Lawyers recommend QoA stress tests for consumer outcomes
Lawyers have recommended proposed scenarios under the Quality of Advice Review be stress-tested pre-implementation to ascertain the possible consumer outcome.
In its submission, the financial services committee of the Law Council of Australia welcomed the proposals put forward by the Quality of Advice Review as it believed it simplify and streamline the regulatory regime.
However, it suggested stress testing any alternative framework for the possible consumer outcomes and whether they would be better off.
“There are plenty of examples of widely reported cases of consumer harm that involved financial advisers, some of which are referred to in this submission,” it said.
“The FS Committee recommends that some of these scenarios should be ‘stress tested’ under any proposed alternative regulatory framework to see whether the outcome for the consumer would be better, worse, or the same if the relevant conduct was to occur under proposed new rules.
“If the consumer outcome would be worse under any proposed new rules, then this would suggest that they are too ‘light touch’ and therefore not appropriate.”
Meanwhile, law firm Herbert Smith Freehills said it disagreed with the proposal to change the definition of personal advice.
“Whilst we understand and appreciate the desire to reduce regulatory uncertainty, we consider that the proposed changes to the definition of ‘personal advice’ will lead to unintended consequences and inequalities in the way advice is regulated.
It acknowledged the change would make it less onerous for a product issuer to cross the ‘personal advice’ line, it felt there was merit in retaining the distinction between the different types of advice.
“Whilst we see merit in reducing regulatory uncertainty, we are concerned that general marketing by a product issuer would be seen to be giving ‘personal advice’ to some clients but not to others. Moreover, the same conduct when carried out by a party that is not a product issuer may not be regulated as financial product advice under Proposal 2.”
It also suggested modification of the term ‘general advice’ so it would only apply to general advice provided to wholesale clients. If it was de-regulated to retail clients as well, this could expose vulnerable consumers to harm such as endorsements by finfluencers.
The Law Council of Australia said it supported the definition changes which would reduce regulatory uncertainty but said it did not believe it would address uncertainty that arose from other information asymmetries which could subsequently lead to bad advice.
“However, the FS Committee does not believe that it will address the uncertainty that arises from other information asymmetries such as circumstances where an adviser’s organisation holds personal information about a client that may or may not be out of date and may be materially incomplete, or where the individual adviser dealing with the client may or may not be aware of all the information relating to the relevant client which the organisation holds. These information asymmetries risk making the advice bad advice rather than good advice.
“The other risk is that while financial institutions can provide more personal advice to consumers, the advice is bad advice because of the out-of-date or materially incomplete information held by the institution.”
AUTHOR
Laura Dew
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So the FS Committee recommends that some of these scenarios should be stressed tested.
The question remains which ones ?
If from the very start a client who says I want my money to last in retirement for the next 30 years but you know they are a "Conservative" investor.
Are you at fault for saying that in order for your money to produce x% return you are going to have to move out of your risk tolerance as a "conservative investor. That means in order to get a higher possible return, you have to take more risk.
If you do that and we have the current scenario where not only are clients subject to "on paper" losses together with draw downs does that stress test then determine through hindsight that the adviser shouldn't have put that client in that position before the current market chaos.
Conversely if the adviser accepted that the client might not withstand a huge market drop in asset values and took the "conservative" path where the client was still withdrawing y% to live, plus" on paper" asset losses albeit not to the same extent, again with hindsight, is the adviser at fault for the clients position if you apply a stress test after the event.
Perhaps the answer lies in the fact that not every client has the same level of tolerance to risk and financial planning advice is not an exact science.
It would be foolhardy for an adviser to put a client into a particular product that was not suitable for the clients level of risk, even if it was on their APL.
You may well argue that if the potential downside risks were pointed out before the client accepted the recommendation.
I suspect that ASIC would not absolve the adviser of responsibility for the recommendation.
Get these lawyers the hell OUT of advice. They have the most inefficient business model, think they know everything and stick their snouts in every trough they can find. We already spend half our lives getting useless signatures thanks to Hayne. Just get rid of them.
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