Top QAR recommendations revealed

The final QAR report has been made public, but advisers will have to wait a little longer for the Minister’s assessment of Michelle Levy’s final recommendations.

In a statement on Wednesday, Mr Jones said: “We thank Michelle Levy for her work in leading this review and producing a detailed and valuable contribution”.

Referring to the report as one "containing options" to get the industry "working better for all Australians", Mr Jones said: “Anyone with an interest in financial advice should read it and make their views known”.

Regarding next steps, Mr Jones revealed that the government will now consult widely on the review’s recommendations.

“We want to see an industry with strong professional standards that’s accessible for more Australians and look forward to hearing views on achieving that goal”.

The final report contains 22 recommendations.

The recommendations include:

Recommendation 1 – Personal advice

According to Ms Levy, the definition of personal advice in the Corporations Act 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.

“Personal advice means financial product advice prepared or adjusted for or directed to a particular client in circumstances where: a) the client tells the provider of the advice their financial situation or one or more of their objectives or needs; or b) the licensee responsible for the advice, or a related entity of the licensee, if the licensee is a body corporate, holds information about the client’s financial situation or one or more of their objectives or needs,” the report reads.

Recommendation 2 – General advice

The QAR suggest that general advice should continue to be a financial service, but the requirement for a general advice warning to accompany general advice should be removed.

Recommendation 3 – Relevant providers

Ms Levy has suggested the Corporations Act should be amended to provide that personal advice must be provided by a relevant provider where: a) the provider is an individual; and b) either: i) the client pays a fee for the advice; or ii) the issuer of the product pays a commission for the sale of the product to which the personal advice relates.

“In all other cases, personal advice can be provided by a person who is not a relevant provider”.

Recommendation 4 – Good Advice Duty

“A person who provides personal advice to a retail client must provide the client with good advice,” the QAR reads.

Good advice, according to Ms Levy, means personal advice that is, at the time it is provided:

1. a) fit for purpose having regard to:
2. i) if the advice is:

1) given in response to a request, question or inquiry from the client, the purpose of the client that the provider is aware of or should reasonably be aware of; or

2) volunteered by the provider, the reason the provider reasonably considers the advice might be of use or benefit to the client;

1. ii) the scope, content and nature of the advice; and

iii) the likely relevant circumstances of the client; and

1. b) in all the circumstances, good.

If the advice is provided by a financial adviser (relevant provider), this duty applies to the financial adviser, however, in all other cases this duty applies to the AFS licensee, Ms Levy explained.

Recommendation 5 – Statutory Best Interests Duty

The existing best interests duty and related obligations (the duty to give appropriate advice assuming the best interests duty is satisfied, the duty to warn the client if the advice is based on inadequate or insufficient information and the duty of priority if there is a conflict) should be replaced with a new statutory best interests duty, Ms Levy has recommended.

“The new best interests duty would be a true fiduciary duty that reflects the general law and will not include a safe harbour. This duty will apply only to financial advisers (relevant providers)”.

Recommendation 6 – Superannuation advice

“Superannuation fund trustees should be able to provide personal advice to their members about their interests in the fund, including when they are transitioning to retirement,” Ms Levy wrote.

In doing so, trustees will, however, be required to consider the member’s personal circumstances, including their family situation and social security entitlements if that is relevant to the advice.

“Superannuation fund trustees should have the power to decide how to charge members for personal advice they provide to members and the restrictions on collective charging of fees should be removed”.

Recommendation 7 – Deduction of adviser fees from superannuation

This recommendations states that 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.

Recommendation 8 – Ongoing fee arrangements and consent requirements

According to this recommendation, the current provisions which require a provider of advice to give a fee disclosure statement to the client, to obtain the client's agreement to renew an ongoing fee arrangement, and the client’s consent to deduct advice fees should all be replaced.

“Providers should still be required to obtain their client's consent on an annual basis to renew an ongoing fee arrangement, but they should be able to do so using a single ‘consent form’,” the QAR reads.

The consent form is expected to explain the services that will be provided and the fee the adviser proposes to charge over the following 12 months.

The consent form is also expected to authorise the deduction of advice fees from the client's financial product and should be able to be relied on by the product issuer.

Recommendation 9 – Statement of advice

The requirement to provide a statement of advice (or record of advice) “should be replaced” with the requirement for providers of personal advice to retail clients to maintain complete records of the advice provided and to provide written advice on request by the client, Ms Levy wrote.

Clients are expected to be asked whether they would like written advice before or at the time the advice is provided, and a request for written advice is required to be made before, or at the time the advice is provided.

According to this recommendation, this requirement would not apply to a person who is currently exempt from the requirement to provide statements of advice (e.g. a person who provides personal advice about general insurance products).

ASIC is expected to provide guidance on how advice providers may comply with their record-keeping obligations.

Recommendation 10 – Financial Services Guide

“Providers of personal advice should either continue to give their clients a financial services guide or make information publicly available on their website about the remuneration and any other benefits the provider receives (if any) in connection with the financial services they provide and their internal and external dispute resolution procedures (and how to access them),” recommendation 10 reads.

Recommendation 11 – Consent requirements for wholesale clients

According to QAR, the Corporations Act should be amended to require a client who meets the assets and income threshold and who has an accountant’s certificate to provide a written consent to being treated as a wholesale client.

