Quality of Advice Review final report - a snapshot

• General advice models: the biggest implications are for advice providers with a 'general advice only' model. The new definition of personal advice would significantly expand the advice caught by the definition, bringing in many of the additional obligations that apply to personal advice. Advice providers should assess the potential for general advice they provide to fall within the new definition, and consequent changes required to their business to comply with heightened duties (some of which will change under other recommendations), or what they would need to do to stop providing personal advice.

The report notes that consumers generally do not understand the general advice warning, and it may in fact be understood by some to indicate that personal advice is being provided. General advice warnings may also be used in an effort to present personal advice as general advice. The review therefore recommends removing the warning requirement to reduce unnecessary prescription in the regulation of financial product advice and remove a source of confusion for consumers. It recommends providers consider the form of warning they give – and it was critical of providers recommending clients obtain advice where there was no reasonable prospect of clients doing so.

Otherwise, the review recommends that general advice should continue to be regulated as a financial service. This is a change from the recommendation in the proposals paper, which suggested that general advice should no longer be regulated as a financial service. The review accepted submissions made that the obligation to hold an AFS licence is a regulatory barrier to mis-selling, and so should be retained.

The report also does not recommend any change to the term 'general advice', while noting there are shortcomings with the use of this term.

• Remove or replace general advice warnings: general advice providers (and others who have used a form of general advice warning) should consider whether it would be appropriate to remove the general advice warning from disclosures in which it is currently used, or whether it should be replaced with another more appropriate form of warning.

Currently all personal advice given by an individual needs to be given by a relevant provider (subject to exceptions for basic deposit products, general insurance products and consumer credit insurance). The recommended change would mean that personal advice given by an individual in circumstances where the client does not pay an advice fee and the issuer does not pay a commission could be given by someone who is not a relevant provider and does not satisfy the professional standards.

The objective of this change is to increase the number of people who can provide personal advice to consumers, so that personal advice is accessible and affordable.

The advice fee would not include a general product fee – even where the holder of a financial product is entitled to receive personal advice at no additional cost. For example, where a member pays an administration fee to a superannuation trustee that covers the costs both of the administration of the product as well as 'intra-fund' advice provided to members on request by an individual, the individual would not need to be a relevant provider on this basis.

The Proposals Paper had recommended an additional limb which would also cover advisers where there is an ongoing advice relationship between the adviser and the client (or the client has a reasonable expectation that such a relationship exists). The review concluded that this test would be both impractical and unnecessary, and the test as to whether a fee or commission is paid is both simpler and more certain.

Licensees would continue to have the obligation to ensure that their representatives are adequately trained and competent, regardless of whether or not they are 'relevant providers'. The report notes that this allows the licensee to determine the training required by the provider of the advice having regard to the nature and the complexity of the advice being provided. ASIC and professional bodies would also be able to impose minimum training standards, although the report notes that these should recognise the wide variety of topics on which financial advice is provided.

• More advice could be given by non-relevant providers: under the proposal, personal advice could be provided by individual advisers who are not 'relevant providers' in a broader range of circumstances, provided they do not receive a fee or commission for the advice provided. This could allow advice providers to provide more personal advice to consumers through appropriately trained and competent individuals, but without having to ensure they meet the education and knowledge standards of a relevant provider. It could make it easier also for financial product issuers to provide personal advice to their customers.
• Those who rely on an exception: advice providers who currently rely on the exception for advice about basic deposit products, general insurance products and consumer credit insurance would need to consider whether the individual they rely on to provide this advice would be relevant providers under the new requirements, and what they would need to do to transition to complying with those requirements.

This recommendation retains the proposal from the Proposals Paper for a new 'good advice' duty, although the final recommendation includes a materially different definition of what constitutes 'good advice'.

In the Proposals Paper, 'good advice' was proposed to be 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 review received feedback that this was too uncertain and that it was not always right to measure good advice in this way.

The proposed definition in the Final Report is more complex and has several limbs. It says that 'good advice' means 'personal advice that is, at the time it is provided:

1. fit for purpose having regard to:
   1. if the advice is:
      1. 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
      2. volunteered by the provider, the reason the provider reasonably considers the advice might be of use or benefit to the client;
   2. the scope, content and nature of the advice; and
   3. the likely relevant circumstances of the client; and
2. in all the circumstances, good.

