The Government responds to the Quality of Advice Review recommendations

The response from the Government is largely limited to noting which of the 22 recommendations in the Final Report it will be looking to implement, with some modifications to the recommendations themselves. In this regard, the Government has given its support (either in full, in part or in principle) to 14 of the 22 recommendations. It has not however, at this stage, ruled out any of the 8 remaining recommendations – instead noting that these are items for future consideration, or that may be influenced as the first 14 are worked through.

Whilst the Government has announced those items it proposes to change, reform will take time and will be subject to further consultation. Bills to implement the changes not expected to be introduced into Parliament until the second half of 2023 or into 2024. Passage of these Bills into formal legislation may then take some time, and perhaps that is why there is no indication at this point of any formal start dates for the new measures.

The response has been broken down into three sections

Reforms to remove regulatory red tape that add to the cost of advice, but do not provide additional consumer protection

One of the recommendations in this space the Government has agreed to is the removal of the safe harbour steps under the best interest duty in the Corporations Act. This change aligns with observations from Commission Hayne during the Financial Services Royal Commission, where he was concerned that the safe harbour steps had become a tick-a-box approach to compliance and had recommended that post the Quality of Advice Review, unless there were good reasons to retain it, the safe harbour steps should be removed. Removal of these safe harbour provisions will actually help to ensure that advice is truly in the client’s best interests – as required under Section 961B(1) of the Corporations Act. Under existing legislation, meeting the safe harbour steps contained in Section 961(2) merely has the effect of discharging the adviser’s obligations under Section 961B(1), but doesn’t actually mean the advice is in the client’s best interests. This approach would also provide a greater alignment with a similar best interests requirement under Standard 5 of the Code of Ethics, which does not have a safe harbour steps defence.

What the Government has not yet provided final recommendations on are the Quality of Advice Review recommendations for the removal of the existing best interests duty in Section 961B(1), its replacement with a good advice duty, and the introduction of a new best interests that is closely aligned to the common law fiduciary obligation on advisers (and other professionals) to prioritise the needs of the client over their own. This recommendation for a legislated fiduciary obligation aligns to the original recommendation back in 2009 from the Ripoll Report, which morphed into the current best interest duty as part of the Future of Financial Advice reforms. The concern many advisers have indicated about this potential change is not the change itself, but rather the proposal that it would only apply to advice from a relevant provider – not advice provided by other entities, such as superannuation trustees. These considerations are part of the Government’s proposed third phase of consultation.

In what would be welcome news for many, if not all advisers, the government has agreed that the annual fee renewal and consent obligations should be simplified. This includes the use of a single standardised form to obtain these consents, and removal of the fee disclosure statements. Getting this settled may take a little time, to ensure that the standardised forms are appropriate to their needs and, importantly, can be implemented as a solution with product providers, but the change will be widely welcomed. This is perhaps an important step on the journey to truly recognise financial planning as a profession. With the Code of Ethics placing a range of ethical obligations on advisers, including that fees charged are fair, reasonable and value for money, we should see more reliance allowed by third parties on information a financial adviser collects from their client – such as the annual consent to on-going fee deduction. It is important to remember though, that while this is an announced change that is expected to come in the future, until the change actually has been made and a start date announced, your obligations to provide feed disclosure statements, and obtain annual consent, remain.

Thirdly, the Government wants to start work on replacing the existing Statement of Advice with something that is more fit for purpose. This recommendation is a slight variation from that in the Quality of Advice Review itself, in that it indicates that there will still be a requirement to provide something (rather than on only on request), but is an important and welcome move given the complexity of these documents, and the cost and time involved in their production. But meaningful reform in this area will require agreement from various parties, including advisers, licensees, consumer groups, regulators and professional indemnity providers, and agreement earlier in the development process. Otherwise we run the risk of future legislative intervention that brings us back to where we are today with SOAs that don’t benefit the client in any real or meaningful way.

Reforms expanding access to retirement income advice

At this stage, this section is primarily focussed on expanding and enabling the ability of superfunds to provide advice to members. We know from talking with advisers all over Australia that there are differing views with some seeing the ability of superfunds to offer intra-fund advice as taking away from their offers. While, others are supportive, as these members are often not clients seeking broader advice (and therefore uneconomical to service), or provide a entry point for those seeking advice, with expansion to an adviser led model in the future as needs expand (and the member sees the value in advice).

In acknowledging the validity of these contrasting views, it is also important to remember that the focus also has to be on the end client – in this case the member of a superfund. At various times, for various reasons, a client who may previously have been advised might become unadvised. This is not necessarily because they, the member, no longer value or no longer want advice, but perhaps their adviser is no longer able to service them due to retirement, or because they believe they are not longer able to provide a service at a reasonable cost. These clients still deserve to have access to advice, and an intra-fund advice type model (whether offered by a superfund or other provider) might just help to fill a necessary gap for a period of time.

In his speech when announcing the Government’s response, the Minister alluded to the upcoming consultation in this area focussing on some important aspects to this advice model, such as how and what can be advised on (ie how far can you go, and it will be significantly broader than “intra fund advice” as we know it today), and what education requirements should apply to the people who are providing the advice under this model. It is also worth noting that separate to the response on the Quality of Advice Review, the Government also introduced a Bill to Parliament this week to give effect to the experience pathway option for existing relevant providers.

This area of reform also contained the Government’s endorsement for clarification on the ability for advisers to be able to charge an advice fee to a client’s super account, and for superannuation trustees to be able to pay these amounts to advisers where the client has consented without being concerned it may be in breach of their sole purpose test and best financial interests requirements.

Similar to the earlier comments on annual consent, it would be significant and valuable reform if this was accompanied by the ability for superfunds to be able to rely on the relevant consents provided by advisers on behalf of their clients, rather than trying to second guess whether the fees are appropriate. As mentioned before, advisers have requirements under the Code of Ethics, particularly under Standard 7, to ensure that their fees are fair, reasonable and value for money. If the fees were deemed inappropriate, this should be dealt with at the adviser level though existing Regulatory processes, rather than requiring super trustees to intervene in an area that generally would not fall within their expertise for judgement.

Reforms exploring new channels for the provision of personal advice

This section is essentially the list of “other” reforms for consideration down the track, which includes the question of whether the definition of personal advice should be expanded, and if it was, who would fall within its scope.

It is also worth noting that the Government has stated this grouping includes finalising details on the design of the replacement Statement of Advice and also the expansion of the ability for consumers to access affordable retirement income advice – both of which were mentioned in the other groupings of reforms.

This shows the inter-relatedness of the reforms and perhaps illustrates why it may still take some time for them to be implemented in full. As an example, work to enable an expanded intra-fund advice model in a cost effective manner can really only work with a redesigned advice document. And any redesigned advice document should be made available across the spectrum of advice providers at the same time– not just intra-fund advice providers.

Given all this, the question is obviously where to now? What’s next? Indications are that details on the next stage of consultations may be released within the next few weeks. We need to continue the momentum to ensure meaningful and collaborative discussion occurs, but also need to be measured to ensure changes are real, enduring and don’t need relitigating. At this stage though, it is positive to see the Government’s commitment to real reform, as the Quality of Advice Review Final Report recommended.

Next: Understanding annuities