Posted 2 November, 2022
By Stephanie Lloyd
With submissions having closed on 23 September 2022, countdown has commenced for delivery of the Treasury’s final report for the Australian Government’s Quality of Advice Review. The final report is due 16 December 2022, with the financial services sector and other affiliated industries keenly awaiting the Treasury’s findings and recommendations.
The Quality of Advice Review
Regulation of financial advice has been a noteworthy topic for discussion, arising from the 2009 inquiry into Financial Products and Services by the Parliamentary Joint Committee on Corporations and Financial Services, and later, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
On 29 August 2022, the Treasury released its Proposals Paper summarising its preliminary findings, concerns, recommendations, and inviting submissions to be made by the public.
By that paper, the Treasury opines that:
- the distinction between what constitutes personal and general advice is uncertain;
- falling from that uncertainty, is excessive legal risk. That is, it was discovered providers of financial advice adopted a conservative, scripted approach in an effort to circumvent the advice falling within the bounds of ‘personal advice’ (from which the regulatory requirements would attach);
- the consequences of such conservative advice are those worn by the consumers, with financial institutions reluctant to provide customers helpful personal advice; and
- as a result, the “current framework is a significant impediment to accessing financial advice”.
 Australian Government Treasury, Quality of Advice Review (Proposal Paper, 29 August 2022), p 4.
In the Treasury’s view, those concerns can be readily extinguished with the implementation of a principles-based approach to regulation.
Current State of Regulation
Regulation of financial advice originates from the definitions prescribed by the Corporations Act 2001 (Cth) (Act). Section 766B of the Act sets out an exhaustive definition of what comprises ‘financial product advice’. Falling out of that service, are a number of stringent obligations which turn on whether that advice is personal or general in nature. Personal advice and general advice are each separately defined in the Act.
Broadly speaking, professionals:
- must provide (when providing personal advice to retail clients):
- product disclosure statements;
- a financial services guide; and
- a statement of advice and various warnings.
- are prohibited from participating in conflicted remuneration structures (such as commissions and volume-based payments); and
- are subject to a duty to act in the ‘best interests’ of their clients, subject to a ‘reasonable steps’ qualification.
The consequences of failing to comply with such obligations are highlighted in the recent decision handed down by the Federal Court of Australia in Australian Securities and Investments Commission v Dixon Advisory & Superannuation Services Ltd  FCA 1105, from which Dixon Advisory was penalised $7.2 million for breaches of the best interest obligations both by virtue of the process and substance of the advice.
In an effort to address the concerns falling from the existing state of regulation, the Treasury makes 12 key proposals.
The regime should regulate the provision of ‘personal advice’, with a revised definition intended to expand the scope of advice captured:
‘Personal advice’ is a recommendation of opinion provided to a client about a financial product (or class of financial product) and at the time the advice is provided, the provider has or holds information about the client’s objectives, needs or any aspect of the client’s financial situation.
General advice should no longer be regulated as a financial service, with the definition being removed altogether. In the Treasury’s view, general financial advice is appropriately captured by:
- section 912A(1)(a) of the Act; and
- consumer protection provisions provided for at Division 2, Part 2 of the Australian Securities and Investments Commission Act 2001 (Cth).
An obligation to provide ‘good advice’ should be imposed. ‘Good advice’, is advice that would be reasonably likely to benefit the client, having regard to the information available to the provider at the time of the advice.
A provider of personal advice must be a ‘relevant provider’ (as that term is defined in the Act) where:
- the provider is an individual;
- the client pays a fee for the advice;
- the provider (or the provider’s authorising licensee) receives a commission in connection with the advice; and
- there is an ongoing advice relationship between the adviser and the client, or the client has a reasonable expectation that such a relationship exists.
Superannuation fund trustees should be able to provide personal advice to their members about their interest in the fund. In doing so, the trustees would be required to take into account the member’s personal circumstances.
Superannuation fund trustees should have discretion to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed.
Superannuation trustees should be able to pay a fee from a member’s superannuation account to an adviser for personal advice provided to the member about the member’s interest in the fund on the direction of the member.
Fee disclosure statements should not be required. Providers of personal advice should obtain annual written consent from their client to deduct advice fees from a financial product if there is an ongoing fee arrangement. The consent form should explain the services that will be provided and the fee the adviser proposes to charge over the course of the following 12 months.
Providers of personal advice to retail clients would be required to maintain complete records of the advice they provide and to provide a written record of advice to a client on request. This would replace the existing requirement for advisers to provide a statement of advice or record of advice.
Providers of personal advice should either continue to give their clients a copy of the financial services guide or make information available to their clients on their website about their remuneration and other benefits they receive, their internal dispute resolution procedures and AFCA.
The reporting requirements under the design and distribution obligations regime should be simplified by requiring relevant providers to only report to the product issuer where they have received a complaint in relation to a product.
There should be an adequate transition period for implementing these changes. Consideration should also be given to allowing providers to ‘opt in’ early.
Whilst the current state of regulation remains in place, providers of financial services ought remain cognisant for the anticipated reforms. Should they come to fruition, the financial advice sector will change significantly.
Providers of financial advice are recommended to seek legal advice regarding the implications of the proposals for their services, in the interests of establishing appropriate risk management protocols.
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Note: This document contains only a general summary of the legal principles relevant to its subject matter and is not intended to be used or relied upon as legal advice. The application of the legal principles discussed may vary depending upon the particular circumstances. Cowen Schwarz Marschke Lawyers take no responsibility for any loss suffered as a result of a person relying on this paper.