While proposed as single obligation, the definition would in effect impose two new obligations on advice providers: to ensure advice is 'fit for purpose', and to ensure advice is 'good' (without this concept being further defined).

Fit for purpose

The definition picks up 'fit for purpose' from the Sale of Goods Act and Australian Consumer Law, but would require fitness for purpose to be assessed having regard to the client's purpose or (if volunteered by the advice provider) the reason the advice provider considers the advice will be of use or benefit to the client, the scope, content and nature of the advice, and the likely relevant circumstances of the client.

The link to the context of the advice means that the duty would require more or less of the adviser depending on each of these factors. Advice about a broader range of topics or more complex areas may require the adviser to consider a broader range of factors and provide advice that addresses more issues than simple advice about one aspect of the client's circumstances.

Nevertheless, what it means for advice to be 'fit for purpose' remains undefined in this context, and there may continue to be uncertainty about how advisers can satisfy themselves that advice they produce complies. Advisers may err on the side of considering a broad range of the customer's circumstances and providing more comprehensive advice to ensure they comply with the duty, which may to some extent undo the intention of simplifying the adviser's legal obligations.

'Good'

While the report accepts that knowing what is 'good' in a particular case might be difficult and so there is a need for a definition of good advice, the definition also includes a requirement that the advice be, 'in all the circumstances, good', without further definition of the term. This would bring us back to the ordinary meaning of this term which would then need to be applied in the context of the provision of advice. Questions remain about how this test would be applied practically and how the 'goodness' of advice will be assessed. The report itself notes the potential for many cases where there will be honest and genuine disagreement about whether a particular piece of advice is good or not.

No safe harbour or prescribed process

Importantly, the new good advice duty would not include a safe harbour or prescribe any specific process for the adviser to follow. Advice providers would be able to decide how they satisfy themselves that the advice is fit for purpose and good in all the circumstances.

• Removal of 'safe harbour' steps: the removal of the safe harbour may free up advisers to adopt different processes for producing advice. They may be able to simplify or reduce the work they currently do, which could reduce costs of advice. Digital and limited advice providers may also find it easier to give personal advice and comply with their obligations.
• New compliance obligations: advice providers will still need to ensure that the advice they produce is fit for purpose and 'good'. We expect licensees and advice providers will still need to have systems and processes for producing advice that is compliant. They may continue to adopt some or all of their existing processes for complying with the safe harbour (if they rely on it). However, having a good process will not ensure compliance with the new duty. Advisers will also need to test the substance of the advice produced against the new duty.

Imposing a 'fiduciary' best interests duty

The report notes that the current best interests duty is greatly misunderstood and has been interpreted by the courts as being about the process advisers are to follow, rather than the substance of the advice. While it uses the terminology of the general law duty, it does not contain the substance of that duty.

The recommendation is to replace the existing formulation with a new one that makes clear the intention to impose the general law concept. While the Proposals Paper recommended relying on the duty in the adviser Code of Ethics, the final report recommends including the duty in the Corporations Act so that it is not subject to change by Ministerial determination.

Reflecting the general law, the new fiduciary duty would require the adviser to avoid conflicts of interest or duty, and to avoid making an unauthorised profit. The sole purpose in providing advice would need to be to further the interests of the client. The report describes it as a stringent duty.

The general law duty is subject to the client's fully informed consent. The adviser could therefore obtain a client's consent to receive a commission or to advise the client despite the existence of a conflict.

Only imposed on relevant providers

The new duty would apply only to relevant providers – so would not apply to entities providing advice and advice providers who are not paid a fee or commission for advice. According to the report this reflects client expectations that only individual advisers who are paid for advice would be subject to a higher fiduciary duty.

No duty of priority

The report says that implementation of a 'true fiduciary duty' so that advisers will not be able to have a conflict of interest without the consent of their client, the duty of priority will have no work to do. However, it is possible that even with the new fiduciary best interest duty, the duty of priority could still have work to do in this context. If an adviser has a conflict of duty and interest – such as where they are employed by an issuer of a financial product on which they are also giving advice, they may in these circumstances obtain their client's consent to provide advice despite the conflict and so remove the prohibition that would otherwise apply under the fiduciary best interests duty. The existing statutory duty of priority would in this case still require the adviser to prioritise the client's interests. Repealing the priority rule would allow the adviser to prioritise their own or their employer's interests over their client's (subject to the advice still meeting the 'good advice' test).

