The Government’s initial response to the Quality of Advice Review

What can you do now?

Superannuation trustees

We recommend that superannuation trustees do the following:

• know your members better: the recurring theme in this reform and others is that superannuation trustees must know their members better. This may require superannuation trustees to identify and triage what data will be required in order to understand the needs and demographics of their members, in particular members approaching or in retirement and how they will obtain that data. Reporting, compliance requirements and data collection arrangements with service providers may also require amendment
• what are pain points and risks?: superannuation trustees may wish to consider the pain points or areas of risk which have been revealed in the advice industry in the past and seek to anticipate where those points or risks may emerge in the reforms. This may assist in formulating governance processes and controls to intercept those risks before they crystallise
• communicating effectively: how will superannuation funds effectively communicate with their members in providing these services and what methods of communication will be best used or preferred by members? A fund may choose to conduct research to test these methods. Once the most effective channels are identified, if they are not available, trustees may explore the time, effort and cost involved to implement these.

Advice licensees and advisers

We recommend advice licensees and advisers do the following:

• rethink advice models: while still relatively common, ongoing fee arrangements (OFAs) have fallen out of favour. The proposals remove some of the practical disadvantages for OFAs, so advice licensees and advisers should think about whether they wish to re-adopt OFA arrangements
• rethink process: the proposal to remove the safe harbour steps represents an opportunity for advice licensees to review and rethink the process for preparing advice. Licensees should start thinking now about what process will deliver complying financial advice in an efficient manner. And remember that the safe harbour steps are not mandatory, so licensees can implement these process changes even before any legislative changes
• rethink advice documents: the general consensus is that statements of advice are too long, unwieldly and not fit for purpose. But what would you do differently?  Advice licensees should think about what their clients need from advice as this will help in the upcoming consultation on advice documents.

The reforms in more detail: removing red tape

The Government has accepted (in full or in principle) several recommendations to streamline the delivery of financial advice.

Removing safe harbour steps from new Best Interests Duty

The Report recommended removing the existing best interests duty (and the associated safe harbour steps) (Recommendation 5) which applies to all who provide personal advice with a fiduciary best interests duty that only applies to financial advisers with no safe harbour steps.

The Government Response accepted in principle the removal of safe harbour steps, with consultation to determine implementation details and the implications of adopting the remainder of recommendation 5 of the Report.

The removal of the safe harbour steps would not necessarily convert the current best interests duty into a fiduciary duty and the duty would continue to apply to all who provide personal advice, including through digital tools.

Further, the duty to give appropriate advice and the duty to prioritise the interests of clients will continue to apply.

The removal of the safe harbour steps will allow advice licensees greater freedom to determine the process by which their advisers will satisfy the best interests duty based on the broad parameters of whether a reasonable adviser would believe that the client is likely to be in a better position if the client follows the advice[1]. Advice licensees could have regard to the factors listed by ASIC in Regulatory Guide 175 at paragraph 256 in designing any new processes.

The removal of the safe harbour steps will involve the removal of any statutory reference to considering the products of third-party product providers. However, advice licensees will still need to have regard to their adviser’s duty to prioritise clients’ interests in determining the products to include on their approved product lists.

In any event, it is unlikely that this change will significantly impact superannuation funds who provide intra-fund advice given that they could not satisfy the safe harbour steps in any event.

The Government will consult further on the Report’s recommendation to introduce a duty to provide good advice (see section 4 below).

Advice disclosure and consumer consent

The Government has accepted in full the following recommendations:

• consolidate the ongoing fee renewal and consent requirements into one form and remove the requirement to provide a fee disclosure statement (Recommendation 8). If implemented this means that members will sign one form, which contains an explanation of the services provided and the fee proposed to be charged over the following 12 months and
• provide flexibility regarding how financial services guide requirements can be met, including providing that information on a personal advice provider’s website (Recommendation 10).

It will be interesting to see if the industry moves again towards multiple year fee agreements in light of the removal of fee disclosure statements which was one reason why many moved away from such agreements.

The Government did not accept the Review’s recommendation to remove the obligation for written advice documents and replace them with enhanced record keeping obligations. Instead, it has determined in principle the following:

• replace Statements of Advice (SoAs) with an advice record that is more fit-for purpose, with consultation to determine the final design of the replacement (Recommendation 9) and
• standardise consumer consent requirements to classify a consumer as a wholesale or ‘sophisticated client’ (Recommendation 11).  

