Quality of Advice Review

It has now almost been six months since the Quality of Advice Review was completed (in December 2022) and three months (February 2023) since it was released by the Treasury.  While there is not yet a meaningful response from the Government on the recommendations made in the Report, industry participants are making their views on the report known.  And those views are divergent.

"This report is a recipe for another royal commission. The radical changes that it recommends will expose consumers to unacceptable risk when obtaining financial advice from a bank or super fund."  “The biggest scandals in financial advice have involved large banks and super funds, yet they will be the greatest beneficiaries of the recommendations in this report. They will be able to undercut independent professional advisers by pushing out cheap and shoddy advice on a mass scale, provided by unqualified staff.”

CHOICE Chief Executive Alan Kirkland, February 2023

"The JAWG believes that the Quality of Advice Review provides a series of carefully considered recommendations that taken together represent a holistic package of reform that will protect consumers and make advice safer, more accessible, and more affordable."

JAWG – Joint Associations Working Group letter to Minister Jones re implementation of Quality of Advice Review recommendations, 26 April 2023

"The idea of allowing unqualified sales people, working for insurance companies, fund managers and super funds, to dish out 'free' financial advice without the consumer protections that apply to financial planners, is the dumbest thing I have ever seen proposed by any report on our industry during my 2 decades as a financial planner. The FPA are a disgrace for supporting it."

Anonymous comment on IFA article, 13 February 2023

Minister Jones has claimed that a response by the Government to the Quality of Advice Review will be released shortly.  However initial indications are that the Government will not act quickly on what it identifies as the more controversial recommendations.  Rather he has anticipated that at this stage the Government may be prepared to adopt the recommendations which it considers to be "obvious, easy wins", leaving the others subject to a longer consultation process.

Obvious, easy wins

So the burning question of the moment is, what might a package "obvious and easy wins" look like?

From the online debate, we have compiled has following list of recommendations from the Quality of Advice Review which could constitute the initial package of reform:

• rationalise the best interests duty and remove the safe harbour steps
• remove the obligation to issue fee disclosure statements and rationalise fee disclosures
• remove the mandatory requirement to provide advice documentation unless the client requests it prior to or at the time the advice is provided
• allow FSGs of financial advisers to be placed on their website
• remove the DDO reporting obligations for relevant providers so they need not report to an issuer on significant dealings outside of the target market, meet additional reporting obligations specified in the TMD by the issuer or report that there have been no complaints during the specified reporting period.

In a nutshell, other than rationalising the best interests duty, the other 'obvious and easy wins' are focussed on reducing the paperwork required for the provision of financial advice.

Why was the Quality of Advice Review commissioned by the then Federal Government?

The object of the QAR was to "ensure Australians have access to high quality, accessible and affordable financial advice".  The Terms of Reference require the Review to consider how the regulatory framework could better enable the provision of high quality, accessible and affordable financial advice for retail clients.

In the author's view, this package of 'obvious and easy wins' will only make minimal differences to the availability of financial advice to average Australians.

Why?

Because in my view, these limited changes will not:

• Increase the number of people who can give advice, or
• Otherwise operate to make advice significantly more accessible or affordable.

Sure, I would relish being able to receive from my financial planner an abbreviated written advice on my financial position and recommendations for action.  But my financial planner will still in the background need to do all of the work which underpinned the existing SoA and keep full records to substantiate any advice provided.  The advice may not be significantly less expensive to provide.

And an FSG will still need to be prepared and periodically reviewed and updated and clients will still need to agree by some method to the fees that are charged.  And fee consent forms will also need to be prepared and consent obtained to ongoing fee arrangements annually.

This short list of recommendations would not if adopted, turn the dial meaningfully on the cost and accessibility of advice.

What is missing in the debate is the voice of the consumer

When I say that, I mean that what is missing is actual data and commentary from people who want but do not have access to financial advice, primarily due to affordability concerns.

I have been fortunate to have been the beneficiary of comprehensive financial advice over many years, but I have close friends and family who are not in that position.

The sorts of questions that they have had for which they have been unable to get advice primarily due to affordability have included

• My life insurance premiums have become unaffordable – should I relinquish my long held life insurance in my current financial circumstances?
• I have a small amount of savings – should I be putting it into super or paying down my mortgage?
• I am 25 and on a low income – should I take out private health insurance at my age or should I be saving the money and if I save it should I be putting it into super?

So what changes should be added to the "obvious and easy" wins?

There is merit in the idea of a 'two tier' personal advice model – whereby more detailed or complex advice, paid for by the client or through commissions is undertaken by a fully-accredited financial planner and another whereby those who hold information about a client and are not being remunerated separately for the advice are able to take those personal circumstances into account to give advice which is 'good' and fit for purpose.

However it is apparent from the dialogue to date that the recommendations that would support this change are likely to be subject to further consultation before they would be adopted by the Government.

There are a few recommendations that would enable in the short term an alternative avenue for advice, at least about superannuation which for many Australians constitutes their primary or only financial asset.  Those recommendations are related to facilitating the provision of personal advice on superannuation by superannuation trustees.  They are:

Recommendation 6 – Superannuation advice – under which superannuation fund trustees would be able to give personal advice about interests in their fund to their members

Recommendation 7 – Deduction of adviser fees from superannuation – under which the anomaly that exists around paying adviser fees from members' superannuation accounts would be resolved

Recommendation 13.2 – Client directed advice fee payments from their superannuation account where the advice relates to their interest in their fund – this facilitates recommendation 7

Recommendation 13.7 – Life insurance – this is a recommendation that continues the existing commission and clawback exemptions from the ban on conflicted remuneration but also requires that a client expressly consent to the adviser accepting the commissions

A final word - digital advice

As an experiment, I typed the following question into a ChatGPT app:

I am 25, live in Australia and am healthy.  Should I take out private health insurance at $100 per fortnight?

The answer, in a nutshell, was that it was up to me.  There was no commentary given about the financial benefits of taking out or not taking out private health insurance, its affordability or what else I should spend my money on.  Or whether I would be better saving the cash and self-funding my health costs (or relying on the public health system) until I was say 30.

Digital advice is at least currently not up to the task of providing advice on the types of discrete sample questions that I have referred to above, and yet, a comprehensive financial plan or limited 'general advice' is also not the answer.

There is a gap in the market where advice is required and not available.  In time digital solutions may assist enormously to fill that gap.  But there is much work to be done before reliable, tailored personal advice, which responds to a specific question and provides a recommended course of action, will be available to make up the shortfall.

Author: Lisa Simmons, Partner