QAR recommendations not inconsistent with FoFA reforms

It is hard to believe that some in the financial advice sector have come out to say they were opposed to the QAR from the start. How can that stance be in the best interests of the advice profession? Who could possibly disagree with the removal of fee disclosure statements, removing the mandatory obligation to provide long and complex advice documents and the other reforms that will improve the efficiency of the financial advice process and administration obligations.

Unfortunately, too many people look for conspiracies and problems, rather than opportunities. With the risk of the QAR recommendations being bogged down with unnecessary and inaccurate negativity, we should focus our advocacy attention on achieving a package of obvious quick win solutions that will deliver material improvements for financial advice clients. We need to find a range of recommendations that we can all get behind and then later progress the recommendations that are more complex, where the concerns about client detriment are strongest.

The key reforms that should be in that priority list of quick wins include:

1. The removal of fee disclosure statements and rationalisation of fee consent.
2. Removal of the mandatory requirement to provide advice documentation.
3. Redefine the Best Interests Duty and remove the Safe Harbour steps.

There are other important reforms, like design and distribution obligations (DDO) reporting and Financial Services Guide (FSG) disclosure that could easily be thrown into this package, however, these are the key ones to get started on.

There is the serious risk of pushback on some of these, and particularly political and “consumer group” claims about “trashing” some of the key Future of Financial Advice Reform. The important reality that we must explain is that none of these QAR recommendations would amount to the removal of any of the key Future of Financial Advice (FoFA) recommendations. Let me explain this.

Fee disclosure statements

The FoFA reforms were first announced by Chris Bowen, the Minister for Financial Services, Superannuation and Corporate Law on 26 April 2010 in response to the 2009 Ripoll Inquiry. Importantly, the first announcement in April 2010 by Chris Bowen, included a proposed obligation for an annual renewal of client fee arrangements. At that stage, there was no requirement to do fee disclosure statements (FDS). It wasn’t until a year later, when on 28 April 2011, the new Minister, Bill Shorten, announced some important changes to the proposed FoFA reforms. In that package, it was announced that “after extensive consultation with stakeholders, the government has decided to amend the opt-in policy, so that retail clients will have to agree (by opting in) to ongoing advice fees every two years”. This was to be supplemented with an annual fee disclosure statement. FDSs were not part of the original FoFA reforms and were only added as a compromise with the industry to reduce the frequency of renewal from annual to every two years. Of course, under FoFA, opt-in only applied to new clients post 1 July 2013.

Much of this changed when the Hayne Royal Commission recommended annual renewal and adding the additional obligation of fee consent for all fee-paying clients. Thus, we now have annual renewal, which was part of the original FoFA reforms, where it is extended to all fee-paying clients. The removal of FDSs takes us back to a place that is more consistent with the original FoFA proposal, however, with the application to all clients and the fee consent obligations, it goes much further than the FoFA reforms.

What we all know is that the cost and complexity of FDSs was seriously underestimated at the time of the FoFA reforms. There were some estimates at that time that opt-in would only cost $11 per client per year. The cost of FDSs and opt-in has turned out to be many multiples of that. Issues have emerged with FDSs, including timing and taxation complications, resulting in small differences that invalidate the FDS. This was highlighted in 2019 in ASIC Report 636 on Compliance with the fee disclosure statement and renewal notice obligations, where the Australian Securities and Investments Commission (ASIC) actually expressed an expectation that financial advisers would need to log “into the product issuer or product platform website or portal to check when fees were deducted from each client’s account”. As an exercise to complete for each client covering each payment of fees, this was a substantial and incredibly inefficient obligation, that disappointingly was not fixed as part of the implementation of the Hayne recommendation. The cost to do FDSs now must be in the multiple hundreds of dollars. Who pays for the cost to do this? Obviously, the cost is ultimately borne by clients, and do they value what they get in FDSs? No, they don’t, and they already get reporting on advice fees through regular product statements. This is a no brainer, and FDSs should go as a matter of priority.

