The latest Delivering Better Financial Outcomes draft legislation maintains an overly prescriptive and doesn’t advance the objectives of the Quality of Advice Review in any material way, according to a leading financial services law expert.
Herbert Smith Freehills Kramer partner Michael Vrisakis tells Professional Planner the Delivering Better Financial Outcomes draft legislation does not achieve the “simplification” and “certainty” the industry is clamouring for.
Vrisakis is a key competitor to Quality of Advice Review lead Michelle Levy in her private practice as a partner at Allens. Both are influential advisers to large corporations including separate big four banks.
Vrisakis is widely recognised as an authority on financial advice and superannuation law and is understood to have been in contention himself for the QAR lead role handed by Levy by former treasurer Josh Frydenberg and his then-deputy Jane Hume.
“[The draft bill doesn’t] really advance those objectives in any kind of material or meaningful way,” Vrisakis says.
“The problem is that the architecture of the legislation, by being overly prescriptive, disappoints that goal.”
Vrisakis penned a submission on behalf of the law firm to Treasury, which argues that section 99F of the Superannuation Industry (Supervision) Act be removed, there are flaws in the targeted prompts proposal and a simpler proposal is needed, and that replacing Statements of Advice with Client Advice Records will have little material difference than the current legal requirements.
Furthermore, Vrisakis says the draft legislation felt incomplete without reforms for the Best Interests Duty and the new class of adviser (NCA), which is yet to have a formal title.
SOA changes an ‘opportunity loss’
The CAR was designed to replace the SOA and instead provide clients with a simplified, shorter document.
However, the draft bill did not provide an example of a CAR and it has been criticised by industry bodies and licensees as just an SOA with a new name.
The submission recommends the law should require advisers to provide written advice to clients only upon request and that firms maintain a complete record of the advice that has been provided, which is in-line with QAR Recommendation 9.
Vrisakis says the proposed CAR is prescriptive and an “opportunity loss” as while there is some flexibility in terms of the delivery mechanisms, there are also additional requirements.
He says the CAR will need guardrails to make sure advisers are protected from regulatory punishment, otherwise they will continue producing what is essentially an SOA.
“You should identify some key things they’ve got to do in that sort of document and you make sure there are some guardrails about that,” Vrisakis says.
“You need certainty that if you do a short document, there’ll be protection for the advisers and they won’t need to be as apprehensive as perhaps they have been to date.”
The Financial Services Council’s submission on the draft legislation, which has also just been made publicly available in the past week, echoes Vrisakis’ view about needing certainty around the guardrails for advisers.
“Reforms to introduce the Client Advice Record must be accompanied by a concerted effort to realign regulatory expectations with the core statutory obligations, so that advisers are not penalised for producing shorter, clearer documents,” the submission says.
“Guidance for industry on ‘technologically neutral’ CAR delivery, covering record retention, consent, and verification, will be important to encourage innovative formats and ensure certainty for industry.”
Widen the scope
The submission recommends removing section 99F of the SIS Act, which governs the cost of collectively charged product advice fees, and is separate to the controversial section 99FA which covers what advice fees can be paid for by a member’s super account, which was dealt with in the first DBFO bill.
The submission argues this is in-line with Recommendation 6 of the QAR, which states 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. This includes removing section 99F.
Vrisakis supports the clarification of the scope of intrafund advice but says the legislation needs to ensure it’s not too narrow.
“One of the issues at the moment is you give intrafund advice, but you’ve got to take external factors into account often in order to give appropriate intrafund advice.
Vrisakis says the certainty is not there, which is important for advisers so they know exactly what is allowed under the regulation.
“The regime should ideally make it clear that inputs in terms of giving on other matters outside of super can be relevant to giving superannuation advice, and people shouldn’t feel nervous about taking those other inputs into account.”
He questions how advisers will able to figure out what the right retirement income is for people within their super fund, if they don’t know what a member has in other super funds or if they potentially have other savings.
“We need to see those missing pieces of [the] puzzle in terms of the simplification of Best Interests Duty and the kind.”
The FSC includes in its submission that collective charging for super fund advice must be reviewed when the draft legislation for NCAs and Best Interests Duty comes through.
Prompt uptake
The Herbert Smith Freehills Kramer submission says far simpler solutions that could be implemented that address the aims of the proposed superannuation prompts regime (otherwise known as ‘nudges’).
Vrisakis says the regime introduces more complexity than value for trustees and members, which will result in a low uptake.
“It’s very specific in terms of the requirements that you’ve got to do for an assessment framework,” he says.
“You’ve got very detailed analysis in terms of the objective situation and needs of the members. If you don’t tick all those boxes, then the trustee can inadvertently fail to comply and be within the realms of personal advice.”
Crossing into personal advice can land a trustee in hot water with the regulator, which may make using the prompts not worth it.
“There’s a real risk that [because] it’s so technical, that trustees will just think there are too many pitfalls or potholes,” Vrisakis says.
“Complexity and prescription is often the enemy of trustees who are seeking to do the right thing.”
Vrisakis says the prompts reform tries to expand advice to more people, but the details are so prescriptive trustees will be wary to adopt it and so the objective will not be achieved. He says the prompts would have higher uptake if the reform had more of a principles-based approach.
“A lot of people will shy away from it, whereas if you went more personal-based, it would be more helpful, and I think you’d also get much better uptake,” Vrisakis says.
“You just need enough playing room within the arena for trustees to be able to engage effectively with their members.”
The FSC submission made a similar recommendation to Vrisakis, arguing the prompts are too prescriptive and will deter trustees from adoption.
“The draft requirements for providing a targeted superannuation prompt should be less prescriptive and proportionate to existing general advice obligations, encouraging trustee uptake of these communications for the benefit of members,” the FSC submission says.
“Where possible the framework should align with a trustee’s obligations under the Retirement Income Covenant and proposed best practice principles for retirement, acknowledging the need for an optimised retirement strategy for members under their statutory obligations.”
The submission also says the prompts should be able to direct members to external advice partners for comprehensive advice.