It’s recommended that the written consent contain an acknowledgment that is given before they are provided with a financial product or service that:

• the advice provider is not required to be a relevant provider and accordingly they will not have to comply with the professional standards;
• the advice provider will not have a duty to give good advice or to act in the best interests of the client under the Corporations Act;
• the advice provider is not required to give the client a product disclosure statement or financial services guide; and
• the client will not be entitled to complain about the advice under the AFS licensee’s internal dispute resolution procedures or to AFCA.

Existing consent requirements for sophisticated investors are also expected to be amended to require a written acknowledgement in the same terms.

Recommendation 12 is split into 12.1 and 12.2, both of which relate to Design and Distribution Obligations.

The first one says that the DDO should be amended in the Corporations Act to limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers.

“Where personal advice is provided by someone who is not a relevant provider, the AFS licensee should, like any other distributor, be required to comply with the distribution obligations,” Ms Levy said.

Recommendation 12.2 explains that in amending DDO in the Corporations Act, the requirement for relevant providers to report significant dealings outside the target market to the product issuer should be removed. As should the requirement to comply with the additional reporting obligations specified by the product issuer in the target market determination, and to report to the product issuer where there have been no complaints during the specified reporting period.

“All providers of personal advice (including relevant providers) will need to report the number of complaints received during a reporting period (if there have been any), as well as a description of the nature of these complaints to the product issuer,” this recommendation reads.

Recommendations 13.1, 13.2, 13.3, 13.4, 13.5, 13.6

Among the next batch of recommendations, Ms Levy argues that the conflicted remuneration provisions in the Corporations Act should be amended to explicitly provide that both monetary and non-monetary benefits given by a client to an AFS licensee or a representative of a licensee are not conflicted remuneration.

13.2 reads: “Remove the exception in section 963B(1)(d)(ii) and 963C(1)(e)(ii) of the Corporations Act and replace it with a specific exception that permits a superannuation fund trustee to pay an AFS licensee or its representative a fee for personal advice where the client directs the trustee to pay the advice fee from their superannuation account”.

The next recommendation relates to removing exceptions for benefits given by clients for issue, sales or dealings in financial products.

According to QAR, if the recommendation that permits benefits (monetary and non-monetary) given by clients to an AFS licensee or a representative is accepted, the following exceptions to the conflicted remuneration provisions are no longer required and should be removed:

• section 963B(1)(d)(i) of the Corporations Act – monetary benefits given by the client for the issue or sale of a financial product;
• section 963C(1)(e)(i) of the Corporations Act – non-monetary benefits given by the client for the issue or sale of a financial product; and
• regulation 7.7A.12E of the Corporations Regulations – monetary benefits given to the provider by a retail client in relation to the provider dealing in a financial product on behalf of the client.

Under recommendation 13.4, Ms Levy’s believes the government should remove the exception for the issue of financial products where advice has not been provided in the previous 12 months.

Recommendation 13.5 points out that the exception for benefits given to agents or employees of Australian authorised deposit-taking institutions should be removed from the Corporations Act, while recommendation 13.6 advises the government to undertake a separate review of time-sharing schemes and their distribution to determine whether the regulatory framework under Chapter 7 of the Corporations Act is appropriate.

Recommendation 13.7 – Life insurance

Under this recommendation, Ms Levy has advised the government to retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product.

“Commission and clawback rates should be maintained at the current levels (60 per cent upfront commissions and 20 per cent trailing commissions, with a 2-year clawback)”.

According to Ms Levy, a person who provides personal advice to retail clients in relation to life risk insurance products, who receives a commission in connection with the issue or sale of the life risk insurance product, must obtain the client’s informed consent before accepting a commission.

This consent, she explained, should be recorded in writing and should be obtained prior to the issue or sale of the life risk insurance product.

In order for the client to make an informed decision, the advice provider must disclose the following: the commission the person will receive (upfront commission and trail commission) as a per cent of the premium; and the nature of any services the adviser will provide to the client (if any) in relation to the life risk insurance product (such as claims assistance).

Consent, Ms Levy confirmed, will be one-off and apply for the duration of the policy.

Recommendation 13.8 – General insurance

Under this recommendation, the QAR reviewer similarly said, “retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a general insurance product”.

“A person who provides personal advice to retail clients in relation to a general insurance product who receive a commission in connection with the issue or sale of the general insurance product, must obtain the client’s informed consent before accepting a commission,” the QAR reads.

Consent will not be necessary for any renewals of the same type of cover provided the client’s original consent applied to the commission payable on any renewed cover.

The advice provider would be required to disclose details of the commission the provider will receive for the issue or sale of the general insurance product (including for subsequent renewals) and any services the provider will provide to the client (if any).

Recommendation 13.9 – Consumer credit insurance

Regarding consumer credit insurance, Ms Levy again said: “Retain the exception to the ban on conflicted remuneration for benefits given in relation to consumer credit insurance”.

According to the QAR, the current cap on commissions in relation to consumer credit insurance (of 20 per cent) should continue to apply.

“A person who provides personal advice to retail clients in relation to consumer credit insurance who receives a commission in relation to consumer credit insurance must obtain the client’s informed consent before accepting a commission”.