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‘Good advice’ duty suits lawyers & product issuers more than advisers

As romantic as it may be to proclaim the emergence of an advice profession and to suggest that a 'good advice' duty is a panacea for systemic failures, the retreat of institutional licensees from advice is not necessarily evidence of our capacity for self-regulation.

George Satanaya famously observed that “those who cannot remember the past are condemned to repeat it”. It’s a particularly relevant observation for the Advice Quality Review but I’ll offer another to those advisers expecting to immediately welcome a brave new world of unfettered activity: “Be careful what you wish for.”

There’s little doubt that Michelle Levy’s focus on advice will provide some incidental benefits to advice professionals, but it’s important to recognise that personal advice is the most expensive, and least efficient, channel for product distribution. If increasing the accessibility and affordability of advice is the dominant purpose of the review, then industrialised advice processes based on replicable interactions must be preferred over direct, intimate and human contact.

Even presuming the best of intentions, one of the critical failures of the review seems to be the unwillingness to accept context or recognise the intent and purpose of earlier reforms. The current regulatory framework did not emerge, fully formed, from the brow of Treasury but was constructed, incrementally and deliberately, in response to a series of advice and product failures, systemic misconduct, unfettered conflicts and industry dysfunction.

  • As compliance professionals, we have always focused on quality over compliance but, in our extensive practical experience, quality is a function of intent, process and outcome. As Commissioner Hayne recognised, our industry’s preference for deifying process undermined professionalism and created a punitive and box-ticking compliance culture. Prioritising process over intent and outcome may have retarded the emergence of an advice profession, but to entirely reject the importance of process would lead to a similarly sub-optimal outcome (and one perhaps more detrimental to predictability and consumer confidence).

    We’ve always been strong advocates for principles-based regulation, but it’s naïve to ignore the reality that businesses react to equivocal regulation (with significant consequences for non-compliance) with conservatism, risk-aversion and timidity. While competent participants’ fear of regulatory sanction might be irrational, it’s pervasive, undeniable and their resultant pursuit of certainty led to increased complexity and compromised principles.

    Unless we address these undeniable realities, any reform will simply repeat the cycle.

    As romantic as it may be to proclaim the emergence of an advice profession and to suggest that a ‘good advice’ duty is a panacea for systemic failures, the retreat of institutional licensees from advice is not necessarily evidence of our capacity for self-regulation. Progress has been made, and progress will continue to be made, but we need to embrace a measure of self-awareness and acknowledge the work still to be done.

    I admire the ambition of Ms Levy’s proposals but acknowledge the consequences and implications of their implementation. Even assuming the government would (over the opposition of consumer groups and licensees) choose to entirely invalidate the conclusions and recommendations of the Hayne Royal Commission, these changes would reduce efficiency, increase uncertainty and simply provide the means for institutions to reclaim their dominance of the advice industry. The, admittedly clumsy, parameters that currently assist advisers to provide appropriate (and compliant) advice will be replaced with even vaguer principles which the Courts, and ASIC, will refine over time.

    Although Ms Levy has rejected incrementalism as the solution to complexity and conservatism, I’d recommend more targeted reforms.

    Firstly, implement Commissioner Hayne’s recommendation that we immediately remove the safe harbour steps which are not only counter-productive but also the single largest contributor to the cost of providing advice.

    Secondly, remove the prescribed form and content of advice documents.

    Thirdly, and most importantly, revise the statutory penalties for non-compliance and create a broader safe harbour for licensees and advisers whose contraventions occur despite their due care and diligence, disinterest in the outcome and rational and informed judgement. Serious fraud, misconduct and systemic failures still need to effectively addressed but this can be done without the punitive penalties associated with almost every conduct obligation.

    For those cynics that suggest that self-interest colours my view, let me assure you that as a financial services lawyer I believe that many of Ms Levy’s proposed recommendations (particularly those in respect of good advice, general advice and relevant providers) will suit lawyers and product issuers far more than advisers. Rebranding and combining current obligations into a single ‘good advice’ obligation is no improvement at all.

    The law does need to be simplified and improved, but progress cannot be built on a denial of history, a rejection of context and the convenient ignorance that prescribed processes were the result of our own failures and our demands for regulatory certainty.

    Sean Graham

    Finance Journalist. Advocate. Presenter. 20+ years in financial services law, compliance and risk management. Passionate about advice, reg-tech, professionalism, culture and conduct.

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