Posted February 13, 2023
Posted By Meghann Cannon
It’s finally here: the QAR report
You could hardly have missed the fact that the Albanese Government released the final report in the Quality of Advice review this week.
We’re not in the business of hot takes and will be taking some time to digest the detail of this very detailed report.
That said, we wanted to give our clients a high-level summary of what the report says and what this means for financial advisers – but we won’t touch on every recommendation here.
The first thing to point out is that there’s still a long way to run before any of the recommendations make it into law. The government hasn’t released their response yet – in contrast, they’ve announced further consultation.
So strap yourselves in, we’re nowhere near the finish line.
1. Don’t take anyone else’s word for it
We wanted to start by encouraging you all to actually read the report. Yes, it’s long, but – without casting aspersions in any directions – the devil is truly in the detail.
We don’t think that a blanket ‘we support’ or ‘we reject’ the recommendations in this report is necessary. While the author of the report, Michelle Levy, has emphasised the interrelated nature of the recommendations, we encourage you to consider each recommendation individually.
As a starting point, we’ve summarised the key recommendations below.
2. ‘Personal advice’ should be expanded
As foreshadowed in the proposals paper, the final report recommends expanding the current definition of personal advice to include all scenarios where customers want or expect personal advice.
The final report clarified that advice will only be personal advice if it’s individualised to the client, i.e. if it’s adjusted for or directed to the particular individual. This addresses the concern that something like a seminar given to clients could be personal advice – it seems it now would only personal if the content had been individualised for each attendee.
3. ‘General advice’ should stay (but the warning should go)
Levy was persuaded by feedback during the consultations to retain the requirement for providers of general advice to hold an AFS licence (or be a representative of an AFS licence). The concerns included e.g. the risk of fin-fluencers and other unlicensed providers providing advice, no access to AFCA, and the relative difficulty for ASIC to take action for misleading and deceptive conduct.
As originally recommended, Levy concludes that a general advice disclaimer should no longer be mandated because, she says, these warnings do not serve their intended purpose and can be counterproductive (the presence of a disclaimer can makes people think the opposite of what is intended – that personal circumstances have been taken into account!). It will be up to each licensee to determine the warnings to apply to communications.
4. A relevant provider (aka financial adviser) should only be required to give advice when the client pays a fee
Levy is very clear that she doesn’t think it’s necessary to require all personal advice to be given by a financial adviser – this has proven to be one of the central tenets of the report.
It seems uncontroversial that customers should be able to receive simple advice from their banks (and members from their super funds) on the products issued by the bank (or super fund) and whether they’re a ‘good’ option for the customer.
However, the framework proposed by Levy will allow advice that goes well beyond this. The framework would allow the scenario where banks structure their operations to begin providing personal advice that must only meet the ‘good advice’ standard (see below) but which automatically recommends one of their own products. Any product fees would not be considered a ‘fee for advice’ under Levy’s proposals.
The suggested requirement in the proposals paper that there to be an ongoing advice relationship (or reasonable expectation of one) has been discarded.
Accountants: Levy rejected calls from the SMSF and accounting professional bodies that accountants should be given an exemption from this framework.
5. ‘Good advice’ duty should apply to all providers of personal advice
The headline here appears to be the same as for the proposals paper, but this is one where the detail of the recommendation has changed.
As with the proposals paper, Levy recommends a focus on the content of advice, rather than the conduct of advisers. Her path to achieving this replaces the current best interests duty with a duty to give good advice, which is applicable to all providers of personal advice (with the higher standard of ‘best’ only applying to financial advisers, see below).
Levy refers to concerns about the possible ambiguity of ‘good’ and acknowledges that there’s a need for a definition of good advice.
In the proposals paper, the suggested definition was ‘advice that was reasonably likely to benefit the client having regard to information available to the provider at the time.’
In the final report, Levy accepts that ‘reasonably likely to benefit’ isn’t sufficiently clear. Her final recommendation is for a more detailed definition of good advice, which incorporates a ‘fit for purpose’ test.
The scope, content and nature of the advice, and likely circumstances of the client are to be considered when assessing fitness for purpose as, Levy notes, advice ‘is not provided in a vacuum’.
Levy has ultimately decided to keep ‘good’ in the definition and the end result is that she effectively recommends a two-step test: is the advice fit for purpose, and is it good in all circumstances?
