The steps needed to smash the barriers facing the advice sector

While new Assistant Treasurer Stephen Jones has promised to “fix the hot mess” that is advice regulation in the near term, it’s the recommendations that come out of the Quality of Advice review in December that will most likely set the tone for advice policy in the years to come. 

It’s no surprise, then, that so many industry advocacy bodies (within and outside of the advice sector) have taken the opportunity to present their vision for the future of advice in Australia. Back in June, for example, Industry Super Australia (ISA) provided a submission to the review. The submission contains 17 recommendations, some of which would entail substantial changes to the current advice regulatory framework. 

According to the research and advocacy group – which, it should be noted, has been an infrequent commentator on advice issues in recent years – super funds have a major stake in this conversation because “quality advice can help members make good decisions that advance their financial position in retirement.” Moreover, the introduction of the Retirement Income Covenant effectively compels super funds to provide advice to members in some form given its requirement to “formulate and give effect to a retirement income strategy” which includes plans for assisting members in balancing “key retirement income objectives.” 

However, ISA argues that current policy settings make providing this kind of advice at scale prohibitively expensive and complex – both for super funds and retail advice businesses.

“Access to quality affordable advice should not always mean comprehensive personal advice,” ISA explains. “Many members – particularly those with relatively straightforward financial circumstances – may be able to rely on advice and guidance other than comprehensive personal advice to achieve good retirement outcomes.”

How can changes to the current legislative and regulatory framework around advice facilitate this? Here are some key insights from the submission. 

Hybrid digital

First, ISA places an emphasis on the importance of a hybridised digital advice model. The submission notes that while there are already “many established models” for digital intra-fund advice, “more can be done within the regulatory settings to facilitate the provision of financial advice to members at scale.” 

“At present,” the submission says, “we consider that digital advice is most helpful for members when it is capable of being used in combination with some level of human engagement, including advice provided by phone, videoconference or in person. This reflects research that indicates that consumers may still prefer a level of human engagement when seeking financial advice and guidance.”

Currently, though, the “technology-neutral” language in the Corporations Act creates uncertainty regarding accountability and the best interests duty. “There is a particular lack of clarity about the involvement and responsibility of a human in a digital advice process,” ISA explains. “For example, in a hybrid advice model it is not clear who is legally responsible for the advice, when the involvement of a human could alter the nature of the advice (for example from general advice to personal advice) and specifically for personal advice, how the best interests duty applies.” 

On the flipside, the licensing system has the potential to skew the responsibility for the advice provided under a hybrid model. In circumstances where a digital advice service does not hold an AFSL, legal responsibility for the advice rests solely with the licensee even though “it is often the digital advice provider who designs and ultimately controls the algorithms that define the advice outcomes.” 

To address this, the submission recommends that the Quality of Advice review consider “whether a separate framework for digital advice that focuses on the design and ongoing monitoring of the algorithm underpinning the digital tool … would improve the development and use of digital advice.” 

Halfway between general and personal

ISA also discusses the murky boundaries between “personal advice, general advice, guidance and factual information.” Referencing the ASIC v Westpac case from 2021, which “[highlighted] uncertainty around the boundaries between personal and general advice,” the submission argues that the review should aim to clarify these matters.

Related to this, ISA proposes a sort of middle-ground between general advice and personal advice in the form of “tailored generic advice”. This kind of advice would be designed to serve specific member cohorts, informed by member data, and would be regulated in a manner commensurate with its “halfway” position in the general/personal spectrum. 

“For example,” ISA says, “there may be no need for a full fact find and resulting SOA because generalised assumptions based on reliable and, with time, more granular data could be made about the member’s financial circumstances.” 

The submission notes that in addition to defining this type of advice in the law, a “tailored generic” model would also benefit from greater access to the wealth of data the Government currently holds about members, including employment income, relationship status, home ownership status and results from public surveys. 

Changes to the review

Finally, the submission addresses the Quality of Advice review itself, criticising the exclusion of the professional standards reforms and recommending that the FOFA reforms be incorporated into the review structure. 

On the former, ISA says that “consideration of the impact of [professional standards reforms] is excluded from the review” even though “the Government recently consulted on proposals to lower the education requirements for financial advisers.” This is arguably oversimplifying it; the consultation ISA alludes to here relates specifically to advisers with over a decade’s experience no longer having to complete a bachelor’s degree if they have a good track record, not to “lowering education requirements” more broadly. 

Either way, though, ISA recommends delaying any changes to the professional standards regime until the review is finalised. 

