AFRM Referral Partner Update - 6 July 2022
AFRM's position on Quality of Advice Review…
The deadline for submissions to Federal Treasury’s Quality of Advice Review fell on 3 June 2022.
As a specialist risk advice practice, AFRM was asked to provide its views on the future regulation of the financial advice sector to be incorporated into formal submissions to Treasury.
Pending any news to the contrary from the new Federal Government we can only assume the Review will continue.
The Quality of Advice Review was established as part of a process designed to ensure Australians “have access to high quality, affordable and accessible financial advice.”
It is part of the previous Government’s response to recommendations 2.3, 2.5 and 2.6 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).
The then Government released the terms of reference on 11 March 2022, submissions were invited from all stakeholders, including consumers, industry, and regulators and a report is scheduled to be provided to Government by 16 December 2022.
Significantly, paragraph 2.4 of the Terms of Reference stated that the Quality of Advice Review would consider:
“Whether parts of the regulatory framework have in practice created undesirable unintended consequences and how those consequences might be mitigated or reduced.”
I think it would be fair to stay that many of us across the industry share the view (at least informally) that the 2014 Future of Financial Advice (FOFA) industry changes, coupled with the Life Insurance Framework (LIF) changes introduced in 2017, “have in practice created undesirable unintended consequences.”
Namely, negatively impacting the affordability and accessibility of risk advice to consumers. These onerous regulatory requirements compounded by the educational requirements from the now defunct FASEA have resulted in an exodus of financial advisers from the industry, which I commented on in my June Referral Partner Update.
As I noted then, the brunt of the adviser exodus is happening in the Risk Advice market niche.
Anyway, back to the Quality of Advice Review. For the sake of transparency, I am sharing with you here a summary of the key points of the submission drafted for AMP.
First, given we are operating in an era of ethics-based principles, we confessed to being conflicted in our submission because any move to scale back regulation – even if the primary intent is to improve the accessibility and affordability of financial advice for consumers – would naturally also benefit AFRM.
We argued that any measures to scale back regulation should incentivise the provision of risk advice across the sector including both niche (such us risk) and generalist financial advice practices.
We qualified this recommendation by saying that any “incentivisation” should be carefully considered and planned to avoid the mistakes of the past.
We also argued that risk advice is a niche specialisation that requires specialist knowledge, skills sets and ongoing effort to remain up to date in what is a complex industry. We suggested it is a discipline that cannot successfully be “dabbled” in.
This specialisation is the basis of the value proposition we deliver to you, our referral partners, who entrust their clients with AFRM for risk advice and service.
In our submission we contended that any regulatory change for the industry needs to balance accessibility, quality of advice and consumer protection.
In short, we said our preference would be to adopt Risk-specific compliance obligations, separate from Financial Planning, in conjunction with specific education, training and experience requirements, to ensure quality risk advice from providers who already have “skin in the game.”
We argued that the biggest impediment to providing more advice to more Australians in our business, using our current resources, are the layers of compliance that exist due to Best Interests Duty (BID) obligations, as detailed in Australian Securities and Investments Commission’s (ASIC) REGULATORY GUIDE 175 - Licensing: Financial product advisers—Conduct and disclosure.
BID is onerous on risk advice providers for the following reasons:
BID requires advisers to meet a checklist of steps in order to meet what ASIC describes as its “Safe harbour for complying with the best interests duty.” Paragraph RG 175.278 of the document details the seven steps an advice provider must undertake to ensure they have achieved that “safe harbour,” Most significantly, the seventh and final step in reality is a broad “catch-all” statement that adds layers of compliance requirements for Licensees and AFSL Lawyers seeking to cover risk due to its vague nature. It states: “(g) take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances: s961B(2)”
As a result of this requirement, significant numbers of pages are added to client Statement of Advices (and the client file itself) for the sole purpose of justifying that our actions meet this “BID” compliance requirement.
From a consumer point of view, BID is not a good fit to Risk advice in the sense that at the end of the day a client’s final decision to proceed almost always comes down to a cost/benefit decision ‒ the price versus the dollar amount of insurance cover the client gets. The current compliance framework does a poor job of understanding this and tries to prescribe a simplistic black and white (compliance steps) approach to what is a kaleidoscopic spectrum of potential solutions which make up the client experience. The legislation dictates that we take all our client’s raw information upfront, crunch the data and come back with the “right” answer. There is little scope at present to engage clients through a broader advice journey, working through different scenarios ‒ to do so, may fall foul of the law. Usually, we would work through the different potential scenarios with the client after our advice is presented. However, under the current regulatory regime, much time (and cost) has been wasted in the interim. Legislation that promotes a consultative approach with clients, that allows them to make informed decisions, would go a long way to improving accessibility, affordability and client engagement within Risk advice.
On this last point, we agree with the view recently attributed to Association of Financial Advisers (AFA) CEO, Phil Anderson, there are alternative ways to simplify and clarify best interests duty for advisers that don’t involve a complete repeal of the safe harbour steps.
Accordingly, we made the following formal recommendations for a new risk advice industry framework:
Risk advice should be separated from Financial Planning as a stand-alone profession with a separate regulatory framework. Remove the current Best Interest Duty requirement to be replaced with regulations akin to pre-FOFA Appropriate Advice obligations;
Implementation of a tailored risk advice Code of Ethics based on the pre-existing FASEA Code of Ethics.
A principles-based standard of behaviour and professionalism that allows for more professional judgement and supplements the separate Risk advice regulatory framework;
As part of the Code of Ethics, risk advice providers should have relevant education, experience and expertise to advise.
To be clear, the proposed amendments to regulatory standards outlined above should not be considered a return to the “old days” but rather be viewed within the context of a framework mandating modern educational standards, a Code of Ethics, a reduced level of conflicts of interest and standardised / capped remuneration models that did not exist in the “old days.” After all, the industry must make positive progress if it is to thrive.
We believe the current compliance framework is restrictive in terms of not allowing advisers flexibility to work with clients to arrive at the right outcome for the individual client in a client-friendly way. In this way the industry actually regressed.
Determining what advice is “appropriate” for an individual is subjective and depends upon that person’s circumstances. A range of recommendations are theoretically possible - and potentially appropriate. The important thing is to give the client all relevant information and a level of control in their decision making to arrive at a decision that is appropriate for them.
At present BID seeks to treat risk advice recommendations as purely quantitative and objective. That is, if all advisers collect the same information they should end up with the same answer, regardless of the client’s individual circumstances and whether or not the adviser is a risk specialist or a generalist adviser.
We know that this is never the case and that the provision of quality advice is more art than science, with a range of options each being potentially appropriate for a client, depending upon that client’s individual personal priorities and preferences. It is time the compliance framework recognised this.
AFRM Managing Director.
Due to some unforeseen circumstances we do not have a case study finalised this month, however glancing over at our wins board in the office I can see a couple of hard-fought claims cases which finalised in the last couple of weeks.
Not large sums in terms of dollars, but I know these claims meant a lot to the people involved. We hope to share more with you in the coming months.