The practical impact of the QAR recommendations on advisers

The Quality Advice Review was not about advisers but consumers with the overarching remit of making advice affordable, respectable and of value.

Do the recommendations achieve this? Yes … and no. Financial advice delivered by a professional adviser will remain out of reach for many as it is often about a range of topics, complex issues and objectives that involve a number of recommendations and ongoing advice assistance over many years. But the QAR recognises that many consumers do not need traditional financial advice – they simply need assistance with point in time topic advice. And it is on this point that the QAR seeks to change the landscape. The recommendations do this by changing the definition of personal advice, general advice, and creating a new role for non-relevant providers.

For limited authorised reps, if the recommendations are enacted, the advice process should be smoother with less compliance and fall into a pattern not dissimilar to how other forms of advice are delivered now inside accounting practices. For accountants who are not authorised, there is no carve out and the broadening of the definition of personal advice is likely to mean that there is no wiggle room. 

The highlights, for those wanting to skip ahead, are:

• Broader definition of personal advice to prevent general advice and disclaimers being used to provide personal advice by stealth (1& 2)
• Removal of the requirement for general advice disclaimers because of the point above (2) 
• Introduction of the concept of a non-relevant provider to enable employees to provide product advice if the employee is not receiving payment or a commission for the advice (will apply predominantly to product providers comfortable taking responsibility for these staff) (3)
• Introduction of a “good advice” requirement and a statutory fiduciary best interests duty, aligning the Corporations Act to the Code of Ethics. Will impact predominantly on product providers utilising non-relevant providers because the responsibility rests with the AFSL and their Directors not the employee. For financial advisers, they are already focussed on the client not product outcomes. However, safe harbour for best interests duty would be removed with the focus on the merit of the advice not the process (4,5)
• Removal of the requirement for SOAs and ROAs but don’t get too excited, the requirements on advisers to prove informed consent and compliance with the Code of Ethics remains. Your notes and interactions will be incredibly important and AFSLs will need to grapple with what this means. (9)
• Advisers will still need client consent annually for ongoing fees and the services to be provided for the next 12 months but reduces the complexity of working with product providers by introducing a standardised ongoing fee form. 
• Keep insurance commissions with disclosure requirements (13.7, 13.8, 13.9)

To date, the Government has given no indication if or when they will legislate the recommendations in part or in full and have stated that they will now “consult widely on the Review’s recommendations”. We have given our view on the likelihood of each recommendation seeing the light of day using a traffic light - green for likely, amber if the recommendation is likely to change, and red where there are significant problems either at a technical or political level (or both).

"And if you want to be *really* sure that the Minister doesn't accept it, you must say the decision is "courageous".  
Bernard Woolley : And that's worse than "controversial"?  
Sir Humphrey Appleby : Oh, yes! "Controversial" only means "this will lose you votes". " 
Yes Minister

Let’s take a look at the recommendations, how we believe they will apply in practice, and the likely practical impact on financial advisers:

Impact on advisers

This recommendation broadens the definition of what constitutes personal financial advice removing ambiguity to prevent providers ‘gaming’ the system by delivering personal advice under the banner of general advice with substantial disclaimers. It is squarely aimed at entities that deliver a ‘general advice only’ model.

An upside is that it would have the effect of freeing up advisers to provide topic by topic advice if they chose to pursue a transactional client model.

Under this recommendation, if you hold personal information on a client about their ‘financial situation’, then your communication is likely to fall within the definition of personal advice. 

The QAR cites:

• The Conexus Institute study that found 40% of consumers wanted advice on a topic-by-topic basis, while 35% wanted a comprehensive plan which was reviewed from time to time. A smaller proportion (22%) wanted a comprehensive plan that they could follow for the next few years; and
• 2021 research by Investment Trends that found that 11% of consumers wanted comprehensive advice, while 38% wanted limited advice, with 50% indicating that they wanted to look for information themselves.

The final report makes three very important observations that have, in their view, limited access to affordable quality advice:

1. the division of financial product advice into general advice and personal advice 
2. the large gap between the obligations applying to a person who provides general advice on the one hand and the obligations applying to a person who provides personal advice on the other; and
3. the inflexibility and, in some cases, unsuitability of the obligations applying to a person who provides personal advice.
   
