Home / Regulation / New best interests duty to cover broader swathe of advice service providers

In Levy's new world, conflicts and vertical integration are likely to be accommodated by a new statutory best interests duty with a broader scope and a lower, more flexible bar in an effort to bring advice to the masses.

Among the 13 recommendations made by Michelle Levy in the Quality of Advice Review, the proposal for a revamped statutory best interests duty remains the most significant area of uncertainty.

The Allens partner’s request for a “true fiduciary duty that reflects the general law”, sans the safe harbour steps, has the potential to reshape the foundations of advice provision.

But what Levy has in mind is a matter of speculation.

The lawyer makes it clear in the review that the current duty, housed in in section 961B(1) of the Corporations Act, is ill-fitting for an environment where cross-selling is an embedded part of the industry and vertical integration “is part of the answer” to getting advice out to more Australians.

The current fiduciary duty doesn’t tolerate conflicts, and demands an adviser act solely for the benefit of clients – directives that don’t scan in an advice world where firms sell their own investment products. The incongruity between regulation and practice has become even clearer since the advent of managed accounts, with firms often charging clients to use their own in-house model portfolios.

“In my view this expresses perfectly the duty that should apply to a financial adviser who is paid a fee for their advice,” Levy said in the final report. “However, it is ill-suited to an employee of a financial institution whose job it is to recommend and sell financial products on behalf of their employer.”

The current duty puts the adviser and the employee in the same bucket, Levy explained, which means the obligation is compromised. “And so,” she said, “it is not surprising that it does not work well.”

A simple fiduciary duty

“She wants to address this view that you can’t have a conflict,” comments compliance specialist Sean Graham from Assured Support.

Graham believes the ultimate regulatory fix here is likely to be a relatively simple one that involves targeting the duty at more providers. Broaden the definition of who a fiduciary is, he says, and make it less stringent so that it works for all.

“Get rid of the safe harbour provisions and change 961B(1) so it’s just not just limited to advice, it’s all service providers,” he tells The Inside Adviser. “Then you’ve got a simple fiduciary duty that applies to all.”

Yet Levy’s new statutory best interests duty will only apply to “relevant provider” advisers, not the institutions that will operate on the second tier. While she wants to broaden the scope of best interests duty to encompass advisers selling product, the lawyer doesn’t want it extending to the banks, super funds and fintechs she’s earmarked for cheaper advice provision.

In Levy’s proposed two-tier advice system, all top tier advisers, whether they sell product or not, should have a functional and applicable fiduciary duty to work with. The second tier of providers will operate outside of the best interest duty, with the new “good advice” imperative, in tandem with existing consumer law, operating as a bulwark against consumer harm.

“The current statutory best interests duty is quite prescriptive, and a new one will probably be a lot simpler and more flexible one that applies in different contexts,” says QMV Legal Solutions managing partner Jonathan Steffanoni.

The design is consistent with the rest of Levy’s advice review. Her playbook is nothing if not pragmatic, seeking to accommodate advice provision, warts and all, in an effort to make the service easier to provide and to access.

Conflicts can’t be ignored, she believes, and should be included in any regulatory reform if advice is going to be extended to the masses.