• New compliance arrangements: the key implication of the change would be the need for financial advisers to review and possibly change the processes and steps they follow to comply with their obligations. It would require re-assessing conflicts that exist for advisers, the disclosures and consents obtained from clients, as well as the steps advisers take in producing advice, to ensure that going forward the advice complies with the fiduciary best interests duty, or that informed client consent is obtained.
• Have processes to obtain fully informed consent: financial advisers who want to act with a conflict would need to obtain fully informed consent from their clients. This may require review of existing disclosures and processes for obtaining consent, to ensure clients understand the implications of consenting to conflicted advice. The removal of the duty of priority means that the adviser would not be required to prioritise their client's interests in the event of a conflict, and they could proceed to give advice as long as they obtain consent, and the advice is 'good' as that term is defined (and they comply with their other obligations).
• Other advice providers could simplify processes: advice providers who are not relevant providers could reassess their compliance steps and potentially simplify the processes they follow in providing advice as they will not be subject to the existing best interests and related obligations. This could free up advice providers to provide advice in simpler and cheaper ways, including through digital channels which previously made it difficult to comply with the safe harbour and other steps.

The recommendation to remove restrictions on collective charging for advice remains unchanged from the Proposals Paper. The effect would be to remove any uncertainty that trustees can charge collectively to pay for personal advice provided to individual members. The removal of the collective charging rules would also give trustees greater discretion to decide how they charge for advice. It would also provide legal certainty to trustees that they can make payments to advisers on the direction of the member, even where the trustee has not separately entered into an agreement with the adviser for the provisions of services.

However, trustees would remain subject to a number of obligations that would continue to restrict them in the advice they can provide and how they allocate advice costs – including the sole purpose test, the best interests duty, the duty to treat members fairly and to promote their financial interests, to allocate costs between members fairly and reasonably, comply with the remaining fees and costs rules, and requirements in relation to fud expenditure in APRA Prudential Standard SPS 515.

• Greater legal certainty: the recommendations would give trustees greater legal certainty about the basis on which they can charge members collectively for personal advice given to individual members.
• More flexibility in paying for advice: repeal of section 99F would also somewhat free up trustees to decide the extent to which they can collectively charge members for advice provided. Trustees may want to consider alternative ways of allocating the costs of advice to members, to ensure costs are both fairly and reasonably allocated, but also to enable advice costs to be shared where this is appropriate and of benefit to members as a whole.

This recommendation reflects the proposal in the Proposals Paper. It would significantly simplify the existing disclosure and consent gathering processes, without undermining the purpose of the existing requirements.

• Changes to processes: advice providers who currently rely on ongoing fee arrangements should consider the changes to processes this recommendation would require—which we expect will be largely simplification or reduction of existing processes.

This again reflects the recommendation in the Proposals Paper.

Advisers would be required to ask clients if they would like, and the client would need to request, written advice before or at the time the advice is provided. The report also recommends that ASIC should provide guidance on how advice providers may comply with their record-keeping obligations.

• Greater freedom in format of advice: advice providers could re-think the form in which they provide advice and the content of advice. Advisers would be freer to tailor the form of advice to the needs and wishes of their clients. Many clients may be satisfied with oral advice. Advisers could also consider providing advice in shorter documents, online, or other formats which their clients will find useful.
• Must have process for record keeping and producing written advice: advisers would still need to have record keeping processes, and the ability to produce written advice on request. Existing processes for producing SOA and ROAs may be able to be adapted (but we expect simplified). Importantly, clients would only be able to request advice up until the advice is provided in any form, so advisers would not be under an ongoing duty to produce written advice later on.

This again reflects the recommendation in the Proposals Paper.

• Greater freedom in FSG information: advice providers would have more freedom in the way they present information currently required to be contained in FSGs. Instead of giving an FSG, they could present the required information more helpfully online.

The concern behind this recommendation is that wholesale clients who are treated as such because of an accountant's certificate may in fact not fully understand the protections they lose by not being treated as retail clients. The solution proposed is detailed disclosure of these lost protections and written consent from clients.

• New disclosure and consent gathering processes: advice providers who currently differentiate between wholesale and retail clients and rely on an accountant's certificate or the sophisticated client test to exclude clients from being treated as retail clients would need to implement new processes to provide the additional required disclosure and gather written client consent.

The first recommendation is new and would ensure advice providers who are not relevant providers would be subject to the reasonable steps obligations. This provides important consumer protections in the context where the new fiduciary best interests duty will not apply to these advice providers.

The recommendations in relation to simplification of DDO reporting is in line with the recommendations in the Proposals Paper. All providers of personal advice would continue to be required to report to the product issuer the number of complaints received during a reporting period (if any have been received), as well as a description of the nature of these complaints.

• Some personal advice providers may need to implement reasonable steps: providers of personal advice who are not relevant providers and who have been relying on the exemption from having to implement reasonable steps because they provide personal advice would need to ensure they comply with the reasonable steps obligations. This may involve additional processes and arrangements, including ensuring the advice process takes of the target market specified in the TMD and produces advice that is consistent with it.
• Financial advisers could reduce their reporting: on the other hand, financial advisers who are relevant providers would have reduced reporting obligations and could reduce their monitoring of issues which they currently need to track to ensure they can report to product issuers (such as significant dealings outside the target market).

The first recommendation is based on the view expressed in the report that the current exception in the FOFA provisions for client-given benefits is available only in limited circumstances and may be currently used by licensees and their representatives to pay and receive benefits that are not strictly covered by the text of the provision. The recommendation would give the exception wider application so that it is not limited to payments in relation to the issue or sale of financial products of financial product advice. The report notes that some of the current 'sharp practices' could be avoided through this amendment. It is not clear how this would be the case as the amendment would instead put current practices on a surer footing under the law.

The report recommends the additional specific exception for payments from superannuation accounts because payments made from superannuation funds are technically made by the trustee, not the member, and so on one view are not given by the client. It also recommends limiting such payments to personal advice, and not allowing them for general advice or other services.

• Changes to client given benefit exceptions: AFS licensees and their representatives who rely on the client given benefit exceptions proposed to be replaced should consider whether the new exception would provide sufficient relief to enable currently exempt payments to be made.
• Greater certainty for superannuation trustees: trustees will have more certainty about the legal basis for paying for personal advice given to members where directed by the member to do so from their superannuation account.

The report considers these exceptions to be anomalous, so that these benefits are treated in the same way as others under the conflicted remuneration provisions. The ordinary conflicted remuneration test would then apply.

• Those relying on these exceptions may need to stop payments or rely on other exceptions: AFS licensees and their representatives who rely on these exceptions should consider whether benefits currently provided in reliance on them are otherwise caught by the conflicted remuneration provisions, or would be banned if the exceptions were removed. If banned, the benefits may need to be stopped or changed to ensure they comply with the law, if these recommendations are implemented.

In the meantime, the report does not recommend any changes to the rules of these schemes.

Having regard to the evidence, the review concluded that on balance the exceptions remains justifiable. It noted improvements in the advice provided, and the real risk that fewer people would get advice if commissions were banned.

The new consent requirement would require providers to obtain the consent in writing or obtain and record the consent prior to the issue or sale of the life product, and prior to any increase in the commission payable to the adviser. To allow clients to make an informed decision, providers would be required to disclose details of the commission as a percentage of premium and the nature of any services the provider will provider to the client in relation to the product (such as claims assistance). Consent is required only in relation to the issue or sale of new life products after the commencement of the reform.

• Changes to advice processes: advice providers who advise retail clients on life insurance products and receive commissions should consider changes that would be required to their business and advice processes to comply with the proposed new requirement to obtain informed consent from clients.
• Disclosure of additional services: advice providers who promote additional services to the life insurance clients should also consider whether and how these should be disclosed to clients, noting the risk identified in the report that failure to provide these services could give rise to claims by clients.

The requirements would be broadly the same as those for life insurance, except that the provider could disclose the commission as a per cent range of the premium (eg 10-20%), and new consent would not be required on renewal of the policy – it would be required only if commission rates are outside the disclosed per cent range in the original consent, or if the product is purchased through another provider.

The report recommends that the requirement to obtain consent would operate in the same way as for general insurance.