The consumer side

Also in June, consumer advocacy group CHOICE made its own submission to the review which contained three “overarching” recommendations. The first was that any remaining conflicts of interest within the advice industry should be banned. According to CHOICE, these include ongoing adviser commissions and asset-based fees which have flown under the radar “as a result of legislative carve-outs that were strongly criticised in the final report of the Banking Royal Commission.”

Expanding on this, CHOICE’s submission argued that, despite increased restrictions on adviser commissions, “recent cases including the collapse of vertically-integrated Dixon Advisory show that the problems of conflicted remuneration and ownership structures still hurt the community three years after the Banking Royal Commission.” 

No changes to the best interests duty

CHOICE’s second recommendation was that the best interests duty should be retained given its role in “[ensuring] that financial advisers are acting in the best interests of consumers, not their own.” 

“As Commissioner Hayne found,” CHOICE’s submission continued, “‘duty to client and self interest pull in opposite directions.’ We recommend that the best interests duty remains in force and that [ASIC] be properly resourced to investigate how it is being applied and take enforcement action where it detects breaches of the law.”

In addition, CHOICE recommended against making any changes to the best interests duty as it currently stands – including the oft-floated proposal to remove the safe harbour provision. 

While the submission acknowledged arguments that the provision encourages a “box-ticking approach” to compliance, CHOICE said that “if advisers are taking such a simplistic approach to compliance, this is strong evidence of an immature culture of compliance within the industry … A more professional industry would not need safe harbour provision in order to adhere to the law. 

“However, as the advice industry is still on the journey towards professionalisation, the safe harbour provisions are needed to set a benchmark for the conduct of advisers when applying the best interests duty.”

Finally, the CHOICE submission recommended that the review should consider “alternative models to financial advice for people seeking guidance.” One such model, CHOICE suggested, could be inspired by the UK’s Money and Pensions Service. 

“This model integrates a range of services into a one-stop-shop,” CHOICe explained. “The Pension Wise service gives people access to free, impartial, specialised guidance about their pension options, delivered face-to-face or over the phone. The service also provides a free, online tool to help people choose how to access their pension money, including a product comparison tool.” 

The industry response

Last month, the AFA responded to the submissions made by ISA and CHOICE. Regarding the former, the AFA noted that “we have not heard much from ISA on the financial advice front in recent times, however we certainly remember the active role that they played at the time of the FoFA legislation and the FoFA Amendments debate in 2014.”

While acknowledging industry funds as “an important part of the solution for providing financial advice,” the AFA’s response strongly criticised the ISA recommendations to ban life insurance commissions and ongoing advice fees in Choice funds.

Regarding ongoing advice fees, the AFA attributed the ISA’s position to the “flawed thinking of Commissioner Hayne,” who failed to recognise that “the value of financial advice was predominantly with respect to strategies and the psychological benefits of confidence about a plan for the future and being held accountable for improved financial behaviours.” 

“He presumably thought that if you had your money in a MySuper option,” the AFA continued, “then there was not much need for ongoing advice. The Government took a more balanced perspective and only banned ongoing fees in My Super funds.”

The AFA’s response added that the call to ban life insurance commissions was based on similarly “flawed logic”. 

“It is seemingly once again founded on the protection of the life insurance offers of the industry funds,” the AFA explained, “however, more than in any other sense, there is a complete lack of comparability of the default life insurance in industry funds, compared to what is available in the individual advised retail context.”

Commenting on CHOICE’s submission, the AFA described it as “full of criticism of financial advisers, unfair judgements and generalisations” and questioned whether the consumer group had any proof of conflicts of interest leading to poor client outcomes “in the post FoFA/LIF/Professional Standards and Annual Renewal era.” 

The AFA continued: “There is nothing in the CHOICE submission that will help to make advice more accessible and affordable for everyday Australians, other than the suggestion that a Government funded advice and guidance service should be established for low to middle income Australians. 

“Otherwise, they are completely resistant to any form of regulatory relief that could have any consequences for consumer protections, even though it might significantly reduce the cost of providing advice.” 

Where to from here?

There’s a lot more detail to discuss in both the submissions and the AFA’s response. But the scope of the disagreements above is a timely reminder of just how large the remit of the Quality of Advice review actually is – and how much room there is for substantial changes to the advice landscape in Australia come December. 

On the one hand, this is encouraging for those advisers clamouring for change – but it’s also concerning how little consensus there is on what “quality, affordable advice” actually looks like. And while much of the discussion around the review (understandably) focuses on how to deliver advice to a wider range of consumers, hopefully there’s some consideration of what clients actually want

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