Winding back regulatory reform – so soon?
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hauled the banking sector and financial planning industry over the coals. The road to increased scrutiny was a one-way street with no offramp in sight.
The 2019 Royal Commission Report, a mere three years ago, shook public trust in the institutions that are the pillars of the Australian Financial System and left tears, apologies, resignations, and a string of successful enforcement actions in its wake. Remarkably, perhaps, a review initiated in the last days of the Morrison Government now seeks to swing the pendulum the other way, towards a fundamentally less prescriptive principles-based framework based on the concept of ‘good advice’ and a faith that providers can decide what they need to do to deliver it. The drivers – increased costs and decreasing accessibility – mean that, despite the hype and headlines, years of regulatory reform looks set to be wound back.
This article is not intended to pass judgment on the proposed reforms set out below or on whether they are likely to succeed in producing a more efficient, reliant and truly client-centric outcomes. Time will tell. However, it is impossible to ignore the significant directional shift toward what appears to be a substantively less regulated climate and what this may mean for providers seeking to balance their risk: return profile.
Draft Consultation Paper
On 29 August, the Federal Treasury released its Quality of Advice Review consultation paper (the Paper). The Royal Commission recommended this review, although it’s difficult to imagine that it could have anticipated its outcome. Surprisingly given the history, the Paper calls for a reduction in regulation and “red tape” which it says has driven up costs and is a barrier to consumers obtaining financial advice.
Recommendations – regulatory u-turns
Financial advice has been classified as either general or personal advice since the AFSL regime was established over 20 years ago. Personal advice is given when the advisor considers one or more of the person’s objectives, financial situation and needs. The first key proposal put forward in the Paper is to broaden the concept of personal advice from those situations where the adviser considers any of these matters, to circumstances when the advisor merely holds it. We agree this would be a sensible way to simplify the regime because it is much easier for consumers to know whether someone has information about them than it is to know whether they have considered it.
For some time now, the duty to act in the best interest of clients that is required of financial planners and other providers of personal financial advice have been the central pillar of financial services regulatory obligations. This duty has underpinned the way personal financial advice is provided as well as driving the massive advice review and remediation programs undertaken by all the major banks.
In fact, Commissioner Hayne identified this duty as being a fundamental precept of the financial service industry to ensure the processes and motivations of financial advisers are focused on what is best for their clients. It is needed to maintain confidence and trust in the financial planning process and industry.
However, driven by an imperative to make financial advice affordable, a (if not the) central recommendation in the Paper is to replace the process driven “best interests duty” (and its current supporting duties) with a more generalised and amorphous outcome-based obligation to provide “good advice“. Notwithstanding the banking blood let during the Royal Commission, the Paper considers that this watered down and less compliance heavy obligation will be strong enough to provide critical protection for consumers. The responsibility placed on providers to ensure the advice they give is ‘good’ is deemed to be enough to lead them to ensure this outcome despite the seemingly endless case studies of the Royal Commission demonstrating the deeply ingrained cultural inability of many of Australia’s largest institutions to do so, despite spending many hundreds of millions of dollars trying. Again, one must ask what has changed since the Report was released three years ago.
Another key proposal is to remove general advice from regulation under the AFSL regime, though ordinary consumer protection laws (such as the ban on misleading and deceptive conduct) still apply. General advice is any advice about or recommendation of a financial product which does not take into account an individual’s personal circumstances. Currently, providers must be licensed, comply with disclosure and licence requirements like training requirements and standards of conduct such as to provide financial services efficiently honestly and fairly. This is another significant regulatory reform u-turn and one which seems to fly in the face of the post-Royal Commission loss of trust in the financial services industry. Social media ‘finfluencers’ are a major concern of the regulator at present with their reach and ability to drive behaviour without appropriate safeguards or disclosure. Theoretically, if the existing consumer protection laws are not effective against the methods used by these individuals this reform could potentially lead to an increase in less scrutinised financial advice becoming ever more prevalent on social media.
Other perhaps unforeseen recommendations include:
- allowing superannuation funds to provide personal financial advice to their members about their investments in the fund with discretion as to how to charge for that advice and by a reference to the good rather than “best interest” advice standard;.
- more generally (i.e. not limited to superannuation funds), removing the requirement for annual fee disclosure statements from all providers and allowing advice providers to obtain annual written consent to deduct ongoing advice fees from a financial product. This is despite the fact that fees and commissions were a big part of the Royal Commissions’ focus and criticism and the driver for multiple remediation programs;
The closing date for submissions of feedback and comments is 23 September 2022. Watch this space for update.
