Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
Advice review outcome a boon for consumers, not just advisers: SMSF Association
The shift from a proscriptive regulatory framework under the Corporations Act to a more principled approach under the Code of Ethics for advisers should facilitate better consumer outcomes, says Neil Sparks, SMSF Association head of membership and corporate development.
“There is much in the Quality of Advice Review (QAR) that will benefit the professional advice community, but what has been overlooked, to some degree, is how it will be positive for the consumer,” Sparks said at the recent SMSF Association Technical Conference on The Gold Coast.
“Under the current legislative regime, the Best Interest Duty (BID) in the Corporations Act defines the broad obligation that advisers must meet to fulfil their professional duty towards their clients – and complying with the seven Safe Harbour Steps is typically how advisers can demonstrate that they have met their BID obligation.”
But the Safe Harbour steps are proscriptive. It’s all about what advisers can’t’ do, not what they can do. What’s needed is a legislative environment that encourages them to use their professional judgment to make the best decision for their clients.
Michelle Levy made this exact point in the QAR final report and it’s one the Government has partly accepted by agreeing to eliminate the Safe Harbour Steps from the BID. Levy reinforced this message in her own recent address to the SMSF Association Technical Summit by again telling the Government that the reforms needed to go further and allow advisers to be encouraged to use their professional judgment to benefit clients.
There are still participants in his debate that believe the proscriptive approach is the best approach, with their point of argument being the litany of abuses detailed in the Financial Services Royal Commission. What they forget to add is that Justice Kenneth Hayne, in his final report, recommended that the Safe Harbour Steps be repealed.
Hayne mounted a convincing argument that Safe Harbour was a form-over-substance approach to advice, and if abolished would compel advisers to focus on the quality of their advice rather than a compliance checklist.
Sparks says: “Assuming the Safe Harbour steps are scrapped and advisers meeting their ethical obligations under the Code of Ethics becomes the industry norm, it will mean an industry where advisers will be focussing on the best financial outcomes for their clients.
“Independent financial advisers – the cornerstone of the advice industry – will be able to use their specialised knowledge, skills, experience, and discretion in making decisions or evaluating information to benefit their clients and not have to engage in a box-ticking exercise.”
In this advisory climate, it will make client meetings more meaningful exercises as they will be able to get advice on specific issues, releasing advisors from the responsibility of having to give comprehensive advice for fear of failing the Safe Harbour Steps and being in breach of the BID.
Certainly, it won’t impar the importance of the client file. Under principles-based regulation and the Code of Ethics, it will still be needed to demonstrate that advisers have exercised their duty of care towards clients. But instead of the file being a box-ticking exercise of the Safe Harbour Steps, the test will be whether an adviser’s advice and recommendations have improved the client’s financial wellbeing.
The Government is moving quickly with Stream 1 of the reforms that focus on removing the regulatory red tape that increases the cost of advice without consumer benefit. These reforms will make it easier for advisers to serve the increasing demand of baby boomers entering retirement to access affordable and professional financial advice.
Sparks concludes: “The Levy reforms are a step in the right direction to addressing this situation as they will simultaneously make advice more affordable, thereby benefiting the consumer.”
