Quality of Advice Review (Proposal Summary)
The current regulatory framework, which commenced with the Financial Services Reform Act 2001, continues the premise that providing the client with all the information will allow them to make well informed decisions in their own interest. Therefore, there are obligations for advisers to provide Product Disclosure Documents (PDS) for the products they recommend, a Financial Services Guide (FSG), a Statement of Advice (SoA), and any applicable warnings, even though the Ripoll Inquiry concluded that disclosure does not protect consumers from harmful advice.
Most of the current financial services industry regulations are the culmination of rules evoked in response to inquiries and reform findings. Many were introduced in response to the 2009 inquiry by the Parliamentary Joint Committee on Corporations and Financial Services (PJC) into Financial Products and Services (Ripoll Inquiry) brought about by the collapse of Storm Financial and Opes Prime.
Then, in response to the Ripoll Inquiry, the 2013 Future of Financial Advice (FoFA) legislation introduced the bans on conflicted remuneration and required advise providers to act in the best interest of their clients when providing personal financial advice.
What has happened
These regulations have created an Advice environment that directs attention to the adviser’s purpose and process, rather than to the substance of the advice provided. The intent of FoFA was that if an adviser has no personal interest in the advice and they comply with the conduct requirements, then the advice they provide will be appropriate. Unfortunately, evidence suggests that the best interest duty has been no more effective than disclosures when it comes to protecting consumers from poor advice.
It is with this backdrop that The Treasury released the Quality of Advice Review Consultation Paper – Proposals for Reform in August 2022. This consultation feedback was closed on 23rd September 2022, and a report is to be provided to the Government by 16th December 2022.
A new regulatory framework
The consultation paper outlines a new regulatory framework that is focused on:
- regulating the content of the advice rather than the process in which the advice was provided
- consumers receiving good advice rather than documents and process
- implementing measures for the advice rather than the conduct.
Good advice should be measured objectively considering all the relevant circumstances at the time of the advice, thus focusing attention on the consumer and the advice, rather than on the provider and the process for formulating the advice. It is hoped that this shift will encourage better, more tailored advice.
Shifting the focus to a duty to give good advice could mean removing many of the regulatory requirements pertinent to disclosure and some relating to conduct. It is hoped that it will create an opportunity for advice providers to think about the form in which their advice is provided and create room for innovation, while ensuring that they are acutely aware of the clients wants and needs.
The consultation paper outlines 12 proposals for consideration:
- Regulation of personal advice. The financial services regime should regulate the provision of ‘personal advice’. ‘Personal advice’ is a recommendation or opinion provided to a client about a financial product (or class of financial products) and, at the time the advice is provided, the provider has or holds information about the client’s objectives, needs, and any aspect of the client’s financial situation.
- General advice. ‘General advice’ should no longer be regulated as a financial service and the definition of ‘general advice’ should be removed together with the obligation to give a general advice warning.
- Obligation to provide good advice. A person who provides personal advice should be required to provide ‘good advice’. ‘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.
- Requirement to be a relevant provider. 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) received 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.
- Personal advice to superannuation fund members. 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. In doing so, trustees would be required to consider the member’s personal circumstances, including their family situation and social security entitlements if that is relevant to the provision of the advice.
- Collective charging of advice fees. Superannuation funds should have discretion to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed.
- Fees for advice provided to members about their superannuation. Superannuation trustees should be able to pay a fee from a member’s superannuation account to an advice provider for personal advice provided to the member about the member’s interest in the fund on the direction of the member.
- Ongoing fee arrangements and consent requirements. Fee disclosure statements should not be required. Providers of personal advice should obtain annual written consent from their client to deduct advice fees from a financial product if there is an ongoing fee arrangement. The consent form should explain the services that will be provided and the fee the adviser proposes to charge over the course of the following 12 months. Where advice fees are deducted from more than one product, a single consent form should cover each of the products issued by the product issuer.
