The cost of wise counsel

The leader of the Quality of Advice Review, Michelle Levy, says customers want good advice, not documents and processes. It’s a mantra she believes many others in the financial advice sector would echo.

The QAR, which is due to report by December 16, has put out an interim paper to seek comments on 12 proposals that aim to simplify advice regulations and make it more accessible for consumers.

Ms Levy believes there is a better way to regulate that starts “with the content of the advice”.

“It is clear the current regulatory framework is a significant impediment to consumers accessing financial advice,” Ms Levy says. “The proposals are intended to make it easier for consumers to get personal advice. Therefore, they are also intended to make it easier for the providers of financial advice.”

The QAR proposals would refocus regulation on a broad definition of ‘personal advice’ and replace the best interests duty with an obligation to provide ‘good advice’ that would be “reasonably likely to benefit the client, having regard to the information that is available to the provider at the time”.

That obligation to provide good advice would replace the best interests duty and the need for statements of advice (SOA).

“What is good advice can and should be measured objectively in light of all of the relevant circumstances at the time the advice is given.”

“The intention of a duty cast in this way is to focus attention directly on the consumer and the advice rather than on the provider and the process for formulating the advice.

“In my view, this greater ease is achieved without introducing a corresponding risk of harm to consumers.”

The consultation paper, released at the end of August, says the current regulatory framework focuses on disclosure, remuneration, education, and conduct.

Instead, it proposes that ‘personal advice’ would apply to whenever a recommendation or opinion is provided to a client about a financial product and, at the time the advice is provided, the advice provider has or holds information about the client’s objectives, needs, or any aspect of their financial situation.

General advice would continue to be subject to general consumer protections, including the prohibition against engaging in misleading or deceptive conduct.

“Good advice”, the paper says, “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.”

Other proposals include that personal advice providers “should be able to determine what form of advice would best suit their clients” and fewer constraints on fee disclosure, with an annual written consent to deduct ongoing fees.

There would also be increased flexibility in how information — such as the provider’s remuneration and dispute procedures — is conveyed to clients as well as simplified requirements under the design and distribution obligations regime, with relevant providers only required “to report to the product issuer where they have received a complaint in relation to a financial product”.

Perhaps the most relevant proposals to members of the Institute of Public Accountant deal with the definition of a ‘provider’.

The review suggests that 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 (or the provider’s authorising licensee) 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.

It continues by saying that a “relevant provider” must (as they do now) comply with the professional standards (education and training standards and the Code of Ethics), noting the government is separately considering the professional standards.

This would replace the existing requirement that any individual who provides personal advice to a retail client be a relevant provider — which is where accountants can now come into the mix.

The IPA has been at the forefront of responding to calls for submissions on a number of these areas, especially in relation to changes that should be made to the regulatory framework applying to financial advice to improve its accessibility and affordability.

In June, an IPA submission made jointly with Chartered Accountants Australia and New Zealand (CA ANZ) and the SMSF Association made a number of recommendations on the issue of accountants providing financial advice. The submission notes that alongside professional advisers who want to provide consumers with comprehensive financial advice, accountants want to find a solution to be able to support small businesses and individuals who seek simple strategic superannuation advice.

Currently licence demands make this impossible.

“Accountants should be able to provide strategic advice to their clients in relation to superannuation, which should simply be in the ordinary course of providing a tax agent service. At present, they can’t do that due to licensing requirements,” the group says in its submission.

“Consumers need access to affordable strategic superannuation advice, which can be delivered through an efficient and effective model, utilising suitably highly qualified professionals with adequate consumer protections in place.”

In a separate submission to Treasury on behalf of the IPA, group executive advocacy and policy Vicki Stylianou reiterates the importance of including the accounting profession in the review.

Ms Stylianou says there is an overwhelming desire for an overhaul of compliance costs so that advice is more accessible to consumers, noting there is a large gap between what it costs to provide the advice versus what consumers are prepared to pay.

“A significant rebalance is needed if the unmet advice needs of consumers are to be satisfied,” she says in the submission.

“The IPA believes that to seriously tackle the affordability issue that compliance requirements will need to be changed in terms of legislation, regulation, interpretation, and implementation.

“We appreciate that ASIC’s role is in interpreting, implementing, and enforcing the legislation and regulation, which are developed and decided by the Treasury and government. However, fees such as those imposed by the ASIC industry funding model, are within the control of ASIC and are part of the increasing cost of doing business suffered by many IPA members and other advisers.

“The conclusion which was noted by many members (including in consultation with members) was that the high cost of advice meant that many consumers were not getting advice.”

A recent survey of IPA members finds they do not offer product recommendations and believe that most consumers would benefit from strategic advice only.

“There was a general consensus among those who do not provide product recommendations that they do not wish to do so on the basis of the compliance burden,” Ms Stylianou says.

“Many members made comments to the effect that SOAs and other documents are really for compliance purposes and to protect licensees and are not for the clients.”

“A number of members suggested that having an individual license structure, like tax agents, lawyers, doctors, SMSF auditors, registered company auditors, would reduce costs. This would reduce the licensee/dealer group costs and reduce complexity and the compliance burden.

“Building competence in a specific area and then advising solely in that area was also suggested by some members. This also goes to the issue of whether scoped advice should be encouraged.”