Accordingly, written advice documents will continue to be required, if in a different form. This likely means that current audit and compliance checking processes can broadly continue, although advice documents may need to be redesigned. Advice licensees may also need to consider how to educate clients on finance concepts if the advice document cannot satisfy this purpose.

Conflicted remuneration

The Government has accepted in full the following recommendations regarding exemptions to the ban on conflicted remuneration:

• clarify that monetary or non-monetary benefits given by a client to an Australian Financial Services (AFS) licensee or representative of a licensee are not conflicted remuneration, along with the removal of consequential exceptions (Recommendation 13.1 and 13.3). This means that the prohibition on AFS licensees, or their representatives accepting monetary and non-monetary benefits only applies to benefits given by a product issuer, not benefits given by a client
• remove the exceptions to conflicted remuneration rules for:
  • the issue of financial products where advice has not been provided in the previous 12 months (Recommendation 13.4) and
  • agents or employees of Australian Authorised Deposit-Taking Institutions (Recommendation 13.5) and
• introduce standardised consumer consent requirements for life, general and consumer credit insurance commissions, which require informed consent to be obtained prior to accepting a commission (Recommendations 13.7-13.9).

The Government will defer consideration of the recommendation to remove the exception to conflicted renumeration as part of a broader review of time-sharing schemes until after the completion of Treasury’s review into the regulatory framework of Managed Investment Schemes (Recommendation 13.6).

These changes will provide much welcome certainty to existing industry practices.

Expanding access

Scope of and collective charging of fees for intra-fund advice

The Government has accepted in principle the removal of restrictions on collective charging of fees (Recommendation 6), which will effectively allow superannuation trustees to provide advice on more topics under an intra-fund advice facility, including retirement income advice. It has also indicated that it is still considering the scope of the advice that superannuation trustees will be allowed to provide. Superannuation trustees should consider what additional topics may be available to cover and relevant to their members, whether they are in a position to begin offering these and what additional training or educational standards may be required for their personnel delivering such intra-fund advice.

At least at this initial stage, there will be no change to the personal advice / general advice dichotomy. So those trustees providing an intra-fund advice facility under a general advice model can continue to do so.

In the Response, the Government has noted that this recommendation will tie in with industry consultation on the other proposals (discussed below).

The Response makes no reference to changing the sole purpose test. If no changes are made, it might be expected that the sole purpose test will continue to act as a limit on the topics for intra-fund advice.

Deduction of adviser service fees from superannuation

The Government has accepted in principle the amendment of the deduction of advice fee provisions in the Superannuation Industry (Supervision) Act 1993 (Cth) (Recommendation 7). This amendment will allow a trustee, at the direction of the member, to deduct advice fees (including ongoing advice fees) from a member's superannuation account and pay the advice fees to an adviser. This is limited to personal advice provided to the member about the member's interest in the fund.

As discussed in our prior alert, trustees will need to consider the appropriate governance arrangement to comply with the sole purpose test and to manage the risk of being implicated in a fee for no service arrangement. Further, they will need to determine how advice fees provided within the superannuation environment interact where they are bundled with other holistic advice services provided outside of super. 

In the Response, the Government noted that legal clarity around current practices for payment of adviser services fees will be provided.

Exploring new channels

Finally, the Government intends to explore expanding the provision of advice by other institutions (eg banks, insurers) by consulting industry and consumer stakeholders on recommendations to:

• broaden the definition of personal advice
• remove the general advice warning
• allow non-relevant providers to provide personal advice
• introduce a good advice duty and
• amend the Design and Distribution Obligations.

Other consultation topics

The Response noted that this consultation will also finalise implementation details for:

• the design for the replacement of SoAs
• the implementation details and implications of adopting remain parts of recommendation 5 (statutory best interests duty)
• the Financial Adviser Code of Ethics and
• expanding access to affordable retirement advice.

What now?

The Government intends to issue its final response on the Delivering Better Financial Outcomes package later in 2023, which should cover their position on the remainder of the Report recommendations. After further industry consultation, draft legislation is expected in to be released later this year or in early 2024. The Government intends to consider the remaining recommendations, including the ‘good advice’ proposal, later this year.