Advice documentation

The requirement to prepare a statement of advice was a Financial Services Reform Act initiative dating back to 2001. This was not a FoFA reform, so there can be no FoFA argument against this. While the Corporations Act places a heavy reliance on disclosure, research by ASIC in Report 632 questions this reliance and suggests that it should not be the default. Clearly, long and complex statements of advice are not good for consumers and a different solution needs to be found.

Best Interests Duty and Safe Harbour

While the original QAR proposals talked about removing the legislated Best Interests Duty (BID) and relying upon the obligation in the Code of Ethics, the final report recommended retaining a Best Interests Duty, however refining it to rationalise the requirements and to remove any confusion that currently exists. Importantly, Michelle Levy clearly set out that the current BID is part of a set of four obligations, including the appropriate advice obligation, the warning where information is incomplete or inaccurate and the obligation to prioritise the interests of the client. We now have nearly 10 years of experience with the BID, so a sensible review of it is long overdue. The QAR report does a good job of explaining the current complexity in how these different obligations apply, how it works in practice, and the risk of how it is interpreted by the courts.

The removal of the Safe Harbour is a key part of this QAR recommendation, and something that was also suggested by Commissioner Kenneth Hayne. Recommendation 2.3 of the Hayne Royal Commission included the following statement on the BID Safe Harbour: “Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.”

With Hayne’s support behind the removal of the BID Safe Harbour, it was essential that it was carefully reviewed with a recommendation for its removal unless there was a clear reason not to. Michelle Levy definitely didn’t find any reason to keep it. The practical reality was that the Safe Harbour was only ever set up as an option for advisers to follow. It was and never should have been mandatory, however, that is how it turned out in practice. ASIC class order [14/923] introduced the requirement to document and retain records to prove actions taken to comply with each of the seven steps of the Safe Harbour. ASIC Report 515 and the subsequent enforcement activity against the large licensees took this obligation to a completely new level. The focus had switched from an option to demonstrate compliance with BID to a lengthy checklist and significant additional obligations around compliance. One of the biggest issues with the Safe Harbour is Section 961B(2)(g), which requires advisers to “take any other step that, at the time the advice is provided, that would reasonably be regarded as being in the best interests of the client”. This is so open-ended, that it never fitted as part of a safe harbour. Advisers never felt safe with this step. Some of the reactive groups have fought hard over the years to retain this catch-all provision, however hopefully with the support of Commissioner Hayne, it might now disappear.

The problem with the BID and Safe Harbour has been highlighted in a number of ASIC reports on advice quality, where the overall compliance failure rate has been quite high, but the number of clients where there was a risk of detriment has been relatively low. For example, in the December 2019 ASIC Report 639 on advice provided by superannuation funds, less than 50 per cent of the files were deemed compliant, but only in 15 per cent of cases was there any risk of client detriment. This highlights how the Safe Harbour is driving complexity and complications that are not reflective of client detriment. It has become extremely expensive to comply with and the cost is ultimately passed on to clients. The time has come to treat financial advisers as professionals and allow them to demonstrate professional judgement, rather than expect them to follow lengthy checklist processes and document everything, simply in order to endavour to prove compliance.

Some will argue that allowing non-relevant providers to operate under a good advice obligation is somehow sacrificing the Best Interests Duty. In reality, much of this advice is going to replace what was previously done as general advice, where there was no Best Interest Duty or anything like it. In any case, that is a more complex matter and not part of our quick wins proposal.

Conclusion

As I have asserted above, the QAR reforms do not do anything to remove or “trash” the FoFA reforms. They simply take into account the reforms that have come since FoFA and seek to leverage the learnings and make these regulatory obligations more efficient for clients. This will ultimately lead to a reduction in the cost of advice, which is beneficial for all Australians.

There are strong arguments to suggest that there would be no losers in these reforms and for those who argue that it goes against the FoFA reforms or any other crucial consumer protection, which is simply not the case, and there is a bucketload of evidence to demonstrate this.

We need to move now and get behind a package of quick wins to take advantage of the important opportunity presented by the QAR reforms. Now is the time for the advice profession to get behind this. With the merger of the AFA and the FPA locked in, we can now collectively get behind a package of QAR quick wins. Now is the time to make this happen and get behind it.

Philip Anderson, chief executive officer at Association of Financial Advisers (AFA)