From acting in the best interest to providing good advice
14 September 2022
What you need to know
- The 12 proposals in the Consultation Paper represent an overhaul of the regulatory framework applying to financial advice following feedback that the difficulty and burden of complying with regulation is impeding access to financial advice.
- The proposals are intended to make it easier for consumers to access financial advice that meets their needs from a range of different providers.
- If introduced, the proposed reforms would broaden the concept of "personal advice" and remove the concept of "general advice" from the financial services regime.
- The Consultation Paper also proposes that an adviser's duty to act in a client's best interests be replaced with a new duty to "give good advice".
What you need to do
- Consider how the proposed reforms would apply to you as a provider of financial advice.
- Identify any difficulties or issues that may arise with its implementation in your organisation.
- Ensure that any written submissions you intend to make on the Consultation Paper are lodged with Treasury by 23 September 2022.
Background
The current regulatory framework and relevant obligations applying to financial advice were largely introduced through the Future of Financial Advice (FOFA) reforms in 2012 which, among other things, introduced a duty for financial advisers to act in the best interests of their clients, subject to a "reasonable steps" qualification, and place the interests of their clients ahead of their own when providing personal advice to retail clients.
It has been identified that the current regulatory framework is a significant impediment to consumers accessing financial advice and is also preventing advisers and institutions providing advice and assistance to its customers.
Treasury has indicated that the proposals in the Consultation Paper are intended to make it easier for consumers to access financial advice that meets their needs from a range of different providers and for advisers and financial institutions to have more helpful conversations with their customers.
What are the key proposals?
The Consultation Paper sets out 12 proposals for consideration and feedback.
The key proposals relate to personal advice and general advice. Relevantly:
- The definition of "personal advice" would be broadened so that it is clear that it applies whenever a recommendation or opinion is provided to a client about a financial product (or class of financial product) and, at the time the advice is provided, the provider has or holds information about the client's objectives, needs or any aspect of their financial situation.
This would replace the current definition of "personal advice" which applies where the provider actually considers the client's objectives, financial situation or needs, or where a reasonable person might expect the provider to have considered any of these matters. - The regime would no longer regulate "general advice" as a financial service and the definition would be removed together with the obligation to give a general advice warning.
The basis for removing general advice from the regime is that those activities would continue to be subject to general consumer protections, in particular the prohibition against engaging in misleading or deceptive conduct in connection to the supply of financial services, and other general obligations of a financial services licensee.
It is also proposed that a new duty to provide "good advice" would replace the best interests duty, the appropriate advice duty, the duty to warn the client and the duty of priority in Chapter 7 of the Corporations Act. "Good advice" is 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.
A detailed breakdown of the proposals is set out below.
| Proposal | Details |
|---|---|
| Proposal 1: Regulation of personal advice | The financial services regime should regulate the provision of "personal advice". "Personal advice" is a recommendation or opinion provided to a client about a financial product (or class of financial product) and, at the time the advice is provided, the provider has or holds information about the client's objectives, needs or any aspect of the client's financial situation. |
| Proposal 2: General advice | "General advice" should no longer be regulated as a financial service and the definition of 'general advice' should be removed together with the obligation to give a general advice warning. |
| Proposal 3: Obligation to provide good advice | A person who provides personal advice should be required to provide "good advice". "Good advice" is 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. |
| Proposal 4: Requirement to be a relevant provider | A provider of personal advice should be a "relevant provider" where the provider is an individual and the client pays a fee for the advice, the provider receives a commission in connection with the advice, there is an ongoing advice relationship between the adviser and the client or the client has a reasonable expectation that such a relationship exists. |
| Proposal 5: Personal advice to superannuation fund members | Superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement. In doing so, trustees would be required to take into account the member's personal circumstances, including their family situation and social security entitlements if that is relevant to the provision of the advice. |
| Proposal 6: Collective charging of advice fees | Superannuation fund trustees should have discretion to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed. |
| Proposal 7: Fees for advice provided to members about their superannuation | Superannuation trustees should be able to pay a fee from a member's superannuation account to an adviser for personal advice provided to the member about the member's interest in the fund on the direction of the member. |
| Proposal 8: Ongoing fee arrangements and consent requirements | Fee disclosure statements should not be required. Providers of personal advice should obtain annual written consent from their client to deduct advice fees from a financial product if there is an ongoing fee arrangement. The consent form should explain the services that will be provided and the fee the adviser proposes to charge over the course of the following 12 months. Where advice fees are deducted from more than one product, a single consent form should cover each of the products issued by a product issuer. |
| Proposal 9: Statement of advice | Providers of personal advice to retail clients would be required to maintain complete records of the advice they provide and to provide a written record of advice to a client on request. This would replace the existing requirement for advisers to provide a statement of advice or record of advice. |
| Proposal 10: Financial Services Guide | Providers of personal advice should either continue to give their clients a copy of the financial services guide or make information available to their clients on their website about their remuneration and other benefits they receive, their internal dispute resolution procedures and AFCA. This information should be available at the time the advice is provided. |
| Proposal 11: Design and distribution obligations reporting requirements | The reporting requirements under the design and distribution obligations regime should be simplified by requiring relevant providers to only report to the product issuer where they have received a complaint in relation to a product. |
| Proposal 12: Transition arrangements | There should be an adequate transition period for implementing these changes. Consideration should also be given to allowing providers to "opt in" early. |
Next Steps
The closing date for submissions on the Consultation Paper is 23 September 2022. Submissions should be lodged by using the template for response provided.
The Quality of Advice Review is due to provide a report to Government by 16 December 2022.
Authors: Corey McHattan, Partner; Nicky Thiyavutikan, Senior Associate; and Caitlin Murphy, Associate.
