Benefits of super prompt advice carve outs ‘questionable’: Allens

When Financial Services Minister Stephen Jones announced that draft legislation for the next tranche of the Delivering Better Financial Outcomes (DBFO) was finally ready – albeit a truncated version – much of the attention was on the expansion of collective charging for super funds and the client advice record.

What wasn’t included – the best interests duty modernisation, safe harbour removal, and the new class of adviser – also garnered wide-ranging coverage and discussion.

Flying somewhat under the radar was the other superannuation-related measure, which allows greater leeway for trustees to deliver nudges to members, though they are now phrased as “targeted superannuation prompts”.

According to the draft bill’s explanatory materials, the amendments “clarify that a recommendation or statement of opinion that is contained in a targeted superannuation prompt that meets all the legislative requirements, is not classified as personal advice”.

Essentially, these actions are carved out from the other legislative requirements for the delivery of personal advice.

“Such advice is therefore subject to the requirements in relation to the provision of general advice, and will satisfy the requirements relating to general advice if the relevant requirements under the new Division are complied with,” the EM added.

Specifically, the bill inserts a new division into the Corporations Act (exactly what that document needs) that:

• sets out the components of a targeted superannuation prompt;
• creates consumer protections in relation to developing and giving targeted superannuation prompts; including assessment and record-keeping obligations for trustees;
• enables members to elect to not receive targeted superannuation prompts for a specified period of time;
• creates obligations on trustees to monitor the effects of the targeted prompts superannuation trustees send out; and
• provides ASIC with the ability to declare that certain trustees cannot provide targeted superannuation prompts.

However, according to law firm Allens – of which Quality of Advice Review lead Michelle Levy is a partner – “it is questionable whether it will provide any useful relief even to superannuation trustees”.

“The QAR recommended that more financial product advice be treated as personal advice. The purpose was to improve the quality of advice provided to consumers by requiring providers to use the information they had about their customers when they gave them financial product advice,” wrote Allens partner Simun Soljo.

“By using that information they would be in a better position to provide their customers with good advice. This was the second limb of the recommendations designed to improve the quality of advice available to consumers.

“Instead, the bill will provide a new exception to personal advice for superannuation funds providing members with 'targeted superannuation prompts'. If the new requirements for such prompts are complied with, personal advice given through the prompts will be treated as general advice.”

Soljo explained that it appears the new requirements are intended to help super trustees comply with the retirement income covenant (RIC), pointing specifically to the need to be able to prompt a “class of members entering the retirement phase that they should consider annuitising a portion of their balance”.

“But trustees will not be able to refer to a specific product – even if they offer members access to a specific annuity product through their fund. Members will need to work out what products are available on their own,” he said.

The prompts are also able to cover the settings of a member’s existing interests in the fund, including contributions, insurance cover, rates of payment of income streams or changing investment options.

“There are prescriptive requirements trustees will need to comply with to come within the exception – in particular they will need to have a written 'assessment framework' which complies with certain process-driven requirements before sending prompts, and will need to give new statements and warnings likely in the form of a long disclaimer,” Soljo added.

“Superannuation prompts will need to be 'appropriately targeted', but this will require them to be aligned with the 'assessment framework' rather than being intended to achieve any particular outcome for members.”

This is an area that Financial Advice Association Australia (FAAA) chief executive Sarah Abood highlighted as an issue, explaining that the bill requires trustees to develop a framework for that can “target groups of members” for suitable advice.

“While there’s a list of characteristics given that could be used for cohorting (such as age, income, home owner status, relationships status etc), the reality is that super funds generally don’t hold much of this information on their members,” Abood said.

According to the CEO, this important and costly area is one in which professional advisers provide the most value, through helping clients pull together all of the information necessary to build a “comprehensive picture” of their current position and future goals.

“Cohorting members based on anything other than age is going to be very difficult for super funds to achieve at present, without the support of a dedicated data collection function – across, for some funds, millions of members – which would presumably be collectively charged,” Abood said.

Referring to the financial services royal commission final report, Soljo said the proposed exception for prompts “goes in the opposite direction” of commissioner Kenneth Hayne’s recommendations to reduce the amount of carve outs.

“While it might be welcomed by some trustees, it complicates the existing rules by providing piecemeal relief for one sector and only in limited circumstances,” he said.

“Given the restrictions, it is questionable whether it will provide any useful relief even to superannuation trustees. It also might make other providers worry about ASIC's existing guidance that advice providers 'can use personal information about a client to give general advice that is more relevant to a client' without this being treated as personal advice (RG 244.47).

“Other product issuers whose clients and customers might equally benefit from 'prompts' will have to continue to grapple with the existing law under which a prompt may be classified as personal or general advice, or merely as information.”