Misleading financial advice back in spotlight as ASIC reveals consumer confusion

Almost half of all of us can’t tell tailored financial advice apart from marketing spin, according to new ASIC research.

Treasurer Josh Frydenberg with Karen Chester the New Deputy Chair of Australian Securities and Investments Commission (ASIC) at Parliament House in Canberra. Picture Kym Smith

The Morrison government faces renewed pressure to act on an long-ignored Financial System Inquiry and Productivity Commission recommendation to tackle misleading financial advice, after the corporate watchdog found almost half of all consumers can’t discern between marketing information and tailored advice.

New research from the Australian Securities & Investments Commission found “substantial gaps in consumer comprehension” of what constituted the difference between “general advice”, where sales staff provide basic information about product features, and “personal advice”, which is information tailored to specific customer situations and needs and legally must be provided in the best interests of members.

Even when prompted with the terms “general advice” and “personal advice”, many of the 2500 survey respondents and focus group members had difficulty distinguishing between the two types of advice.

When given two sets of scenarios and asked to identify which was personal and which was general, only 53 per cent of consumers could identify when a sales worker was giving general advice. Only 19 per cent could tell when the scenario was personal tailored advice.

Highlighting the confusion, 14 per cent of consumers thought the general advice scenario represented personal advice and 34 per cent thought that the personal advice scenario represented general advice.

The release of the new data coincides with a battle between the Australian Securities & Investments Commission and Westpac over potentially misleading superannuation sales using the general advice model, wherein basic marketing information has been provided in a way that could be seen to trick customers into believing their personal circumstances were being taken into consideration by sales staff. As a number of major banks strip-back their wealth management divisions, companies are moving towards a “robo-advice” model, where personal information is used to tailor artificial intelligence-driven financial advice. These businesses as they currently stand will be operating under a “general advice” license despite their use of personal information.

“This disturbing gap in understanding whether the advice they are getting is personal or not means many consumers are under the false premise their interests are being prioritised, when no such protection exists,” ASIC deputy chair Karen Chester said.

A Productivity Commission recommendation, released in August last year, urged the government to clarify the law between the two forms of advice. Ms Chester is a former deputy chair of the Productivity Commission.

“General advice, as defined in the Corporations Act … is a misleading term and should be renamed,” the PC said in its Competition in the Financial System report, which was steered by the department’s former chair Peter Harris.

David Murray’s Financial System Inquiry in 2014 recommended the term “general advice” should be renamed to remove confusion and uncertainty with this term, however the government has failed to legislate this.

The government has not yet formally responded to the report’s recommendations, in which time hundreds of thousands of consumers have continued to be put at risk of being shunted into inappropriate products under the impression they are receiving tailored advice.

And even when provided the general advice warning, nearly 40 per cent of those surveyed wrongly believed the adviser had an obligation to take their personal circumstances into account.

“The survey also revealed that the responsibilities of financial advisers, when providing general advice, is not well understood,” ASIC deputy Karen Chester said.

Alan Kirkland, chief executive of consumer advocacy group Choice, said banks and financial companies were taking advantage of customers due to the confusion over general advice.

“We need to stop calling sales by bank tellers and telemarketers ‘advice’ when it is clearly not,” Mr Kirkland said.

“David Murray’s Financial System Inquiry recommended this problem be fixed over four years ago. Since then, the Productivity Commission has made clear and simple recommendations to fix this in two major reports but there has been no action by government,” Mr Kirkland said.

“Banks are already changing their business models in response to the Royal Commission, to move out of personal advice and push more products through general advice. If we don’t get rid of the term ‘general advice’, consumers will think they are getting personal, tailored advice when they simply aren’t. This will undermine the entire Future of Financial Advice regime and anything that comes out of the Royal Commission to reform financial advice,” he said.

Gerard Brody, chief executive of the Consumer Action Law Centre, said the research was unsurprising.

“Most people don’t understand these terms around general advice and personal advice,” Mr Brody said.

“If robo-advice is operating on a general advice model, it really isn’t advice — it’s marketing, it’s sales,” he said. “With consumer protection, we’re asking advice to do more than it can. We should be aiming to have simpler products.”