Best interests duty out, good advice in as financial advice proposals get warm welcome

The Labor government says it will focus on the needs of consumers in a financial advice market that ‘is cooked’, as it prepares to respond to a suite of proposed reforms.

Financial advisers would be required to provide ‘good advice’ to clients, while the best interests duty would be scrapped under proposed advice reforms.

The Labor government says it will focus on the needs of consumers in a financial advice market that “is cooked”, as it prepares to respond to a suite of proposed reforms that requires advisers provide “good advice” to consumers in place of the best interests duty.

The reforms, proposed by Quality of Advice reviewer Michelle Levy in a consultation paper released on Monday, are a bid to overhaul financial advice regulations, cut red tape and slash the cost of financial advice for consumers.

Financial Services Minister Stephen Jones said the current regime was “working for nobody”.

“Firstly, I’m looking at it from the point of view of the consumer, not from the point of view of the product manufacturers or the profession or the big advising houses,” he told The Australian.

“Consumers have never been retiring with more income, never been confronted with more investment options and never been bombarded – through social media and other channels – with more opaque forms of so-called information.”

“What I’m certain of is the existing market for financial advice is cooked, it’s working for nobody. If you’re a high income earner you can access it, for everyone else you’re on the outside … I think reform is needed and what we put in place will probably end up being the least perfect form of regulation. But what we know is what we’ve got at the moment ain’t working so we’ve got to have a look at it.”

Mr Jones said he wanted to see the feedback from the consultation and was “not going to pre-empt it”.

Alongside the Quality of Advice review, Labor has already started consulting on proposed changes toeducational standards for advisers and easing the regulatory burden to make advice more affordable and stem the exodus from the industry. It has lost 40 per cent of its headcount in just three years.

The sweeping reforms proposed in the consultation paper also include broadening the definition of personal advice, while general advice would no longer be counted as a financial service.

A written record of advice, meanwhile, would replace the cumbersome – and costly – statement of advice required to be provided to clients under current obligations.

The changes would aim to reduce regulatory complexity while improving the quality of financial advice, Ms Levy, a partner at law firm Allens, wrote in the consultation paper.

“We have been told that the difficulty and burden of complying with regulation is impeding access to financial advice,“ she said.

“It prevents many financial services providers providing simple advice and assistance to their customers; it inhibits the development of digital advice tools; and, it has made comprehensive advice unaffordable for many people.”

Advisers are exiting the industry and not being replaced and when consumers do get financial product advice they are given documents they do not want and rarely read, she noted.

“Removing regulatory requirements could make it much easier for the industry to provide financial product advice and to provide that advice at a lower cost. However, accessible and affordable advice is only worthwhile if the advice is good advice.”

Under the proposed changes, ‘good advice’ would be defined as “reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided”.

Ms Levy also wrote that there was “no reason to think a statement of advice or financial services guide provides any real consumer benefit”, as she flagged the proposed reform to remove SOAs in favour of providers maintaining records of the advice they provide.

Further proposed changes would also make it easier for superannuation funds to provide advice to members.

“Superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement,” Ms Levy said.

“In doing so, trustees would be required to take into account the member‘s personal circumstances, including their family situation and social security entitlements if that is relevant to the provision of the advice.”

The proposed reforms were welcomed by industry, with the Financial Services Council saying they were a sensible road map for delivering affordable and accessible advice “by focusing on outcomes for consumers, not outdated compliance documents and red tape”.

“Financial advice is weighed down by layers of red tape that has pushed the cost of advice to more than $5000, putting it out of reach for most Australians,” FSC chief executive Blake Briggs said.

“The review has listened to stakeholders and got the balance right, by detailing a framework that allows consumers to get advice on the topics they need, with all the necessary consumer protections, and through a channel that suits them, rather than a one-size-fits-all model.”

Financial Planning Association chief executive Sarah Abood said the paper put forward some “very extensive” changes that would help to remove the compliance burden on advisers.

“The review has really recognised that the compliance burden that planners and advisers have faced has really gotten in the way of providing efficient, affordable quality advice to clients. And we think this will definitely help redress the situation,” Ms Abood told The Australian.

Prioritising good advice rather than the best interests duty meant the focus would be on the content of the advice rather than the way it was delivered, she added.

“In principle, that’s a good thing, that we should be really looking at the advice itself and getting to an understanding of whether that advice is going to benefit the client, is it going to leave them better off.

“That’s the test that we should be using, considering whether advice is of high quality …. the intent to focus on the content of the advice, not the delivery of the advice, is laudable and I think is the way we should absolutely be going,” she said.

Consultation with industry closes on September 23, with the final report due by the end of the year.