Simple advice definition crucial as NCAs take shape

David Barrett, an independent consultant and technical advice specialist, said there is a “tension” between the introduction of the new class of adviser (NCA) and the government’s decision not to move forward with the proposed good advice duty.

“This level of advice was intended to be at this good advice duty level,” Barrett told ifa.

“I think there’s a tension in the government not going ahead with the good advice duty, and yet still implementing this secondary level of advice, which is intended to be about simple concepts and simple advice, whatever that might mean.”

In addition to proposing a new statutory best interests duty exclusively for financial advisers, independent chair of the Quality of Advice Review (QAR) Michelle Levy had backed the imposition of a separate “good advice duty” under recommendation four of her final report.

This new obligation, which she recommended be enshrined in the Corporations Act, would have applied to all providers of personal advice to retail clients, and was, according to Levy’s earlier comments, the crux of the QAR.

Levy argued that implementing a duty of good advice could effectively reconcile the conflict between the two obligations currently confronting super funds – a duty to act in the best interests of the members as a collective, and the duty to act in the best interests of individual members.

But in delivering the government’s final response to the QAR, Financial Services Minister Stephen Jones said that “Australians deserve the best, not just good”, putting a clear full stop on the good advice debate.

In an update on the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms earlier this month, Jones clarified that NCAs will be restricted to providing advice on products issued by “prudentially regulated entities”.

“They will be prevented from providing advice on more complex topics, such as establishing a self-managed superannuation fund or advising on a managed investment scheme, through a blacklist to be prescribed in regulations,” Minister Jones said.

“This will allow these advisers to focus on simple topics that most Australians would benefit from more information on. It will also ensure that there is a clear boundary between the new class of adviser and professional financial advisers.

“It is the government’s vision that the new class of adviser serves as one entry point to rebuild the financial advice profession, and the government remains committed to reforming the broader education pathways for financial advisers.”

However, exactly what this simple advice will look like is still murky.

“What is simple advice and what’s not is yet to come, and that’s going to be critical,” Barrett told ifa.

“What an [NCA] can advise on will be dictated to, I imagine, by the definition of what’s simple advice and what’s not simple advice, and then that simple advice will still be subject to a best interests duty, but then the best interests duty is being revised to try and make it clear that scaled advice can be given.

“In a lot of ways, I think you sort of end up pretty close to a good advice duty when you look at that. So, we don’t know what the best interest is going to look like, we don’t know what simple advice is going to be.”

In his announcement, Minister Jones did note that the government aims to “modernise the best interests duty by providing legal clarity that will allow advice on single or limited scope issues if this meets the client’s needs”.

Again, however, there is not yet draft legislation that details how this will be delivered.

The scaled advice ‘perception problem’

According to Barrett, there is a “perception problem” around scaled advice, with the government and regulator believing the rules are clear yet that’s not holding up in reality.

“The starting point for this is understanding where we’re at in the industry at the moment,” he told ifa.

“It seems to be more of a perception issue than a reality. A lot of the government comments – and ASIC has a regulatory guide that spelled out how to provide scaled advice, so the regulator and government don’t seem to think there’s a problem.

“But it’s come out of a conservative approach across the industry in general, especially from the large licensees that have these compliance teams that have come in and tend to be very conservative in their interpretation, because they’re so scared of getting a rap over knuckles from the regulators.

“You have this idea that maybe practice doesn’t align with what the intention in the legislation was in the first place, and the regulator and government is around the current legislation. So you know, how do you solve for that?”

Barrett added that there are also issues around the Code of Ethics and providing scaled advice if an adviser does not understand their full circumstances.

“If you have a look at the guidance around the Code of Ethics, it suggests that although you can have scaled advice – and it’s pretty clear scaled advice is OK – a financial adviser subject to the Code of Ethics if you’re going to give scaled advice, you’ve got to be clear that it’s in the client’s best interest to provide advice on that particular issue as a priority,” he said.

“So, if you identify something that should be prioritised before what the client’s actually asking for, you’re under a duty to provide advice on that first, and that then sort of loops you back that you need to understand the client’s full circumstances in order to be able to prioritise what the client needs versus what they’re asking for when they walk in the door to seek advice.”

In order to get around this sticking point, Barrett said there would need to be a rethink of the interpretation of the Code of Ethics as well as the best interests duty.

“Removing the safe harbour steps is a really important step forward, although some would argue it’s not necessary,” he said.

“But then, clarification and maybe loosening up the best interests duty a little bit to look more like a good advice duty where as long as the clients put in a better position, then it should be OK. There shouldn’t be this idea that you need to provide the best possible and how onerous that might be.”

Whether NCAs are even subject to the Code of Ethics, Barrett added, is still a question mark that will need to be tied in with all of these considerations.

“I’m not surprised that the government’s taking a long time to work through this stuff, because it’s not easy, there’s no obvious solution that I can see. Even the drafting, revising the best interests duty itself, is a significant piece of work,” he said.