The good, the bad and the banks

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

It’s no surprise, then, that simplification appears to be the overarching objective of Quality of Advice reviewer Michelle Levy’s paper. And many of the recommendations contained therein, such as scrapping SOA and ROA requirements and standardising the fee consent process so that only one signature is required each year, would substantially simplify the existing regulatory framework.

For those advisers whose businesses have been weighed down by “bricks of paper” and inconsistent client consent forms, these proposals will surely ameliorate any concerns that the Quality of Advice review will result in even more red tape for the industry. 

Good as it gets 

Levy’s paper doesn’t just address documentation, though. The most significant recommendation she makes (which informs many of the other proposed changes) involves the effective removal of the best interests duty, replacing it with an obligation to provide “good advice”. 

Under Levy’s plan, any provider of personal advice – whether they’re a professional adviser, a bank, a super fund or even an algorithm – would be subject to this obligation. And as to what constitutes “good advice,” Levy defines it 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.”

This is contrasted with the existing obligation that personal advice, regardless of its “goodness,” be provided with the client’s best interests in mind (using the safe harbour steps as a baseline). In Levy’s view, this is the “wrong way around …  [it regulates] the conduct of the adviser giving the advice rather than … the content of the advice.” 

Levy notes that her “good advice” formulation does not preclude a separate best interests obligation in appropriate circumstances. “Relevant providers,” here defined as individuals remunerated for their advice (via fee or commission) as part of an ongoing relationship with a client, would also be subject to the Code of Ethics. While the Code has been (controversially) excluded from the Quality of Advice review’s mandate, Levy argues that it more or less replicates advisers’ best interests obligations under the Corporations Act. 

In her words: “The Code of Ethics 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. Many submissions have pointed to the inconsistencies between the two sets of obligations. I agree – there are inconsistencies and it is possible that an adviser may comply with the Chapter 7 best interests obligations but not the Code of Ethics. This is undesirable.” 

Expanding exemptions

Putting aside the question of whether the Code itself is fit-for-purpose – it’s outside of Levy’s remit, anyway – the removal and replacement of the best interests duty would definitely go some lengths to addressing the notorious amount of duplication in the Corporations Act and associated legislation. However, it’s worth asking: who would be the primary beneficiaries of the “good advice” framework? 

If we take the opening statement of this article as gospel, consumers would likely benefit from the cost savings derived from simplification. And while advocacy groups like Choice have voiced their “grave concerns” that eliminating the best interests duty would precipitate a return to the “bad old days” of weaker consumer protections, Levy disagrees that this would create a greater risk of consumer harm. After all, she says, “anyone who gives personal advice to a retail client would have to give good advice.” 

What they wouldn’t have to do, though, is comply with best interests obligations in the Code of Ethics or the associated education and professional standards requirements – unless they meet the definition of a relevant provider. Currently, certain types of advice (such as advice on general insurance products) are exempted from these rules, but the “good advice” proposal would widen this exemption to include any limited advice where the provider is not directly charging the client for the service. 

Who wins?

Clearly, this would make it significantly easier for super funds to provide limited advice to members under a collective charging arrangement – or for bank employees to (once again) provide limited advice to customers. Indeed, Levy argues that the view that all personal advice should be provided by advisers “with fiduciary-like duties” has always been “poorly-suited to financial institutions (banks, insurers and superannuation funds) that may want to and may be asked to give personal advice to customers.” 

These institutions, she adds, have become “reluctant to give their customers helpful personal advice and avoid using the information they have about their customers when they are asked for advice.” The good advice proposal, Levy suggests, would increase the availability and affordability of advice by allowing these institutions to offer advice services via personnel who are not relevant providers – in other words, people who are not necessarily qualified to offer ongoing personal advice, nor subject to the same professional standards obligations. 

What about those relevant providers, though? If you’re a fee-for-service adviser offering ongoing advice to your clients, how do you factor into the “good advice” proposal? Well, as Levy notes, the current regime (including the best interests duty, presumably) “does not even work well for those for whom it has been directly designed – the financial advisers and advice licensees.”

“They have been its loudest critics,” she continues. “They have told us the regime is complex, difficult to understand and imposes a very heavy compliance burden. I agree. The result of this is that it is difficult for advisers to operate sustainable businesses and to attract new entrants. Most relevant for this review, it means that it can be difficult for consumers to get helpful advice, especially simple one-off advice and to get it at an affordable price.”

Assuming those consumers don’t exclusively avail themselves of the collectively-charged (or even free) advice services offered by the institutions mentioned above, do you think this proposal would make it easier and cheaper for your business to offer advice?