CPD: Financial advice – 2024 regulation and compliance look ahead

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2024 sees many significant regulatory changes on the agenda for advisers, including the two tranches of QAR legislation.

Introduction

For financial advisers, 2024 promises to be another busy year from a regulation and compliance perspective. But with the government response to the Quality of Advice Review grabbing most of the headlines in the latter part of 2023 – and deservedly so – a number of other important legislative developments are likely to have dropped off the radar for many. With several of these having impending deadlines for action, this article is intended to be a primer for advisers seeking to understand the regulatory and compliance ‘big picture’ for 2024.

By being abreast of this regulatory big picture, advisers will be well placed to not only meet their compliance obligations, but to also help shape the overall regulatory framework by participating in the various consultation processes that accompany most legislative changes.

Untangling the final QAR position – 18 of 22 recommendations ultimately accepted

As all advisers would be aware, 2023 saw the long-awaited government response(s) to recommendations made by Michelle Levy in her Quality of Advice Review (QAR) Final Report.

In June 2023, the federal government announced it was happy to accept 14 of Levy’s 22 recommendations[1], largely intact, with its position on the remaining 8 to be announced later in the year. Much later in the year that clarity came, with the Minister Stephen Jones announcing a second tranche of reforms less than three weeks before Christmas[2].

Between the two ‘tranches’ of reforms, the government ultimately accepted 18 of the original 22 QAR recommendations, deciding not to move ahead with:

  • Recommendation 1 (expanding the definition of personal advice)
  • Recommendation 2 (removing the General Advice Warning), and
  • Recommendations 12.1 & 12.2 (amending the Design and Distribution Obligations).

Tranche 1 – consultations closed 6 December 2023, legislation to take effect in 2024

November saw the release of draft legislation covering the bulk of the 14 recommendations accepted in June[3].

The exposure draft – consultation for which closed on December 2023 – covered off:

  • deduction of adviser fees from superannuation
  • ongoing fee arrangements
  • flexibility for FSG requirements
  • conflicted remuneration (chiefly insurance commissions), and
  • standard consent requirements for certain insurance commissions.

Several of the recommendations expected to be covered off in this initial tranche, including those relating to SOA’s (arguably the headline recommendation in terms of red tape removal) and the removal of safe harbour steps, were held off until the second and final tranche, released in early December 2023.

With consultations now closed, and little if any change expected to the final bill, 2024 will see the government introduce the legislation into Parliament, possibly within the first half of the year, putting it well ahead of the Tranche 2 reforms (below). Once passed into law, the majority of changes are expected to take effect quite quickly. For example, the insurance commission changes will become effective 3 months after the Draft Bill becomes law[4].

Under the hood of Tranche 1 – incremental gains become meaningful in aggregate

It’s fair to say the industry was largely underwhelmed by the Tranche 1 reforms. Even the locking in of insurance commissions – arguably the headline change of that tranche – was seen as a somewhat pyrrhic victory as they were locked in at the existing 60/20 levels (seen by many as economically unviable).

However, a look underneath the hood reveals several changes which will ultimately make advisers’ lives easier by providing more clarity and removing complexity.

These ‘hidden gems’ include:

1. SIS Act amendments – charging advice costs to members

These amendments will provide greater clarity about when a super fund trustee can deduct an advice fee from a member’s account. Importantly, it clarifies that the advice must be personal advice which is partly or wholly about a member’s interest in the fund, meaning advice fees can be deducted even if some of that advice covers non-super topics (fees can only be deducted for the super-related portion). While not a new change as such, this additional clarity should mean all super funds allow advice fee deductions going forward, a change no doubt welcomed by clients and advisers alike.

2. Single Fee consent form replaces FDS and multiple consents for ongoing fees

The Draft Bill streamlines the current consent and disclosure requirements to allow for a single form, which can be relied on by advisers and product issuers as evidence of a client’s consent to paying fees under an ongoing arrangement.

3. Flexibility to provide FSG via adviser’s website

Under the draft legislation, a provider of financial advice can choose whether to continue providing a FSG in accordance with the current law or alternatively provide the FSG on their website (subject to certain criteria being satisfied). A seemingly modest change, this is just one of a series of small red tape reductions which – in aggregate – add up to significant improvements in efficiency and customer experience.

Tranche 2 – fleshing out the big ideas in 2024

The second and final tranche of reforms were announced by the government in December 2023, and after the somewhat glacial pace of its initial response, the speed with which the government made some BIG announcements about financial advice caught many by surprise.

These announcements related to its proposed approach to implementing QAR Recommendations 3, 4, 5, 6 and 9.

Unsurprisingly, the change attracting the most headlines was that relating to a new class of financial advisers, designed to ‘fill the advice gap by advising on less complex matters’[5].