- Statement of Advice. Providers of personal advice to retail clients would be required to maintain complete records of the advice they provide and to provide a written record of advice to a client on request. This would replace the existing requirement for advisers to provide a statement of advice or record of advice.
- Financial Services Guide. Providers of personal advice should either continue to give their clients a copy of the financial services guide or make information available to their clients on their website about their remuneration and other benefits they receive, their internal dispute resolution procedures and AFCA. This information should be available at the time the advice is provided.
- Design and distribution obligations reporting requirements. The reporting requirements under the design and distribution obligations regime should be simplified by requiring relevant providers to only report to the product issuer where they have received a complaint in relation to a product.
- Transition arrangements. There should be an adequate transition period for implementing these changes. Consideration should be given to allowing providers to ‘opt-in’ early.
Let’s break it down for a Financial Advice provider:
|Corporations Act Obligations: You must act in the best interests of your client in relation to the advice including making inquiries necessary to identify the objectives, financial situations and needs reasonably considered relevant to the advice sought. The advice must be appropriate, and you must prioritise your client’s interests in the event of a conflict. The licensee is required to take reasonable steps to ensure the advice provider complies with these obligations.
|Corporations Act Obligations: You must provide good advice, advice that is reasonably likely to benefit your client. Your licensee is required to take reasonable steps to ensure you comply with this obligation.
|Licensee/Adviser: The Corporations Act no longer prescribes the process you should follow when providing advice. The adviser should make sufficient inquiries to ensure that the advice provided is reasonably likely to benefit the client. The licensee may need to adjust its controls to ensure advisers are meeting the new standard.
Consumer: No significant change. The advice must be good, and the client retains the right to access both internal and external dispute resolution if required.
|Professional Standards: You are providing personal advice to a retail client in relation to a relevant financial product – therefore you must be a relevant provider. This includes meeting the education and training standards and complying with the Code of Ethics.
|Professional Standards: No change. As an ongoing relationship is envisaged and your client is paying a fee for the advice, you must be a relevant provider and meet the professional standards.
|Disclosure Documents: You must give your client a statement of advice and a financial services guide.
|Disclosure Documents: Unless your client requests it, you are not required to provide your client with a statement of advice but must keep complete records. You can either give your client a financial services guide or make the relevant information available on your (or your licensee’s) website at the time the advice is provided.
|Licensee/Adviser: The form of advice documents provided to clients is no longer prescribed by law. This means that you and your client can agree on a format that is most suitable for their circumstances.
Consumer: Your client can request a copy of the advice in writing.
|Charging arrangements: Annually, you must provide your client with: a Fee Disclosure Statement (which includes services and fees provided over the past year and the upcoming year), get the client’s agreement to renew the ongoing fee arrangement, andobtain your client’s signed consent for fees to be deducted from a product.
|Charging arrangements: You must obtain your client’s annual written consent to deduct ongoing advice fees from a financial product. This form is only required to include an explanation of the services and expected fees for the upcoming 12 months.
|Licensee/Adviser: Simplified obligations apply in relation to obtaining client consent to deduct fees from a product.
Consumer: the client continues to provide annual consent to the deduction of advice fees from a product.
More to Come
Over the next few weeks, we will continue to provide more in-depth information about the changes that would likely impact you the most. We will also prepare some information once the final report has been released.
Changes to ASIC registrations
On an additional note, on 1 November 2022 the Government announced the delay of the Financial Adviser registration requirement until 1 July 2023. This 6-month extension to the Stage 1 registration of all existing financial advisers who provide personal advice to retail clients is to allow ASIC time to implement improvements to the registration process.
GRC Essentials can help
Please don’t hesitate to contact us if you have any questions or if we can help you with any of your compliance matters.
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i. Quality of Advice Review – Consultation paper – Proposal for Reform (https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf)
ii. Quality of Advice Review – Consultation paper – Proposal for Reform (https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf)