Last week, we discussed some of the most significant recommendations in the final report for the Quality of Advice review – what they entail, their potential implications for the advice industry and how they compare to the proposals paper released last year.
As mentioned in that piece, the expansion of what constitutes personal advice and the “good advice” proposal would both simplify advice regulation and allow for a wider variety of advice providers in Australia – including, of course, financial institutions like super funds and banks. Levy argued that given the disparity between the Australian population and the number of advisers on ASIC’s register – 25 million versus 16,000 and falling – “to a large extent [the role of providing advice] will have to fall on financial institutions – banks, superannuation funds, insurers and wealth managers.”
Unlike banks, which largely exited the wealth space in the years leading up to and following the Royal Commission, many super funds have been offering advice to members for quite some time – albeit on a limited basis and with restrictions on how members are charged for the service.
For the most part, these restrictions are outlined in section 99F of the Superannuation Industry (Supervision) Act, which prohibits super funds collectively charging members for personal advice in circumstances where:
- the person being advised is not yet a member of the fund (but is considering becoming one)
- the advice pertains to a financial product that is not an interest in the fund, a related pension fund, a related insurance product or a cash management facility within the fund
- the advice pertains to consolidating super fund accounts
- the person receiving the advice expects that the advice will be periodically reviewed or monitored
In the report, Levy noted that this section has been interpreted by some super fund trustees as express permission to “provide certain kinds of advice to their members and to use the administration fee charged to all members to meet the cost of doing so. As I wrote in the Proposals Paper, it does not do either of these things.”
While she agreed with the view that providing advice about members’ interests in their super fund is consistent with the sole purpose test, “I do note the question has never been considered by a court and so the precise scope of what is a proper use of fund resources and what is not has not been tested and is uncertain.”
Indeed, communications from APRA over the past few years point towards a misalignment between trustees’ expectations and regulation. On the other hand, one could easily argue that trustees’ new responsibilities under the Retirement Income Covenant – which, as per ASIC and APRA’s “indicative’ guidance, affect accumulation members as well as retirees – more or less necessitate some kind of comprehensive advice service.
To remedy this confusion, Levy recommended removing section 99F from the SIS Act. She described it as “poorly drafted and understood” and said it “imposes an unnecessary compliance burden on trustees (albeit one which does not appear to concern many trustees).” Furthermore, she said the Act should be amended to give super funds explicit permission to apply its resources “for the purpose of providing personal advice to members about their superannuation.”
She explained: “Superannuation funds are collective investment vehicles. Expenses are routinely shared. Administration fees commonly include a percentage-based fee and so members with higher balances will make a greater contribution to fixed expenses than members with lower balances.
“It is the job of the trustee to determine how those expenses should be recovered and shared between members. The trustee’s duties to exercise its powers in the best financial interests of members … There is no reason to think that a special rule is required for the treatment of expenses incurred in providing advice to members.”
Levy’s recommendations would make it much easier for super fund trustees to (confidently) offer advice to members. As above, they’re also consistent with the whole-of-fund member education and guidance responsibilities trustees now have under the Retirement Income Covenant.
The only question is: who will actually be giving the advice? While some super funds may elect to outsource this function to external advice businesses (or employ a stable of relevant providers in-house), Levy’s “good advice” proposal does not (nor intend to) guarantee that members receive advice from a qualified professional adviser. Elsewhere in the report, Levy said that “some personal advice does not need the skills, expertise and judgement of a financial adviser and should be able to be provided by other people (and entities).
“Where this is the case,” she added, “an AFS licensee must determine what education and training is required for their representatives to provide personal advice.”
So, in other words: it’ll be up to the super fund in question. What’s less clear is where the line should be drawn regarding what merits the attention and expertise of a qualified adviser.
After all, as we’ve previously discussed, it’s unlikely that members will be able to make that distinction by themselves.
