Following recommendations 2.3, 2.5 and 2.6 in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission), the Quality of Advice Review (QAR) has almost reached its conclusion, with Michelle Levy scheduled to provide her recommendations for reform to the Australian Government on or before 16 December 2022 (the Final Report).
The QAR’s terms of reference include identifying opportunities to simplify regulatory compliance obligations to reduce cost and remove duplication, identify principles-based regulations to replace rules-based constructs and simplify disclosure requirements.
A public consultation was held between 29 August and 23 September 2022 (the Proposals Paper) seeking feedback on the initial thinking behind what the reform may look like, which received almost 180 submissions in response.
The Proposals Paper follows the Issues Paper released by Treasury in March 2022 and contains 12 proposals for changes to the financial advice regulatory framework designed to improve accessibility and affordability of financial advice. Some of the key points introduced in the Proposals Paper and debated in the Public Consultation and industry commentary are explored below.
Key proposals for reform
1. Removal of general financial product advice and the general advice warning
It has been proposed that general advice should no longer be regulated as a financial service. The conflicted remuneration provisions in the Corporations Act should continue to apply to conduct that is currently regulated as general financial product advice, as should the consumer protection provisions in Division 2 of Part 2 of the ASIC Act (each of which will require amendment). The general advice warning in s.949A of the Corporations Act would no longer be required.
The rationale behind this proposal is that there is evidence that consumers do not understand what general advice is, that there is no compelling evidence that regulation of general advice benefits consumers and that good consumer outcomes can be achieved through the prohibition on conflicted remuneration and consumer protection provisions without the need for the complex financial services regulatory overlay.
Subject to this proposal remaining in the Final Report, general advice providers stand to benefit from deregulation. This may be particularly appealing to finfluencers who have endured scrutiny from ASIC over the last 18 months, with guidance being released in March 2022.
Submissions from industry groups have raised concerns around the resulting removal of access to dispute resolution schemes, while product issuers agree that consumer protection provisions are adequate safeguards in lieu of regulation. Other submissions have proposed a middle ground of deregulation of general advice that is provided to wholesale clients only but preserving the regulatory framework for general advice that is provided to retail clients.
2. Expanding the definition of personal financial product advice
One of the more topical proposals is for the definition of personal financial product advice to be expanded beyond the current definition, as clarified in the judgment in Westpac Securities Administration Ltd v Australian Securities and Investments Commission  HCA 3 (the Westpac case). ASIC’s media release regarding the judgment can be found here.
The Proposals Paper proposes that any financial product advice that is provided in circumstances where the provider has or holds information about the client’s objectives, needs or any aspects of the client’s financial situation, be regulated as personal financial product advice. In the Westpac case, the High Court dissected the definition of personal financial product advice in s.766B of the Corporations Act, having particular regard to when a provider “considers” a person’s objectives, needs or financial situation or where a reasonable person might expect the provider to have considered one or more of them. The effect of the proposed amendment is such that the test of whether personal advice is provided will be easier to apply, but personal advice will be given more often.
The proposal indicates that a relevant provider that charges a fee for personal advice will be subject to existing provisions which apply to the financial advice industry, such as minimum education standards.
Submissions have raised concerns about the potential unintended reach of this proposal. For example, where a large financial institution holds information about existing clients’ objectives, needs or financial situations (e.g., a super fund that holds relevant information about its members), any mass advertising campaign by that institution is seemingly personal advice under the proposed expanded concept. It has also been pointed out that the same mass advertising conduct by non-product issuing businesses would be deregulated under the proposed removal of the general advice concept. Further clarity is needed regarding how the expanded definition would apply in mass marketing contexts.
3. Replacing the best interests’ duty for financial advisers and amending disclosure requirements
Recommendation 2.3 from the Royal Commission required a review of the effectiveness of the measures implemented to improve the quality of financial advice, including the safe harbour steps in s.961B(2) of the Corporations Act. Commissioner Hayne was not against removal, nor supportive of retaining the safe harbour steps, although expressed the view that a “tick a box” approach to compliance had the potential to undermine broader obligations for advisers to act in the best interests of their client, whilst balancing a view that reform should consider broader regulatory changes that had been introduced (i.e. minimum education standards for financial advisers).
The Consultation Paper has proposed that the best interests obligation in s.961B of the Corporations Act be replaced with an obligation to provide “good advice”. The new obligation will require advice that is reasonably likely to benefit the client, having regard to the information available to the provider at the time the advice is provided.
This proposal has been one of the most fiercely debated. Those advocating for the best interests duty to be retained have focussed on “best” as being better than “good”, and that adopting a standard of “good” is a lessening of the quality of advice and consumer outcomes. Those advocating for the “good advice” proposal have pointed out that the best interests obligation has resulted in an overall reduction of advice provided and that “good advice” will also deliver positive consumer outcomes.
As part of the proposed reform, advisers would no longer be required to provide Statements of Advice and Financial Services Guides, although it is expected that the content disclosed in a Financial Services Guide will be retained in some form.
4. Design and Distribution obligations (DDO)
Following the reform to the definition of financial product advice, amendments will be required to the DDO to replace the provision of general advice as a trigger for retail product distribution conduct. At present, the provision of general financial product advice causes a person to be a product distributor (for those products caught by the DDO).
The Proposals Paper has also proposed simplified disclosure requirements for relevant providers, including to remove nil reporting requirements, so that reporting to product issuers is limited to complaints received.
What’s next for the Quality of Advice Review
The Final Report from the QAR is due to be submitted to the Australian Government by 16 December 2022. Overall, there has largely been support for regulatory change, with a number of submissions made with the intention of assisting the development of the reform. The recommendations in the Final Report will need to be tabled and passed through the parliamentary process before taking effect.
If you would like to discuss the implications of the proposed reforms on your business, please contact our Fintech + Web3 team.