QAR, ‘good advice’ and the statutory BID: Handle with care

Much has been said about the Quality of Advice Review recommendation to replace the “Best Interests Duty” with a duty to give “good advice”, and that advisers should be subject to a new “statutory best interests duty”. In doing so, the QAR calls out several failings of BID in its current form.

What the discussion certainly highlights, and indeed acknowledged by the Minister for Financial Services Stephen Jones in last week’s QAR Roadshows hosted by Conexus Financial (in Sydney, Brisbane and Melbourne), is the layers upon layers of regulation to which financial advisers are currently subjected. The Minister hinted at simplifying some of the existing laws, and acknowledged the “tick-a-box, form-filling procedural exercise” that the BID “safe harbour” had become.

Let’s compare other advice-based professions. How have lawyers, for example, been able to provide advice day-in day-out without the legislature (or their relevant Law Society) dictating what that advice should be or how it should look? No Statements of Advice for lawyers. Indeed, the idea of regulating an 80-100 page advice document for lawyers comes across as quite ludicrous when you play out the narrative. It would likely mean Australians would be less inclined to engage lawyers, which of course is problematic.

The law says that lawyers owe a fiduciary duty to their clients. Any basic consideration of the fiduciary duty under the general law speaks to notions such as:

• Acting in your client’s best interests (sound familiar?);
• Avoiding conflicts of interest (sound familiar?);
• Prioritising your client’s interest over yours (sound familiar?); and
• Clients placing their trust and confidence in you.

Seems to have worked well enough over the centuries without needing to reduce it to a legislative checklist. It appears the legal profession trusts the judicial system to make those calls.

Yet the sky hasn’t fallen in for the profession. In fact, despite the absence of legislated advice prescription, clients enjoy healthy relationships of trust and confidence with their lawyers, the legal profession continues to thrive, more and more lawyers enter the profession (not exit in droves), and the profession enjoys a privileged and respected (some might even say honourable) place in the community.

Further, lawyers in private practice enjoy the benefit of limited liability under professional standards legislation. Yes, liability is capped. As the NSW Law Society neatly puts the proposition:

[The schemes] are specifically designed to promote professional standards, enhance consumer protection and to enable private practice members to limit their civil liability to selected amounts.

The NSW Bar Association says this (in relation to barristers):

The New South Wales Bar Association Professional Standards Scheme benefits the entire community… It is widely accepted that outcomes for clients improve significantly when there is competent legal advice and representation at the earliest possible stage of any dispute. In fact, the proper operation of our court system depends on the interaction between experienced judges and specialist advocates.

So, the provision of legal advice with limited liability:

• Promotes professional standards;
• Benefits the community;
• Ensures consumers can access timely and affordable legal advice;
• Ensures the provision of legal services;
• Enhances consumer protection; and
• Keeps insurance premiums down.

How does the heavily-regulated provision of financial advice stack up against each of these metrics?

Thankfully, the QAR potentially opens the door to a simplified and common-sense solution. I say potentially because the proposed reforms sit on the precipice of FoFA 2.0 if poorly handled by the Government. FoFA 1.0 speaks for itself: the industry doesn’t need a reincarnation.

Part of the QAR’s rationale for the recommendations is to “impose a true fiduciary duty on financial advisers who have undertaken to provide advice in the best interests of their clients“.

The following paragraph from the QAR appears to set the scene for the recommendations around the provision of advice:

To be clear, a fiduciary duty to act in the best interests of a client is a stringent and important obligation. It requires the fiduciary to exercise their powers and discretions solely for the benefit of the beneficiary and so that they are honestly and freely able to do so it says the fiduciary cannot have a conflict and cannot accept a personal benefit other than with the consent of the beneficiary…

…It borrows the language of a fiduciary duty, but the safe harbour steps and the duty of priority make it clear that it does not create or apply one.

Levy (rightly in my view) comments that BID is “neither a genuine fiduciary duty nor particularly effective at protecting consumers from poor advice”, and says further that the recommended “statutory best interests duty” will be a “true fiduciary duty that reflects the general law”.

Here’s where, in my view, FoFA 2.0 risks conception. Or, worse still, a re-write of FoFA 1.0 which achieves a practical restatement of the status quo.

The notion of “good advice” propounded in the QAR, whilst well-intentioned, is problematic in my view. This is because any attempt to create a statutory definition puts us back to where we left BID. Also, the current proposed definition adopts principles (such as “fitness for purpose”) from sale of goods legislation and related case law, which does not have (and should not have) a place in the financial advice space.

We know that BID was derived from the “fiduciary duty” to begin with. The Explanatory Memorandum to the legislation which introduced FoFA makes this clear. The EM refers to “fiduciary-like duties”, and separately an “explicit fiduciary duty”, needing to be imposed on advisers. BID purported to do that. The QAR acknowledges that BID “borrows the language of a fiduciary duty”.

The relationship of financial adviser and client, however, is already a fiduciary one. Advisers are already subject to a fiduciary duty under the general law: financial advisers, pre-FoFA (and without the assistance of FoFA since), are obliged to:

• Act in their client’s best interests;
• Avoid conflicts of interest;
• Prioritise their client’s interest over their own; and
• Obtain their client’s consent if they are to financially gain from the relationship.

The QAR effectively concedes this proposition:

…The client of a financial adviser expects and is entitled to expect that their adviser will act in their interests when they provide their advice. This is consistent with the general law which imposes fiduciary obligations on a person who undertakes to act in the interests of another person in circumstances where that other person could be exposed to harm or detriment if the fiduciary acts for another purpose.

BID proved (unequivocally in my view) that statutory prescription or codification of general law obligations (especially when those obligations are founded in equity) don’t work. They especially don’t work when the statutory powers afforded by the prescription are statutorily given to the wrong person, and not left for the courts to properly determine (i.e. in accordance with the general law).

What BID accomplished instead, was a completely different set of rules, operating under the guise of “fiduciary duties”. The regulator, consequently, wrote its own rules which had nothing to do with the general law. The outcome? BID has failed – and the banning order regime is consequently enlivened – when that same alleged conduct would not infringe the adviser’s fiduciary duty when determined as it should be determined by the courts and pursuant to the general law. That disconnect cannot be allowed to resurface in any revised shape or form. Worse still, it energises precisely what the QAR is seeking to avoid and one of the premises on which the QAR was commissioned in the first place: process-based advice which has become more expensive for consumers.

The proposed statutory prescription (or, specifically, the rationale for it) risks taking us back to where we started on this journey 12 years or so ago. Having said that, the QAR – if properly handled – represents a welcome inflexion point for the industry, and the opportunity should be seized to both advocate and legislate the themes which clearly emanate (directly and indirectly) from Levy’s report, including:

• Dismantling statutory advice document prescription and annual disclosures (frankly, just get rid of SOAs and FDSs – Ms Levy’s proposals in this regard should be endorsed);
• Creating a true advice “profession”, which by definition should encompass limited liability under professional standards legislation in a similar way enjoyed by other professions such as legal and accounting;
• A refocus on the general law as the sensible and appropriate benchmark for regulating the discharge of financial advisers’ fiduciary duties to their clients; and
• A single registration body and association through which financial advisers are registered to provide financial services, supported in professional practice, and disciplined for poor conduct. We could do worse than look to the Law Societies as precedent.

The Australian economy will benefit from a thriving financial advice profession as well.