“Banks are likely to use ‘free’ advice as a loss leader to attract potential customers into their ecosystem.”
The practice of financial institutions selling their own managed funds or insurance products under the guise of financial advice was criticized by the Hayne Royal Commission and its elimination was a key driver for the introduction of the best interest obligation of fiduciary type.
The concept of “good advice” could be particularly tricky in assessing the environmental, social and governance (ESG) merits or otherwise of a particular investment, Dr. Humphery-Jenner said. His comments come as debate has raged among superannuation trustees since Treasurer Jim Chalmers called on them to support social and environmental causes last week.
But the academic added that he agreed with the premise that “financial advice rules can be unnecessarily complex” and that “the amount of regulation increases costs”. He also noted Ms Levy’s caveat that it might be appropriate for the best interests obligation to remain in place for certain forms of complex advice or where a commission is paid.
The document presented 12 proposals revising 20 years of law reform, after concluding that the regulations had created a “significant obstacle” for ordinary workers to receive advice.
Its centerpiece was to replace existing obligations, including the duty to act in the best interests of clients introduced by the Labor Party in 2012, with an overriding duty to “give good advice”.
The move was criticized by consumer groups and financial advisers in a joint statement. “We have serious concerns,” said CHOICE chief executive Alan Kirkland. “If the government removes the best interests obligation, as this report proposes, we will be back to the bad old days.
“The review’s proposals to weaken consumer protections will fuel a revival of vertical integration, making it easier for big banks and super funds to use their data to sell products to existing customers.”
Financial Counseling Australia CEO Fiona Guthrie lamented that the best interests obligation is consumers’ “only bulwark” against bad advice, while Gerard Brody of the Consumer Action Law Center said Australia should not “no turning back” on the principles of consumer protection.
“Reduce costs for consumers”
But industry representatives said incentivizing new forms of digital and affordable advice would have many benefits for consumers – only 10% of whom currently receive professional advice.
“Encouraging more financial advice providers into the market is what will reduce costs for consumers,” said Financial Services Council chief executive Blake Briggs. “The industry should welcome a regulatory framework that encourages all participants to provide good quality advice.”
The FSC has been one of the strongest proponents of cutting regulatory bureaucracy and improving consumer access to advice. It is understood that only a handful of its members – retail fund managers, super funds and life insurers – still provide advice to consumers since the royal commission.
The big four retail banks have closed or sold most of their financial advisory businesses since 2018, as part of their broader exit from the wealth management sector.
But Commonwealth Bank chief executive Matt Comyn has indicated Australia’s biggest bank would be willing to provide forms of digital advice if regulations were relaxed, telling the Australian Financial Review Banking Summit in May that the Australia would ‘regret’ wealth sector reform.
AMP Counseling Director Matt Lawler said the report indicated he was encouraged by proposals to simplify counseling processes and use technology to provide counseling to more people.
“The consultation paper acknowledges what we and many in the financial advice profession have been saying for some time, that excessive regulation has had a serious impact on the ability of advisers and licensees to deliver a service accessible and affordable to Australians,” he said. .
Financial advisers themselves were split on the proposal, with many celebrating the removal of red tape on social media, but others worried that a return to harmful practices could damage the sector’s still shaky reputation.
“Consumer Protection Basis”
Association of Independently Owned Financial Professionals director Peter Johnston, which lobbies on behalf of smaller wealth management firms not aligned with banks or fund managers, said product providers should not be encouraged to provide advice.
“[The proposals are] not in the best interests of consumers and create a pathway for institutions to re-enter the market with conflicting digital and/or vertically integrated advice,” Johnston wrote to members on Monday.
He argued against the conclusion that super funds should be able to provide advice to members paid by collective members, arguing that this amounts to charging a “no-service fee”.
Phillipa Hunt, director of Artemis Financial Services and a trained psychologist, said the proposals would also improve the mental health of some practitioners.
A survey conducted by Ms Hunt and business broker Steve Prendeville earlier this year revealed widespread poor mental health among peers in the consulting industry.
“The stress created by this level of waste compliance has caused companies to hire staff just to chase customer forms and signatures,” Ms. Hunt said.
Ashurst partner Hong-Viet Nguyen, a specialist in financial regulation, said a “good advice” requirement could have benefits in theory. “If designed appropriately, [it] should reduce the regulatory costs of financial advisors and help reduce the cost of financial advice to consumers,” said Ms. Nguyen. “However, with any reform, the devil will be in the details.”
If removed, it could create regulatory inconsistency given that mortgage brokers became subject to a best interests obligation following the royal commission, she added.
Regulatory consultant Brett Walker, a former investigator for ASIC’s predecessor, the Australian Securities Commission, said scrapping the best interest requirement would be “too high a price” for affordable financial advice.
“Best interests are the foundation of consumer protection,” Walker said. “By all means remove the tote bag of best interest requirements within the safe harbor… But let the best interest duty be the advice quality test”.
‘Safe, compliant and affordable’
Craig Keary, Asia-Pacific head of digital advice provider Ignition Advice, said he was “confident” that software advice provided by financial institutions could be “safe, compliant and affordable” for consumers.
“We have argued ourselves that financial institutions, including super funds, are logical and trusted entities to provide retirement advice to their members, especially given the complexity of the retirement system,” said Mr Keary.
Mercer associate Tim Jenkins, who authored the Actuaries Institute’s submission to the Levy Review, said bolstering “intra-fund advice” with super funds would be in the interests of members.
“The funds will be able to provide information and advice in a cost-effective and accessible way without the burden of existing personal advice legislation,” he said.
Financial Services Minister Stephen Jones said financial advice regulation as it stood “didn’t suit anyone”, but any changes had to “strike the right balance” between cutting red tape and protecting consumers.
The Treasury will consult on the proposals until September 23. The Levy Review is due to make its final recommendations by December 16.