One of the biggest criticisms of the final Quality of Advice report relates to its broadening of who can provide personal advice – and how this could facilitate, in consumer advocacy group Choice’s words, a return to the “bad old days” of vertical integration.
The argument is based primarily on two recommendations in the report: the first would see all advice on financial products be considered personal advice if it’s given to a client in a personal interaction or via a personalised communication, assuming the provider of that advice has information about the client’s financial situation or objectives. Because this would require any advice that falls into that category (including much of what is presently considered general advice, rightly or wrongly) to be provided by a qualified financial adviser under current regulatory settings, the report also introduces the “good advice” obligation.
Per the report, all providers of personal advice would have to adhere to the “good advice” obligation, but only those deemed relevant providers would have to meet the education and professional standards requirements associated with comprehensive financial advice.
In effect, this would make it much easier (and cheaper) for institutions like super funds and banks to provide advice to consumers when they request it. According to QAR reviewer Michelle Levy, “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.”
It’s this idea – that restrictions on financial institutions should be eased so they can assist the millions of Australians who can’t afford or don’t want to see a financial adviser – that’s provoked concerns about consumer protections from some commentators. For example, former Rice Warner CEO Michael Rice suggested at a recent Actuaries Institute event that the report doesn’t adequately address “the risk of harm for consumers”.
He explained: “The proposal does not differentiate between a simple piece of harmless advice and a complicated risky strategy. The former could easily be provided by superannuation funds, banks and others with large customer bases. However, many forms of advice are complex and risky – and the legislation needs to reflect that.”
To illustrate, Rice used the example of a couple in a super fund: “Superannuation funds are likely to put members into cohorts when forming their retirement income strategies … 70% of members will be married when they enter retirement – and their spouse will usually not be in the same fund unless they have an SMSF. They will need to know whether to stay in separate funds or whether a new fund might be more suitable for both.
“They will be offered a longevity product, but is this suitable if they are a homeowner? They might prefer to wait until later in life and buy a reverse mortgage to supplement their income rather than allocate money to a longevity product with an uncertain outcome, noting that the values of future benefits could depend on the longevity of all members. They cannot get these answers from their own fund which is conflicted.”
Speaking at the same event, Levy argued that these kinds of conflicts not only already exist but are prevalent throughout all aspects of financial services – and her recommendations are explicitly designed to address this issue. She noted that institutions like banks, super funds and insurers frequently try to sell products under the veneer of providing general advice. “Vertical integration remains lawful and prevalent, despite its obvious implications,” she added.
Her recommendations would address this problem, she said, by requiring these institutions to recommend products to consumers “only if it [meets their needs]. The customer should not have to go to a third person to decide whether the product is suitable for them.”
Levy’s comments echo her conclusions in the final QAR report. In it, she acknowledged the reality that “financial institutions benefit from the financial products their customers hold” but argued that it is precisely for that reason that “[those institutions] should provide [customers] with the advice they need about those products. The law should encourage [institutions] to do so in a way that is not only safe but which serves the interests of consumers.”
