The Australian government is poised to try one more time to regulate financial advice better after, another, almost final set of reform proposals for the sector landed last week.
Among more than 20 recommendations (including about 10 sub-ideas grouped under one number), the Michelle Levy-headed ‘Quality of Advice Review’ (QAR) calls for sweeping changes to the so-called ‘best interests’ duty, the introduction of opt-in disclosure rules and the removal of barriers preventing product providers from advising clients.
For example, the Levy report proposes a ‘good advice’ standard that would apply across a more broadly defined ‘personal advice’ universe.
The ‘good advice’ rules effectively allow advisers, and providers, to offer targeted advice to retail clients without triggering the full-on client scoping and reporting duties required in the current regime.
But while all those dealing with retail clients would have to comply with the ‘good advice’ rules, the QAR says professional ‘financial advisers’ should still fall under a tougher fiduciary ‘best interests’ duty.
“The recommendations preserve an exclusive role for those individuals who are financial advisers, financial planners and stockbrokers, who can be paid a fee for their advice (or who, in respect of insurance, may receive a commission),” the report says. “When they are engaged by a client they undertake to provide advice that is in the interests of their client. Under these recommendations, financial advisers will have a personal duty to give good advice and they will have a statutory duty to act in the best interests of their clients when they give advice.”
And Levy also recommends dispensing with rigid disclosure rules that compel advisers to supply clients with lengthy documents each time they provide advice.
“Much of the existing framework focuses on disclosure and arming consumers with the information they need to make decisions in their own interests. This too does not work. Instead the law requires providers of financial advice to prepare documents their customers and clients pay for but rarely want or read,” the report says. “The recommendations will remove most of this and turn the current law on its head – providers of advice will have to ask themselves, and their customers and clients, how they would like advice to be provided to them.”
Somewhat controversially, the Levy reforms also offer a wide range of financial institutions, including superannuation funds, a way back in to providing commissioned advice after most exited the business in the wake of onerous regulations and reputational damage post the 2018 Australia Royal Commission (ARC) into financial services.
“There are about 16,000 financial advisers in Australia and they are professionals with the skills and expertise to provide complex advice,” the QAR says. “There are about 25 million Australians and there are too few financial advisers to provide financial advice to all who need it. To a large extent this role will have to fall on financial institutions – banks, superannuation funds, insurers and wealth managers.”
Furthermore, the Levy report recommends allowing super funds to included embedded advice fees – a currently banned practice in Australia and one coming under increased scrutiny in the NZ KiwiSaver market.
“Superannuation fund trustees should have the power to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed,” the QAR says.
Other Levy reform proposals address wholesale client rule changes as well as ways to incorporate new product ‘design and distribution obligations’ in a new advice regime.
The Australian government initiated the latest review partly out of findings in the earlier ARC but also following a regulatory probe into the lack of ‘affordable advice’.
Levy notes in the final QAR that the existing mish-mash of rules governing the Australian financial advice industry “has not even proved effective in preventing consumer harm”.
“The regulation applying to the provision of financial advice has accumulated with rapid succession over a short period of time in response to crises and scandals involving financial institutions and financial advisers with each one leading to more patching of the law,” she says. “The result is not coherent and it is plainly not working.”
In a release, Australian Assistant Treasurer and Minister for Financial Services, Stephen Jones, said the final Levy report, weighing in at 267 pages, was a “detailed and valuable contribution” to the growing body of financial advice reform literature.
Levy embarked on the QAR in March last year, publishing a consultation paper in August 2022.
“The government will now consult widely on the Review’s recommendations,” Jones said, with an “expert analysis” of the Levy report also planned.
In good news for Queensland-based property spruikers, the Levy report may even spawn a further separate review on time-share schemes.
According to recommendation 13.6, as “part of this review, consideration should be given to whether the exception to the ban on conflicted remuneration for time-sharing schemes should be removed”.