‘Good advice’ not quite dead, less ‘Qualified Advisers’ around the corner?
The Federal Government has revealed what it calls its 'final position' on the balance of the recommendations made by Michelle Levy's Quality of Advice (QAR) review (after a first tranche of draft legislation was released about 1-month ago dealing with its initial response to the QAR).
Levy's QAR report contained two key recommendations that the Government did not address in its initial response but has now addressed in its 'final position'. The Government’s response to each recommendation is ‘no’:
- the oddly named 'good advice' duty proposal (who would ever want just 'good' financial advice?) was rejected; and
- likewise, Levy's proposal to dump the requirement for any written personal advice.
The proposed 'good advice' duty to replace the requirement to provide appropriate advice may have been doomed to fail from the outset, if only because of its name. 'Good' suggested a lack of ambition to improve the quality of financial advice, which was quite at odds with a report examining ways to do exactly that. It also suggested a subjective analysis of the advice was required - i.e. what was 'good' advice for a financial advice client at any particular point in time, having regard to all of their personal circumstances. On its face, it could be a regulatory and legal quagmire.
In fact, the 'good advice' proposal was just poorly named. The duty as proposed was actually directed at ensuring that personal financial advice was 'fit-for-purpose', which would have been an easier standard to objectively assess, and a sensible approach. It was not to be, or at least not in the way that Levy envisaged.
As it turns out, the Government did take some aspects of the 'good advice' concept onboard. The Government's announcement confirms that the existing duty to provide appropriate advice will be modified to also require that the advice is fit-for-purpose. This appears to be a sensible compromise, although the concept of 'fit for purpose' is completely new in financial services legislation and will require consideration and guidance around its implementation. ‘Good advice’ therefore lives on, albeit in a limited form and with a better name.
Levy's other key proposal, being to remove the requirement for personal advice to be provided in writing, was also rejected by the Government. The Government will allow a less onerous written record of advice to be provided in lieu of a statement of advice. The Government's focus will be on ensuring that the adviser maintains records that support the advice. This is unquestionably a better outcome for the recipients of retail financial advice, who are currently required to wade through dense, boilerplate statements of advice even for pedestrian matters. Long statements of advice create cost and time inefficiencies and are of limited benefit to financial advice customers.
However, this also creates risks for financial planners. The statement of advice format forced financial advisers to exhaustively document their advice. A 'horses for courses' standard as proposed invites the risk that not all of the relevant advice will be recorded, opening the door to disputes about that advice in the future. It will be critical for the adviser to retain their own good notes of the advice they provided, the more detailed, the better.
There are other aspects to the second and final stage of the QAR reforms, some of which are controversial. The most controversial is the acceptance of Levy's proposal to allow a structure for 'qualified advisers' to provide intra-fund advice without breaching the sole-purpose test. This creates a second tier of advisers- employees or contractors of the relevant super fund - who could provide members with personalised 'nudges' at key decision points as their superannuation fund accumulates.
Some Financial Advisers who stuck with the industry, professionalised and spent many years since the Hayne Royal Commission rebuilding their reputations as reputable professionals are not enamoured with this idea. Nor are their peak representative bodies. Many are dismayed at the ‘winding back of the clock’ and speculate that it will be a return to integrated financial advice across superannuation, banking and insurance.
The response specifically deals with superannuation funds and the present focus should be here.
The reform must be recognised for what it is - an attempt to open up access to affordable financial advice at a time when access to advice has contracted after years of reduction in the numbers of financial advisers and increasing costs of advice. There are simply not enough financial advisers to provide advice, particularly as a large part of the workforce transitions to retirement. Furthermore - for reasons the QAR is attempting to address - advice has become too expensive for many. And there are a large number who simply do not engage with superannuation and investment, and when they do, do so on Tik Tok.
The qualified adviser proposal is an attempt to at least partially open up superfunds as a source of affordable financial advice to super beneficiaries, who are currently receiving little or no personalised advice. How this is designed, and in particular what protections are put in place to protect members, will be critical to its success.
All that has happened so far in respect of the second tranche of QAR reforms is the government has made an announcement. There forms in the response are the most complex to implement. Their implementation will be critical to their success and to addressing the controversy and risks many in the industry are concerned by. The purpose and intent is there, now it needs to be executed properly.
The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such. It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only. You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.