Around a year in the making, it appears Michelle Levy’s Quality of Advice Review continues to divide a financial services industry eager for meaningful reform.
The idea of an independent review was first put forward in the Hayne Royal Commission, to look into the effectiveness of measures to improve the quality of financial advice. Despite a change in Government, it continued on and was submitted to Minister for Financial Services, Stephen Jones, in mid-December 2022.
Much of the final recommendations put forward by Levy were in-line with ideas explored in the first issues paper in March and the proposals paper in August.
In fact, throughout the process, Levy would remain consistent and transparent about prioritising the review’s end-goal of helping consumers over supporting advisers, digital advice providers, and other players in the industry.
“Despite all the regulatory reforms that are intended to improve the quality of advice, it continues to be poor and consumers say they can’t get the advice they want,” Levy said in a speech just days before the review’s publication.
She added the current regime’s prescriptive laws had “not only [made] jobs harder but are an impediment to accessible and affordable advice and which detrimentally affect the quality of advice”.
What were the recommendations?
The report, which was 267 pages, contained 22 specific recommendations to improve accessibility and affordability of advice.
The one immediately welcomed was the removal of Statements of Advice (SOA) requirements. Instead, Levy advocated for advisers to “maintain a contemporaneous record” of advice provided and give the client a written record if requested.
The Financial Planning Association of Australia (FPA), which had long advocated for more client-friendly approaches to advice documents, welcomed the recommendations.
“The FPA has been working with members for many years on improving ways to deliver advice, including innovative and more client-friendly initiatives such as video Statements of Advice (SOA),” stated Sarah Abood, FPA chief executive.
“These changes would allow financial planners to speed up the advice process and give consumers more relevant information, also offering the real potential to meaningfully reduce the costs involved in providing advice.”
HUB24 CEO, Andrew Alcock, was in agreement, stating: “Streamlining disclosure documents is a game changer for advisers. It reduces complexity, alleviates confusion for consumers and makes it easier to deliver advice”.
A second was that superannuation fund trustees would now be able to provide personal advice to their members about their interests in the fund in addition to funds being able to pay the fee for personal advice provided from a member’s super account, on the direction of the member.
“It’s simply not possible for the current regulatory framework to support the amount of advice Australians need and want, in the way they want it provided,” Aware Super CEO Deanne Stewart, admitted.
“The Levy report provides the blueprint needed to unlock advice for all Australians and for the industry to think differently as to how to best help and advise their members.”
Regarding digital advice, Craig Keary, CEO Asia Pacific at Ignition Advice, held a positive outlook on its potential role which had been supported by Levy as a way to improve accessibility of advice.
“Levy concludes that the provision of digital advice does not require specific regulation or specific regulatory changes but is inherent in the drive towards ‘good advice’,” he stated.
“Rather, the ability to provide widespread digital advice is an outcome of the recommendation that a ‘good advice’ duty applies to any person or institution providing advice, including digital advice tools, rather than being an individual financial advice construct.
“By implication it is clear that financial institutions – banks, super funds, insurers etc – can use digital hybrid models today, rather than wait for any changes to the regulatory framework. By allowing financial advisers to use digital advice tools, they will be able to serve many more customers, at much lower cost, than has been possible in the past.”
It was recommended the definition of personal advice should be broadened so that all financial product advice will be personal advice if it is given to a client in a personal interaction or personalised communication by a provider of advice who has (or whose related body corporate has) information about the client’s financial situation or one or more of their objectives or needs.
In her report, Levy also proposed the introduction of a ‘statutory best interests duty’ which included a ‘duty of priority’ — favouring a client’s interests if conflicted with those related to the issuer of a financial product.
CPA Australia spokesperson Jane Rennie believed such recommendations held the consumer’s interests paramount.
“Many of the proposed changes to the way advice is provided will help improve consumer protections, including scrapping unwieldy and complex disclosures. Lumbering clients with inaccessible information does not increase their understanding or protection.
“These recommendations will help ensure clients are properly informed and empowered to make better decisions.”
The Joint Associations Working Group, which consisted of 13 financial services industry associations like the FPA, Financial Services Council, and The Advisers Association Ltd (TAA), agreed it was “time to think differently”.
