The Australian financial advisory sector faces another significant regulatory overhaul under wide-sweeping proposals unveiled last week set to declutter the compliance-clogged industry.
Among a raft of other fundamental reforms, the ‘Quality of Advice’ review paper recommends ditching the controversial requirement for advisers to always act in their clients’ ‘best interests’ in favour of a new focus on providing ‘good advice’.
NZ financial advisers are subject to a similar obligation to put “client’s interests first when giving advice”, according to the Financial Markets Authority.
However, Michelle Levy, leader of the Quality of Advice review says the idealistic best interests test has not served either the industry or consumers well in practice.
“… even in the absence of commissions, bonuses and volume-benefits [banned in Australia in 2013], it is very difficult to remove self-interest and hard to regulate conduct that happens in private and the evidence suggests the best interests duty has not been more effective than disclosure in protecting consumers from poor advice,” Levy says.
“In my view a more direct and better way to regulate the provision of advice is to start precisely where the current regime does not – with the content of the advice. Consumers want good advice – not documents and processes. And advice can be more easily measured and assessed than conduct.”
The proposed new rules would slightly expand the definition of ‘personal’ financial advice while deleting ‘general’ advice as a regulated service (although it would be covered under other general consumer protection laws).
Furthermore, the Levy recommendations would significantly cut the amount of paperwork in the industry, relaxing rules around providing ‘statements of advice’ and other disclosure documents such as annual fee renewal consent forms.
Superannuation funds would also be able to deduct financial advice fees from member accounts if the proposals pass into law.
She says in the consultation paper that the “current regulatory framework is a significant impediment” for consumers, advisers and financial institutions.
“We have been told that the difficulty and burden of complying with regulation is impeding access to financial advice. It prevents many financial services providers providing simple advice and assistance to their customers; it inhibits the development of digital advice tools; and, it has made comprehensive advice unaffordable for many people,” Levy says in the proposal document. “Advisers have left the industry and are not being replaced and when consumers do get financial product advice they are given documents they do not want and rarely read.”
The Australian advice sector has been subject to three major regulatory system changes dating back to the 2001 Financial Services Reform Act. In 2013 the Future of Financial Advice regime introduced tough new measures such as banning most investment product commissions and volume bonuses, imposing an annual opt-in fee renewal process and the best interests duty.
Post the Royal Commission into financial services the Australian government added more regulatory constraints on the advice sector.
However, the Quality of Advice proposals have been criticised in some quarters as reopening the door to hard-sell financial product practices banned in previous legislative programs.
“Some stakeholders might be concerned that the proposals would retract hard fought changes intended to protect consumers. I do not hold that view. The proposals are intended to make it easier for consumers to get personal advice,” Levy says. “Therefore, they are also intended to make it easier for providers of financial advice – financial advisers, product issuers and digital advice providers – to provide personal advice. In my view this greater ease is achieved without introducing a corresponding risk of harm to consumers, who will be protected by a proposed new obligation to give good advice and by the many existing consumer protection provisions in the law.”
The Quality of Advice consultation closes to submissions on September 23.