FSC chief executive Sally Loane

The Financial Services Council continued its push for a new advice model with the release of a green paper detailing an expanded blueprint for the industry that includes the abandonment of Statements of Advice (SoAs) in favour of Letters of Advice (LoAs) and the abolition of safe harbour rules altogether.

The greenpaper represents the third attempt by the FSC to gain traction for its ‘simple vs complex’ advice proposal after the release of its original report with actuary Rice Warner in August 2020, followed by a review from pollsters that validated many of its findings.

While many of the original report’s proposals remain, the FSC makes several significant variations to its original blueprint.

Foremost among these is a call for the seven Safe Harbour Steps – which ensure Best Interests Duty has been met – to be abandoned. The steps have led to “entrenched and rigid” record-keeping, the council states, which “confuses consumers and undermines the overall trust they have in the advice process”.

When Best Interests Duty was introduced back in 2013, the council continues, conflicted remuneration and “product flogging” was rife throughout the industry.

“Since that time, a more rigorous conduct regime has been introduced and advice is becoming a more professional industry. To be sustainable long-term there is a question about how the Best Interests Duty should evolve. The Government should consider abolishing the safe harbour.”

Advisers should be using the 2017 Code of Ethics as the “single tool” to guide them towards satisfying Best Interests Duty, the FSC argues, instead of an outdated compliance exercise.

“The Code of Ethics’ primarily would be strengthened by removing the safe harbour steps as the financial adviser would be obliged to meet the Best Interests Duty based on their own ethical approach, rather than an administrative process.”

At the Royal Commission Kenneth Hayne said safe harbour encouraged a ‘tick-a-box’ compliance regime, and abolishing the steps was an idea “not without merit”.

‘Ladder-style’ approach

The FSC repeats its call for the separation of personal advice into ‘simple’ and complex’ with an expanded risk-based framework.

The risk-based framework is based on a “ladder-style” approach with broad-based general advice at the bottom extending to specialised complex personal advice at the top.

“A ladder of advice within the advice process that provides a guardrail for consumers accessing advice determined to be lower risk before proceeding with complex personal advice options,” the council explains. “This definition enables the consumer a lighter entry point into advice on basic needs that is less costly to provide and lower risk.”

The FSC has seemingly abandoned its plan for “online tools backed by call centres” doling out simple personal advice. The original proposal from the FSC and Rice Warner had authorised advisers overseeing teams of simple advice providers.

Advice by another name

The third major pillar of the FSC’s draft for the advice industry is the abolition of “unwieldy” SoAs in favour of “short, concise and consumer orientated” LoAs.

In order to simplify documentation and reduce cost, the FSC suggests a scalable and “substantially shortened” document that outlines the advice sought, relevant circumstances, recommendation and rationale.

“Requirements of the LOA should be driven by the need for consumer to understand and make informed consent when receiving advice that is higher risk,” the FSC states.

“The content of that advice should be whatever the consumer needs in order to make an informed decision about whether or not to follow the advice,” the paper continues. “Unnecessary disclosure that does not add value for a consumer should be removed.”

Submissions for the consultation paper are open up until 1 July, 2021.

3 comments on “FSC punts safe harbour steps in third ‘simple vs complex’ advice pitch”
  1. Avatar

    It would be great if the SoA could become a client centric document that helps them to make an informed decision.
    It is viewed as, and has become, simply a compliance document to protect Licensees. The Royal Commission however revealed that all the over-anxious disclosure required in current SoAs does not necessarily lead to good advice.

  2. Avatar
    Anthony Wolfenden

    Meeting client best interest duty and providing clients the information they need to make an informed decision, is not difficult for an educated ethical adviser (the bulk of the industry). Doing so in a cost-effective way with a rigid framework and over burdensome and duplicate compliance regimes is very challenging and essentially self-defeating. Protecting clients by ensuring they cannot afford advice in the first place or cannot understand it they od get it, is the reality of where we stand today.

    Online tools backed by call centres for simple advice has resulted in cases of “robo ripoff”. Costly (4K) generic rollover advice, with high annual percentage-based (2%) fees and poor outcomes.

    The current legislative and regulatory environment for the industry treats all advisers as if they are very naughty children trying to rip off their clients, who need to be carefully watched by their parents to make sure they don’t, while always handing in their homework on time. Good luck getting professional adult behaviour out of that approach.

    Thank you for the article and the update. I look forward to interacting with my clients as a professional, rather than a child with his 120 page essay (SoA) who needs his parents (Licensee / ASIC) along to watch.

  3. Avatar

    Excellent article.
    Current SOA regime is dysfunctional.
    No other profession documents its advice to consumers and patients in this totally ill conceived way.
    I agree that there should be a far simpler and concise document that is easily understood and is able to be prepared and presented to the consumer in a quick and efficient manner.
    What we currently have is regulators continuing to enforce more restrictions and complications that are even harder to comply with when the real culprit is our documentation process.

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