6. Financial advisers should have a ‘true fiduciary duty’ (and there should be no safe harbour)
This is, in our view, the big one. And if you don’t make it through the whole report, we recommend that you read this section in detail (not just the recommendation but the commentary too).
Levy recommends a new duty which only applies when personal advice is provided by a financial adviser. This would be a ‘true fiduciary duty’ which is a very traditional concept developed originally through case law but which, in this case, would be set out in legislation. It wouldn’t include a safe harbour.
So what is a fiduciary duty? The impact of imposing this duty on financial advisers shouldn’t be underestimated.
Under a fiduciary duty, the sole purpose of the adviser in providing the advice must be to further the interests of the client.
The adviser can’t have conflicts of interest and they can’t obtain an unauthorised benefit from providing advice (e.g. a fee), without the fully informed consent of the client. In itself, informed consent is a complex idea that judges have long considered.
What’s more, Levy notes that ‘the adviser will be required to recommend the product the adviser honestly thinks is the best product available to meet the client’s needs and objectives at the time the advice is provided’ (our emphasis).
This is a significant shift from the existing duty. Taken on its face ‘best’ product means exactly that – in the whole market, which is the best product for this client and their particular circumstances and objectives? It doesn’t mean the best product on an APL. And, without the safe harbour, it doesn’t mean the best option based on a reasonable investigation.
We understand a lot of the angst about the existing safe harbour. However, it’s important for advisers to understand that it provides a ‘safety net’ that won’t exist if the recommendations are implemented as proposed.
Levy’s final recommendations on the various types of disclosure (FDS/SOA/FSG) aren’t significantly different to the suggestions in her proposals paper.
Briefly, Levy recommends:
- re FDS – combining the renewal agreement and consent (without the backward-looking component of the existing FDS). She also specifically recommends that this should be a single prescribed form that can be relied on by all product issuers (but the law will not require the product issuer to allow deduction of fees from the product) and acknowledges that advisers want flexibility about when this can be signed.
- re SOA – replacing the current requirement to give retail clients an SOA or ROA with a requirement to maintain contemporaneous (internal) records of advice and provide written advice only when requested by the client (noting the client must be informed of their right to request advice in writing). Levy has added a further requirement – that the client be required to make the request for written advice before or at the time of the advice, not later. We expect consumer groups will be concerned that consumers are not allowed the chance to later request a written copy of the advice to confirm what they were told.
- re FSG – allowing licensees the option to provide an FSG (as currently required) or to make certain information (e.g. on remuneration or other benefits and dispute resolution procedures) available on their website.
7. Super, digital advice and DDO – no major changes from proposals paper
Levy repeated her recommendations from the proposal paper in relation to superannuation (fund trustees able to provide personal advice and deduct fees from super), digital advice and DDO.
8. Surprise! Wholesale consent requirements
Coming slightly out of left field was Levy’s recommendation on wholesale consent requirements. While mentioned in the original issues paper, this wasn’t discussed in the proposals paper.
Levy recommends that clients (who meet the assets and income test, with an accountant’s certificate as per current requirements) would also need to provide written consent to being treated as a wholesale client.
9. Conflicted remuneration gets a mention
Levy didn’t spend a lot of time discussing conflicted remuneration in the proposals paper. And when she did, it was mostly linked to her original (now discarded) proposal to remove general advice from the licensing framework. The review did release a separate paper on conflicted remuneration which presented a snapshot of the data Levy considered, and suggested a number of changes to regime.
In the final paper, Levy recommends changing the conflicted remuneration provisions so that they exclude benefits given by a client (whether monetary or not) to an AFS licensee from the definition of conflicted remuneration.
This means the conflicted remuneration provisions will only apply to benefits from a product issuer, not a client.
As we mentioned at the top, there’s still a long way to go before we find out which recommendations will make it into law – and in what form.
The government has said it will request further ‘expert analysis and stress-testing’ alongside additional public consultation.
This will undoubtedly involve consultation with your professional bodies, so we encourage you to read the report and engage with your association so that they’re able to make a nuanced and truly representative response to government.
Assistant Treasurer Stephen Jones is also running a number of forums in March and we’ll be attending the Melbourne session.
For now, all we can say is we’ll keep you updated! (And read the report!)