   

The reality is often financial institutions have relevant financial information about their customers. The report is recommending that financial institutions be encouraged to provide advice as it is in their interests to do so, but not via the use scripted responses and general advice disclaimers.

Impact on advisers

The inference from the final report is that given the exemption to what constitutes personal financial advice, it should be obvious when personal financial advice is not being provided, and therefore a disclaimer should not be required.

The requirement to have an AFS licence when providing general advice will remain in place. Instead of a requirement, warnings and disclaimers will become the responsibility of the entity providing the general advice under general principles. We can’t see any adviser not providing a disclaimer when delivering say a seminar! 

Impact on advisers

This recommendation simply states if you are getting paid a fee or commission, you need to be a relevant provider. This recommendation does not change what is required from current relevant providers, including complying with regulations, general law, and the Code of Ethics.

However, the concept of a non-relevant provider is new. This definition is likely to apply to employees of product providers who are not generating a fee or commission. For example, an employee of a superannuation product provider could provide advice to a member about transition to retirement or downsizer. 

Despite what some groups are saying, this distinction will not represent a return to the bad old days of financial advice.  In fact, the contrary may occur. 

A product provider must obtain an AFS licence to provide financial advice. Importantly, if they hold financial information about their customer, they must provide personal financial advice NOT general advice or refer the customer to a relevant provider. Finally, based on feedback from industry to the interim report the final report recommended retaining the requirement to hold an AFS license to provide general advice.  As a result, a product issuer who wants to facilitate sales of their product must by law comply with section 912A of the Corporations Act to do all things necessary to operate efficiently, honestly and fairly. 

This is significant because in March of 2019, this section of the Act was weaponised based on recommendation from the Royal Commission, due to multiple breaches of s912A by institutions. Consequently, the maximum civil penalty for breaching s912A was raised to $555 million but more importantly individuals will also be held liable (subject to civil penalties) if involved in a contravention. 

The simple point is institutions will no longer be able to game the system and provide general advice.  Plus, individuals such as directors or officers of a product provider (the decision makers) run significant personal financial risks in doing so. This recommendation relies on the law to act as gatekeeper of good behaviour and prevent Royal Commission style scenarios occurring again. 

Finally, for AFS licenses who have been set up specifically to provide general advice, this recommendation may require a rethink of the services they provide.  It may well mean that they will no longer be able to provide general advice. For existing relevant providers this recommendation should pose no issues.

Impact on advisers

The final report comments on a number of occasions where current regulation focuses on the adviser’s actions, that is the process not the outcome or the merits of the advice provided. The argument of the final report is that good advice duty is written and defined with the client in mind. The Code of the Ethics is also drafted with the outcome in mind and therefore the final report recommending a “good advice duty” poses no contradictions to what relevant providers do now.

Following on from Recommendation 3, this recommendation recognises an import issue for employees of institutions who provide advice, for example superannuation funds. Relevant providers are required to comply with regulations, general law and the Code of Ethics. They are potentially individually liable for breaches of parts of the Corporations Act, general law and the Code of Ethics. The problem faced by an employee who is also a relevant provider is they also serve the interests of their employer. In recognition of this conflict, employees would be recognised as non-relevant providers. As a result, the recommendation is that the good advice duty will rest entirely with the AFS license.

Impact on advisers

This recommendation represents a significant change for the industry but will not adversely impact relevant providers as they are required to apply the Code of Ethics requirements. At present there is a difference between the Code and statutory law.

The interim report recommended a repeal of s961B Best Interest Duty and Safe Harbour. However, the final report recommended a significant strengthening by replacing best interest duty with a duty to act in the best interest of the client and removal of s961J duty of priority. If implemented, this recommendation codifies a fiduciary duty in the Corporations Act, that is a duty to act in the clients’ best interests. 

Critics of this recommendation state that any changes to current best interests’ duty in the Corporation’s Act will be a retrograde step. But this is not the case. It is in fact a significant strengthening of regulation by requiring relevant providers to be a true fiduciary’s which is a higher standard of duty of care governed by the ‘no profit, no conflict’ rule. 

