Stephen Jones has finally announced the government’s much anticipated plan for implementing the Quality of Advice recommendations.
In an address to the Association of Superannuation Funds of Australia, the Minister announced that the government accepts 14 of the 22 QAR recommendations in full or in principle.
The industry has already responded, generally positively, to the Minister’s announcement. In particular, there’s been celebratory headlines farewelling FDS.
We agree that there’s much to be positive about in the government’s plan so far.
But we’re also wary that, while we’re getting closer to the finish line, there’s still a way to go.
Two important things to note
There were two things that stood out to us about the Minister’s speech.
First – the Minister is taking a consumer-centric view on reforms. This means changes to process will be about simplifying things from a consumer’s point of view, not simply to make processes easier for advisers.
Of course, in many cases, it will make things easier for advisers too.
But when it comes to changes to processes like fee disclosure, it likely means that the requirement to disclose fees and obtain your clients’ consent will remain.
This is because it’s important for clients to understand what they’re paying for. The process, however, will change. In the Minister’s words, it will be ‘streamlined’.
Secondly – we know from (at times painful) experience, that the devil is truly in the detail. The Minister said legislation will ‘come in the second half of 2023 and early 2024.’
Until we have the legislation, we won’t know exactly how the changes will unfold.
For now, we know that some recommendations have been accepted in full, others have been accepted ‘in principle’.
- We expect that recommendations that are accepted in full will likely look very much like Levy’s recommendations in her report.
- The recommendations that are accepted ‘in principle’ leave greater scope for consultation and re-scoping in the final legislation.
While we wait to hear more, we wanted to provide a quick summary of what we know so far.
Three streams of work
Jones outlined three streams of work to implement the QAR recommendations.
This division of work in some ways make things seem simpler than they are.
For one thing, the streams cover not only the 14 recommendations that are accepted, but also the remaining 8 – none of which have been categorically ruled out.
The streams are also interrelated. Even stream one, which covers most of the so-called ‘quick wins’, will require some degree of further consultation.
So what does each stream cover?
Stream 1 – Removing red tape
The first stream is intended to focus on issues with the existing process of giving advice.
Safe harbour – Recommendation 5 – Accept in principle
The government supports removing the ‘safe harbour’ steps from the Best Interest Duty. However, implementation details and the implications of adopting the remaining parts of recommendation 5 will be considered in consultation.
The remaining part of recommendation 5 suggests replacing the BID with a statutory fiduciary duty. We have discussed the implications of this in a previous news story. In short, Levy’s report suggested a ‘true fiduciary duty’, meaning advisers can’t have conflicts of interest, can’t obtain an unauthorised benefit (including fees) without fully informed consent, and would have to recommend the ‘best product available’.
Ongoing fee renewal and consent requirements – Recommendation 8 – Accept in full
The government supports removing the existing FDS, but this doesn’t mean consent requirements will be removed.
The requirements will be ‘streamlined’.
This recommendation has been accepted in full. Therefore, based on Levy’s report, we can assume that the new requirements will involve a single, annual consent form which covers the fees to be charged in the following 12 months, but removes the requirement to reconcile the fees charged in the previous 12 months.
SOAs – Recommendation 9 – Accept in principle
SOAs will be replaced with ‘an advice record that is more fit-for-purpose’. The Minister actually used the word ‘something’ in his speech, so this one obviously has a way to go.
The final form of the ‘advice record’ will be considered in consultation. We think this will also have to be considered together with the changes to the safe harbour.
FSG – Recommendation 10 – Accept in full
Another ‘accept in full’, so we expect this will look a lot like Levy’s recommendation, meaning more flexibility to provide the FSG via your website.
Consent requirements for wholesale / sophisticated client – Recommendation 11 – Accept in principle
The MIS review is also considering the retail / wholesale client thresholds, so it makes sense that this recommendation is accepted in principle, but the final form may also depend on the MIS review.
Conflicted remuneration – Recommendations 13.1, 13.3 – 13.5 – Accept in full
The government has accepted in full the recommendations to:
- clarify that monetary or non-monetary benefits given by a client are not conflicted remuneration (and remove consequential exceptions);
- remove the exception for the issue of financial products where advice hasn’t been provided in the previous 12 months (such benefits will now be conflicted remuneration); and
- remove the exception for agents or employees of ADIs (these people will no longer be permitted by law to receive conflicted remuneration from their employers, in line with all other employees covered by the rule).
Time-sharing schemes – Recommendation 13.6 – Deferred until after the MIS review
Consent requirements for life, general and consumer credit insurance commissions – Recommendations 13.7 – 13.9 – Accept in full
Again, Levy’s recommendations here were accepted in full. She recommended retaining commissions for these products, but requiring advisers to obtain informed consent from their clients regarding commissions. Levy didn’t recommend a prescribed form for obtaining consent.
Stream 2 – Expand access to retirement income advice
The Minister devoted quite a bit of time in his speech to both emphasising the scope of the ‘problem’ (not enough advisers to service Australia’s retiring population), as well as the solution (super funds providing advice).
Jones called this the ‘most significant burning deck in the financial advice space’.
The government is clearly comfortable with opening the current regime to allow super funds to to provide more retirement advice and information to their members. Jones specifically mentioned the obligation on super funds to act in the best interests of their members.
However, the relevant QAR recommendations (6 and 7) were accepted ‘in principle’ and the Minister said there were many questions still to answer, including:
- What is the scope of advice that can be provided by a super fund?
- What are the education standards needed for an employee or representative?
- And how do we hold them to an appropriate duty?
Like the changes to SOAs, the answers to these questions will be considered in consultation.
Importantly, it appears this consultation will also include consultation on recommendations 1 – 4, the remainder of 5 and also 12.1 and 12.2 (DDO – as it applies to super funds). The big one here is the recommendation on the ‘good advice’ standard which remains, technically, on the table.
Given the scope of consultation required here, it seems likely these changes are more likely to come in 2024.
Stream 3 – Exploring new channels for advice
In contrast to the ‘burning deck’ of allowing super funds to provide advice, the Minister sees this stream – which considers the role of banks and other institutions (insurers) providing advice – as a much lower priority.
That said, the current wording of the government’s response suggests these issues will be consulted on at the same time as the consultation on the super funds, the appropriate duty for advisers, the form for the alternative SOA, and the remaining recommendations that have not yet been accepted.
Which makes for one heck of a consultation.
Final thoughts
The brevity of the government’s response means there are many questions still to be answered.
In our view, the first changes that will be introduced will be (possibly by the end 2023):
- FSG flexibility;
- streamlining of fee disclosure;
- changes to conflicted remuneration; and
- commission consent requirements.
The remaining recommendations – even those that have already been accepted by the government – require further consultation and / or are so interrelated with areas requiring consultation that they can’t easily be acted on separately.
Which leaves us thinking that these changes are more likely to happen in 2024.
Of course, prediction is a mug’s game, so once again we shall have to wait and see.