’ best interest. It is not the ongoing advice relationship that requires this duty but the unequal relationship between the parties and the vulnerability of the client to the advice they receive.
This duty should exist irrespective of how advice is delivered.
Algorithms, trustees and product issuers who provide advice to those that who act or rely on it should not otherwise be exempted from these requirements. To be clear, we believe that exempting these providers would both increase the risk of significant client detriment and “expose consumers to the risk of poorer quality advice”.