Self interest versus best interest

This article has been taken from the NMP education library which has now moved to Advisely

The report contains 13 primary recommendations. These include an expansion of the definition of personal advice – it would cover any financial product advice given on a personal basis by a provider who has information about a client’s financial situation – as well as the replacement of the current best interests duty. The report also recommends changes to how super funds charge members for advice, consolidation of client fee consent into a single annual form, scrapping mandatory SOAs and adjustments to the design and distribution obligations (DDO) regime. 

You can read the full list here, and we’ll explore each of the items in more detail over the coming weeks, but it’s worth discussing the most significant group of recommendations – as well as how they’ve changed (or haven’t changed) between the final report and the proposals paper released in August last year.   

The evolution of good advice

In that paper, Levy outlined a new model for advice regulation premised on “the content of the advice” rather than the “conduct of the adviser”. Her model would effectively replace the best interests duty (and corresponding safe harbour steps) with an overarching obligation to provide “good advice” – then defined as “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.”

The “good advice” obligation, combined with other related recommendations in the proposals paper, would have the effect of increasing the diversity and number of personal advice providers in Australia – with the caveat that only a subset of those, deemed “relevant providers”, would be able to offer ongoing comprehensive advice (and also be subject to additional standards and obligations). 

For those relevant providers, Levy proposed the Code of Ethics as an effective substitute for the best interests duty, noting that the Code “covers the same topics as the Chapter 7 best interests obligations and uses some of the same terms, but it does so in different ways.” Relevant providers would also, obviously, be held to higher education and training standards – which is to say, the current requirements in the professional standards legislation. 

Those outside the “relevant provider” category (which might include super funds, banks and digital advice providers) would not be subject to the same requirements outside of the “good advice” obligation. 

This proposal raised concerns from consumer groups like Choice, which suggested it could precipitate a return to the “bad old days” of vertical integration and weaker consumer protections. Here at NMP, we wondered how the “good advice” world – where there would be a variety of ways for consumers to get advice at a significantly lower price-point than if they’d engaged the services of a qualified, professional adviser – would impact today’s financial advisers, virtually all of whom would be classified as relevant providers. 

The specifics

The question, then, was how Levy would respond to concerns like these in the final report. Would the “good advice” proposal be amended or scrapped? Would there be more clarification on, say, the minimum qualifications or training a “non-relevant” advice provider might need to have? How would Levy’s proposal take into account the lingering, post-Royal Commission doubts regarding financial institutions’ ability to provide impartial advice on products they’re selling? 

At the outset, Levy makes clear her objective is to “make financial product advice more accessible and affordable.” Her recommendations, therefore, are not designed to “help financial advisers, digital advice providers, banks, superannuation funds, platform providers, investment managers or insurers sell their products.”

“To the extent the recommendations do so,” she adds, “that is because advisers, human and digital, and financial institutions have an important part to play in providing financial advice to consumers.” 

Against a “strong back drop of consumer protection regulation,” Levy suggests, the obligation to give “good advice” would require any provider – whether a super fund, an individual adviser, or a digital advice provider – to “ask themselves what their customers and clients want and they will have to consider the purpose of their advice and the relevant needs and circumstances of their customers and clients.

“They will not be able to answer a specific question with a general response, a general advice warning and a recommendation to seek financial advice.”

However, Levy’s report acknowledges that “some people worry that [the good advice obligation] will lead to poorer quality advice and they say they do not know what good means.” To that end, she has proposed the following definition to be included in the Corporations Act: 

Good advice means personal advice that is, at the time the advice is provided:

• fit for purpose having regard to:
  • if the advice is:
    • given in response to a request, question or inquiry from the client, the purpose of the client that the provider is aware of or should reasonably be aware of; or 
    • volunteered by the provider, the reason the provider reasonably considers the advice might be of use or benefit to the client;
  • the scope, content and nature of the advice; 
  • the likely relevant circumstances of the client; and 
• in all the circumstances, good. 

Putting aside the circular elements of the proposed definition – good advice being “personal advice that is … in all the circumstances, good” – this suggests that providers must consider all relevant information about a client’s circumstances as well as what would constitute a “reasonable benefit” to the client given those circumstances. A super fund, for example, would need to factor the data it has accumulated about a member into the advice it provides and determine what would be “of use or benefit” to the member based on that information. 

The great mischief 

This definition works in concert with the proposed expansion of what constitutes “personal advice” as mentioned earlier in this article. Levy has recommended that all advice on financial products be considered personal advice if it’s “given to a client in a personal interaction or personalised communication by a provider of advice who has (or whose related body corporate has) information about the client’s financial situation or one or more of their objectives or needs.” 

In discussing her reasoning, Levy makes explicit references to the Westpac v ASIC case which highlighted the fuzzy boundaries between general and personal advice along with how consumer expectations often differ from prescribed disclosure requirements. In that case, she says, “it appears a great deal of time and effort went into avoiding personal advice. While ultimately [Westpac] failed (and the call centre staff gave personal advice), the approach – careful scripting and artificial conversations to avoid giving personal advice – is commonplace.” 

The core of Levy’s argument, then, is that the current system – which largely restricts the provision of personal advice to qualified, professional advisers “with fiduciary-like duties” – has actually created “an incentive in the regulatory regime for product issuers and distributors to provide recommendations to their customers that do not take into account their objectives, financial situation or needs.” 

Expanding the definition of personal advice (and requiring that product distributors and issuers provide “good advice”) would, she suggests, address this problem, which she calls “one of the great mischiefs of the existing regime.” 

Where do advisers fit? 

As to where relevant providers fit into all of this, it’s worth noting that the wording has been changed somewhat from Levy’s original definition. In the final report, she proposes that personal advice must be provided by a relevant provider where: 

• the provider is an individual; and 
• either: 
  • the client pays a fee for the advice; or 
  • the issuer of the product pays a commission for the sale of the product to which the personal advice relates. 
• In all other cases, personal advice can be provided by a person who is not a relevant provider.

This is a somewhat broader definition than the one included in the proposals paper, which included a requirement that the adviser-client relationship be ongoing (or that a client could reasonably believe such a relationship exists). Nonetheless, Levy has maintained that relevant providers simply can’t be the sole solution to Australia’s advice shortfall. 

“There are about 25 million Australians and there are too few financial advisers to provide financial advice to all who need it,” she says. “To a large extent this role will have to fall on financial institutions – banks, superannuation funds, insurers and wealth managers.”

“Financial institutions,” she continues, “benefit from the financial products their customers hold and, because of that (rather than in spite of that) they should provide them with the advice they need about those products. The law should encourage them to do so in a way that is not only safe but which serves the interests of consumers.” 

Levy still sees a place for comprehensive advice given by relevant providers, but argues that type of advice may be unsuited to (or unwanted by) a large segment of the Australian population. The challenge for legislators now is to ensure that the alternative advice models Levy’s report proposes will actually be “good”.

We’ll be discussing more details in the final report over the next few weeks.