A second look at insurance commissions
The report also stated there were benefits of retaining commission for life insurance while admitting it could result in lower-quality advice for consumers.
Presently, there were numerous monetary and non-monetary benefits that were excluded from conflicted remuneration for benefits given in connection with the issue or sale of an insurance product.
Levy recommended life insurance commissions and clawback rates should be maintained at the current levels (60% upfront commissions and 20% trailing commissions, with a two-year clawback). A consent form should be provided to clients in which the provider must disclose the commission as a percentage of the premium and the nature of any services the adviser will provide to the client in relation to the product. This consent would be one-off and applied for the duration of the policy and only applicable to life risk products.
To this, Kent Griffin, MLCL Life Insurance managing director, said: “Life insurance through default superannuation is effective and efficient, but rising levels of indebtedness, particularly due to increases in property prices, mortgages and rising interest rates mean default group cover is unlikely to have kept pace and members should be able to access advice which responds to their needs on an affordable basis”.
It was also welcomed by the Council of Life Insurers (CALI), a group representing 19 life insurers, who said it stood ready to work with the Government on the reforms.
How long until the recommendations could be implemented?
The recommendations were designed to complement one another and should be viewed as a package, Levy had stated.
Some of the measures such as charging arrangements, disclosure documents and reporting requirements could commence with only a relatively short transition period.
Once relevant legislation was enacted, she expected transition periods on the super and insurance-specific recommendations would not be extended either and would be able to “commence shortly”.
However, recommendations around personal advice, good advice duty, best interests duty, would require significant adjustments to industry systems and processes and could take longer to implement.
Not a rosy picture for all
Although many in the industry welcomed Levy’s brave vision, not all parties were happy with the drastic changes.
Criticism for Levy’s recommendations came from within the financial services industry itself, with the Association of Independently Owned Financial Professionals (AIOFP) taking aim at the elimination of best interests duty.
It argued that Levy’s definition of good advice as that which “would be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided” would not be in consumers’ best interests.
“We think institutions should receive a strictly-worded legislated carve out where internal staff can discuss internal products with consumers and the government should not capitulate to pressure from the institutional lobby and their aligned associations,” said Peter Johnston, AIOFP executive director.
“We are the first to agree that institutions should be allowed to have trained internal staff explaining/advising on their own internal products with consumers, it makes sense. But in order for this to happen, the Corporations Act needs to be changed to accommodate best advice and eliminate best interests.”
Lifespan Financial Planning, one of Australia’s largest privately-owned financial advice networks, highlighted deeper scrutiny was needed of the proposed changes that could lead to unqualified people giving personal advice.
“Under the recommendations, anyone, including employees of banks, super funds and product providers who currently provides general advice to existing clients, would be deemed to be providing personal advice and so would be subject to a higher standard having to satisfy a ‘good advice’ test and show that the advice was fit for purpose and relevant to the client’s needs,” Lifespan CEO Eugene Ardino said.
“However, the risk and possible downside is that there will be scope for unqualified people to give personal advice. We’ll need to work through as to what standards and restrictions would apply to those who are not relevant providers and are able to provide personal advice under QOA recommendations.”
What next?
Seven weeks after receiving the report, Minister Jones released the Review for public viewing in early February, thanking Levy for producing a “detailed and valuable contribution”.
However, he was yet to confirm which recommendations would be formally implemented and it is understood he is likely to conduct expert analysis to ‘stress test’ the recommendations.
As the industry waits with bated breath, the Albanese Government would have to decide whether to implement all the recommendations, some of them, or reject them altogether.
One would hope Jones’ vision for the future of the industry is one that’s not afraid of purposeful change.
To ensure advice is available to Australian’s the proposals related to ‘charging arrangements, disclosure documents and reporting requirements’ most stakeholders agree they should commence quickly. With regard to life insurance commissions as they are the same for all products, conflicts of interest are minimised and manageable. In The Advisers Association’s submissions, we believe they should be increased to 80%. As a minimum, they should remain where they are at 60/20%, ideally with a one-year responsibility period.