Importantly, the final report highlighted that relevant providers are already required to act as a fiduciary due to the Code of Ethics. This recommendation resolves the conflict between the Corporations Act and the Code of Ethics.  However, in the final report Michelle Levy was critical of the drafting of the Code of Ethics which ultimately persuaded her to retain in the Corporations Act a duty for a relevant provider to act in the best interests of their client. 

The final report also acknowledges the conflict of interest that occurs between an institution and their employees. This is one of the important reasons the category of non-relevant provider has been recommended. It is impossible for an employee of an institution to provide personal financial advice in the same way as relevant provider who is a fiduciary. This is simply because an employee cannot serve two masters i.e., their employer and their client.

While this recommendation invites criticism, remember that conflict of interest was not dealt with via the FoFA reforms as clearly evidenced by the Royal Commission. Creating non-relevant providers is a recognition of the obvious conflicts that can lead to moral hazards that harm consumers. The final report has addressed this situation by placing all responsibility for the provision of personal advice on the AFS licence when they employ non-relevant providers. 

For relevant providers, this does not represent a significant change as it aligns the Corporations Act with the Code of Ethics. It will be a challenge for product providers who employ financial advisers as the recommendation clearly aligns responsibility with the AFS license. Some may choose to employ relevant providers who possess the same qualifications and experience as current relevant providers. This will be based on the nature, scale and complexity of the advice and services they provide. Or, they may be forced to choose to refer to a third party relevant provider. 

Impact on advisers

Gives trustees the power to decide how to pay the fees for financial advice – upfront or through the fund. 

The final report is not recommending expanding intra-fund advice. However, it did express the view that it is in the interest of superannuation fund members to be able to get good advice from their fund. That is, satisfy the good advice duty. 

Micelle Levy was concerned that Section 99F of the SIS Act was poorly drafted as it does not give permission to use fund assets to provide advice and does not set boundaries on advice to be provided.  The objective of the recommendation is to give trustees greater confidence about the scope of advice and how to allocate cost of advice between members.

Impact on advisers

If passed, this recommendation will significantly reduce the compliance burden on advice practices. Advisers will still be required to obtain consent from clients each year to deduct ongoing advice fees and disclose the services to be provided in the following 12 months. 

The change is that product providers would no longer be required to accept the ongoing advice fees form. With different providers having different rules on the payments of ongoing fees, this is a common-sense approach.

Impact on advisers

Now we’re getting into controversial territory. Under this proposal, advisers would no longer be required to produce Statements or Records of Advice. Woohoo. On the face of it, this is a very important recommendation that will improve efficiency and reduce the cost of advice. The recommendation also recognises that in reality, an SOA or ROA neither demonstrates that the advice provided is appropriate or informed consent was obtained.

But…..advisers are not off the hook. It will require that advisers have contemporaneous records to demonstrate their clients have provided informed consent including the requirements under the Code of Ethics. The report also recommends that ASIC provide guidance on what these documentation requirements look like. In essence, this proposal brings financial advice into a similar framework as other professions – legal, accounting etc. 

This change is likely to be a challenge for some AFS license. There are no changes to section 912A to do all things necessary to operate efficiently, honestly and fairly.  Therefore, AFS licenses may need to review their operations, for example risk mitigation will require each AFS license to determine what form of evidence is required in advice files, and whether a short form advice document would be useful to ensure there is evidence of informed consent. Ultimately, this would be dependent on the nature, scale and complexity of the services provided by the AFS license.

Impact on advisers

Whether or not a client should be a wholesale client is contentious. Meeting a financial threshold does not mean that the client meets any form of financial literacy or capacity benchmark. This recommendation will require the client to positively consent to the implications of being a wholesale client. By inference, an adviser is held to account by informed consent.

Impact on advisers

This recommendation is to retain life insurance commissions – although the QAR did not address the commercial viability of current commission payment levels. 

The industry needs change and a workable framework that delivers. What do you think? Does QAR achieve this?