The obligation of “good advice” would replace best interests duty, according to one of the many proposals by the Quality of Advice review lead Michelle Levy.
Treasury released for consultation Levy’s interim report on Tuesday afternoon which outlines her first proposals since commencing as advice review lead.
“The financial services regime should require a person who provides personal advice to provide ‘good advice’,” Levy stated in the report. “’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.”
In one of her first public appearances since taking the job, Levy noted at the Professional Planner Licensee Summit the industry’s “considerable fear” of non-compliance.
Levy will present her in depth findings during a webinar hosted by Professional Planner in partnership with AMP on Wednesday, 7 September.
“A duty to give good advice does place a different kind of responsibility on providers than laws which prescribe process,” Levy’s proposals continued. “It also creates the opportunity to remove many of the regulatory requirements relating to disclosure and some relating to conduct.”
Levy added this will allow providers to decide what they need to do to ensure their advice is in fact “good advice” and relieve providers of unnecessary obligations which she hopes will improve innovation in the industry.
“In my view this would encourage better quality advice and provide consumers and advisers with a clear statement of what they can expect and what they are required to do.”
Levy said she comfortably believes a principles-based regulatory regime will be more effective.
“My answer to that question is ‘yes’ if that expression means fewer defined terms, less prescription and more flexibility so that what is required by the law adjusts to the circumstances. I do not think it follows that principles-based law is more uncertain. Few people say that the laws prohibiting misleading or deceptive conduct are unclear.”
Personal advice, but not general advice should be regulated by the financial services regime according to Levy. However personal advice should be made broader, so it clearly applies whenever a recommendation about a product is made “… and, at the time the advice is provided, the provider has or holds information about the client’s objectives, needs or any aspect of their financial situation”, the report stated.
General advice has not been forgotten and Levy stated it should continue to be subject to general consumer protections.
Although best interests duty has been recommended for removal, safe harbour steps will stay in place.
Less to disclose
While eliminating best interests duty might be a massive win for advisers, Levy has also suggested changes that would simplify the disclosure process.
Advice providers would be required to only obtain written consent from their clients to deduct ongoing advice fees from a product once a year and a single consent form would be able to cover each of the products issued from a product issuer.
Instead of Statements of Advice and Records of Advice, providers should be able to determine what advice best suits their client, as long they maintain a written record of the advice they provide which can be provided upon request.
The removal of Design and Distribution Obligations wasn’t recommended, but Levy stated it should be simplified to be required to only report a complaint to the product issuer.
However, she has recommended static information used for every client, like financial services guide, remuneration information, internal dispute resolution producers and the AFCA process should continue to be presented to clients.
Super advice
A potential showdown between Levy and financial minister Stephen Jones could happen down the track, with Levy being quite open to expanding intra-fund advice despite the minister being explicit that he has rebuffed calls from super funds to relax rules surrounding it.
Jones was explicit he did not want to see vertical integration creep into superannuation and Levy’s recommendations may not give complete leeway.
Levy recommended super 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 take into account the member’s personal circumstances, including their family situation and social security entitlements if that is relevant to the provision of the advice.”
Additionally, they should have the flexibility to decide how much they want to charge for personal advice and restrictions on elective charging of fees should be removed.
“Superannuation trustees should be able to pay a fee from a member’s superannuation account to an adviser for personal advice provided to the member about the member’s interest in the fund on the direction of the member.”
The consultation will close on 23 September 2022.
Michelle Levy is a breath of fresh air. That said, whatever the eventual legislative outcomes, the practical application of any such changes at a licensee, and perhaps more fundamentally the PI insurer level, will be where the tangible change is felt by most advisers.
All good words and intentions but allow me to state the real issues: it doesn’t matter what it is called (good advice, proper advice, best advice, best interests duty etc. etc.) the fact is that all of it is subjective. If someone gives advice to client who will decide that it was good, proper, best, in the best interest? I put it to all concerned that it is impossible to regulate or legislate intentions to put into words what are, in reality, thoughts and feelings. It is like asking 10 different advisors to make a recommendation to a client: i post that we will receive 10 different answers: so which will qualify as the best and best for and in the best interest of the client? The regulator is trying to protect the future outcome with the knowledge that there isn’t any control over what happens in the future.
Whilst it is true, good advice is a function of perception, in this context it requires the “Man on the Clapham Bus” test to be the judge. Does your file provide enough evidence to lead an “uninterested bystander” (with similar level of education and training) to come to the same, or similar conclusion? Where advisers tend to let themselves down is the “downloading” into a client file of the what and why they have provided a particular piece of advice, which is a solid proof point that they have given appropriate advice. Professional judgement has to become truly enabled and eventually the hall mark of this emerging profession.
Whilst the concept of principles based legislation is appealing, the industry has become so “regulation shy” I think it will be less than imagined (if indeed it gets up). The Code of Ethics is a recent example of an attempt to introduce principles based legislation and look what happened. The industry demanded clarification and even a rewrite. Because the legal profession has such a strangle hold on licensees (as well as a vested interest in being ‘chicken little’), the Code couldn’t be as it was intended. We are at the start of the journey to professionalism so it may be premature to think the current regime can be replaced with a principles based system without a lot of angst along the way. I agree that we should start to give more discussion to the intention of the FASEA education uplift as the key to becoming a profession but we have only (largely) just got through existing advisers and are yet to see the new entrants really have an impact. Maybe the final review recommendations will be embraced but I suspect the legislative process will be painfully slow. Stephen Jones needs to learn a lot more about Financial Services and become an ally for real reform and not be tempted with more featherbedding for vested interests in order for this to work. Expectation is high concerning this Review but it is looking like the usual self interest biases will prevail.