Treasury releases roadmap for financial advice reform package  

The Government has unveiled its proposals to reform existing laws on financial advice, finalising its response to the Quality of Advice Review.

What you need to know

• Treasury has released its final response to the Quality of Advice Review (QoA Review), following its announcement of three reform streams to improve access to financial advice in June 2023.
• The new proposed reforms are:

introducing an updated best interests duty which will apply to all financial advisers;

introducing a new class of financial advice provider who will not be able to charge a fee or receive a commission for the provision of personal advice;

introducing a comprehensive framework for superannuation advice; and

replacing Statements of Advice with a principles-based advice record.

• The government intends to commence consultation on the draft legislation in the coming months, with a view to progressing legislation to Parliament for consideration by the end of 2024.

What you need to do

• Carefully consider the proposed reforms, and their impact on any proposed or existing services you offer.
• Stay tuned for any exposure draft legislation that Treasury releases to implement the proposed reforms.

Background

On 13 June 2023, Treasury released its first response to the QoA review as part of its Delivering Better Financial Outcomes package. This responded to 14 of 22 recommendations in the QoA review and comprised the following three streams:

• removing red tape that adds to the cost of financial advice with no benefit to consumers;
• expanding access to retirement income advice; and
• exploring the merits of expanding the provision of personal advice by other financial institutions.

On 14 November 2023, the Government released for consultation exposure draft legislation to deliver the first tranche of the reforms, responding to the following recommendations of the QoA Review:

• Recommendation 7: clarifying the legal basis for superannuation trustees reimbursing a member’s financial advice fees from their superannuation account, and associated tax consequences;
• Recommendation 8: streamlining ongoing fee renewal and consent requirements and removing the requirement to provide a fee disclosure statement;
• Recommendation 10: providing more flexibility on how FSG requirements can be met;
• Simplifying and clarifying the provisions governing conflicted remuneration, including:

Recommendations 13.1 and 13.3: clarifying that monetary or non-monetary benefits given by a client are not conflicted remuneration along with the removal of consequential exceptions;

Recommendation 13.4: removing the exception to conflicted remuneration rules for the issue of financial products where advice has not been provided in the previous 12 months;

Recommendation 13.5: removing the exception to conflicted remuneration rules for agents or employees of ADIs; and

• Recommendation 13.2: introducing a specific exception to the conflicted remuneration provisions that permits a superannuation fund trustee to pay a fee for personal advice where the client requests the trustee to pay the fee from their superannuation account.

• Recommendations 13.7 to 13.9: introducing new standardised consent requirements for life risk insurance, general insurance and consumer credit insurance commissions.

The Government has now released its final response to each of the QoA Review recommendations in the 'Delivering Better Financial Outcomes: Detailed Overview December 2023.'

Set out below are the key proposals for financial advice reform.

New best interests duty

Treasury will introduce an updated best interests duty which is intended to operate more flexibly and will apply to all financial product advice providers. Although the existing primary obligation to act in the client's best interests and prioritise a client's interests in the event of a conflict will remain central to the renewed standard, the updated standard will provide clearer legislative support for scaled or limited scope advice where this meets the client's objectives and needs, and in relation to advice where the provider has limited, but relevant, information.

The current requirement to provide appropriate advice will be retained, as will the existing concessional treatment for personal advice provided by banks and general insurers on defined basic products.

The updated duty responds to the following recommendations of the QoA Review:

• Recommendation 4: requiring a person who provides personal advice to a retail client to provide the client with good advice, meaning personal advice that is fit for purpose and, in all the circumstances, good;
• Recommendation 5: replacing the existing best interests duty and related obligations with a new statutory best interests duty.

New class of financial adviser

Treasury will introduce a new class of financial advice provider to promote the availability and affordability of simple personal advice.

This new class of adviser will not be able to charge a fee or receive a commission relating to the personal advice they provide. However, they will be required to meet additional standards not recommended in the QoA review, including being subject to the modernised best interests duty.

The Government has also indicated that it will introduce additional safeguards to ensure consumers are protected in relation to this new class of advice provider, including additional obligations on AFSL holders and legislated minimum competency standards for the adviser. In all cases, licensees will be wholly responsible for the advice provided by this new class of financial adviser.

This responds to Recommendation 3 of the QoA Review, which recommended amending the Corporations Act 2001 (Cth) (Corporations Act) to provide that personal advice must be provided by a relevant provider where the provider is an individual and either the client pays a fee for the advice, or the issuer of the product pays a commission for the sale of the product to which the personal advice relates.

Framework for superannuation advice

Treasury will introduce a new comprehensive framework for superannuation, including:

• legislating rules on what advice topics can be paid for through superannuation. The same list of topics will apply to both collectively charged advice and advice charged directly to an individual member's superannuation account;
• allowing superannuation funds to consider a broader range of a member's personal and household circumstances, including debt, spousal income or age pension eligibility; and
• providing superannuation funds with greater legal certainty to provide personalised 'nudges' to members at key decision points in the retirement income journey (for example, prompting members approaching retirement to consider options for how they may wish to drawdown on their super).

This responds to Recommendation 6 of the QoA Review to enable superannuation fund trustees to provide members with personal advice regarding their interest in the fund, including when they are transitioning to retirement.

New principles-based advice record

Treasury intends to replace Statements of Advice with a principles-based, advice record addressing the following principles:

• subject matter and scope;
• the advice;
• reasons for the advice; and
• the cost of the advice to the client and/or benefits received by the adviser.

The current requirement to give a record to the client will be maintained, but adviser record-keeping obligations will be updated to ensure key information underpinning the advice is appropriately recorded without overcomplicating the advice record with information that will hinder the client's ability to understand and make an informed decision about the advice.

Treasury has also indicated that it will review the Financial Planners and Advisers Code of Ethics 2019 after the Delivering Better Financial Outcomes package has been implemented. This will ensure that it appropriately aligns with the financial advice reforms and remains fit-for purpose.

The Government will not be proceeding with the following recommendations from the QoA Review:

• Recommendation 1: expanding the definition of personal advice under the Corporations Act to cover all financial product advice given to a client in a personal interaction or personalised communication by an advice provider who has information about the client’s financial situation or one or more of their objectives or needs.
• Recommendation 2: removing the requirement for a general advice warning to accompany general advice.
• Recommendation 12.1: amending the Design and Distribution Obligation (DDO) to limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers.
• Recommendation 12.2: amending the DDO reporting requirements to remove the requirement for relevant providers to:

report significant dealings outside the target market to the product issuer;

comply with the additional reporting obligations specified by the product issuer in the target market determination; and

report to the product issuer where there have been no complaints during the specified reporting period.

Authors: Narelle Smythe, Partner; and Vivien Lin Associate.