Under the government’s proposal, these advisers (given a working title of ‘qualified advisers’, unlikely to see out 2024!) will be:

  • likely to be employees of a licensed institution
  • unable to receive a fee or commission for the ‘advice’ they provide
  • subject to lower educational requirements than ‘professional advisers’[6].

Perhaps the biggest surprise of all was that contrary to the labour-big super rhetoric, these changes also pave the way for banks and insurers – as well as super funds – to start providing this simplified advice to their customers.

A related change provides super funds with clarity around the types of advice they can charge members for, and creates a specific permission within general advice for them to ‘nudge’ their members.

Given the seismic and unexpected nature of some of these proposals, it is perhaps unsurprising that much less fanfare was afforded the two changes arguably with the biggest direct impact on the financial viability of advice, and the broader advice client experience:

1. Replacing Statements of Advice (SOAs) with a simpler, ‘principles-based advice record’, designed to be clear, concise, and effective, and addressing these four areas:

  • subject matter/scope
  • the advice
  • reasons for the advice
  • the cost of advice to the client and/or benefits received by the adviser.

(According to law firm Minter Ellison, ‘these content requirements are very different to the current SOA requirements.’[7])

2. The introduction of a ‘modernised and flexible best interests duty which will apply to all providers of advice’ and provide more support for limited advice:

  • existing best interests duty safe harbour steps will be removed
  • the updated standard will provide clearer legislative support for scaled or limited advice
  • requirement to provide appropriate advice will be retained.

Potential Tranche 2 timeline

The Tranche 2 proposals were released just before the end of 2023, and at the time of writing, detail is scarce.

The first step will be for government to consult stakeholders over the draft legislation, a process which – based on industry reaction to the proposals – is likely to be lengthy and widely participated in.

While Minister Jones has indicated a desire to have legislation introduced into Parliament before the end of 2024, many observers[8] are sceptical the legislation will be introduced prior to the next Federal Election (likely towards the middle of 2025).

With the potential for a change of government not as fanciful as it may have seemed several months ago, the potential for the SOA and Safe Harbour changes to be delayed and even changed again, remains a disappointing possibility.

The registration deadline – 16th February 2024 – that may surprise some advisers

Having already being extended several times already (due to delays in passing associated legislation), the deadline for Financial Adviser Registration has been set down for February 16th, 2024[9].

While this requirement has been on the cards for quite some time (being an outcome of the Hayne Royal Commission), the delayed implementation, coupled with the relatively late release of ASIC Guidance (the applicable Information Sheets were only released in November 2023) could well catch some advisers by surprise. Similarly, the use of the term ‘registration’ may contribute to confusion amongst advisers, who may mistakenly believe that being on the Financial Adviser Register, and being registered, are one and the same (they are not).

From 16  February 2024, all relevant providers must be registered before providing personal advice to retail clients about relevant financial products. This includes relevant providers who only provide advice on time-sharing schemes (time-share advisers). This does not include provisional relevant providers who cannot be registered.

The requirement for individuals providing personal advice about relevant financial products (‘relevant providers’) to be registered was introduced by the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Act 2021 (Better Advice Act) and is separate to the requirement for AFS licensees to authorise and appoint relevant providers to the Financial Advisers Register.

The February 2024 deadline is the ‘Stage One’ deadline, and requires licensees to register all relevant providers authorised by them. Stage Two – due in 2026 – will see individual advisers required to register themselves.

ASIC’s answers to the following basic questions are instructive[10]:

Q:  What is the registration requirement for relevant providers?

A: The registration requirement is an ongoing obligation and is separate to the requirement for AFS licensees to authorise and appoint a relevant provider to the Financial Advisers Register. From 1 February 2024, AFS licensees must authorise, appoint, and register a relevant provider before the relevant provider can lawfully provide personal advice to retail clients on relevant financial products.

Q: Are relevant providers already registered if they are listed on the Financial Advisers Register?

A: No. The requirement for relevant providers to be registered is a new obligation introduced by the Better Advice Act. It is separate to the requirement for an AFS licensee to notify ASIC when it has authorised a relevant provider.

Q: What are the regulatory consequences if a relevant provider gives personal advice while unregistered after 16th February 2024?

A: If a relevant provider gives personal advice while unregistered from 16 February 2024, the relevant provider will be in breach of a restricted civil penalty provision and may be subject to regulatory action.

Detailed guidance around the registration process, including flowcharts and details of advisers deemed to be already registered can be found in ASIC Information Sheets 276 and 277 and on the ASIC website[11].

Law Reform Commission Review of Financial Services Law

The final report of the ALRC review of financial services law was provided to the federal government on 30th November 2023[12].

Commenced in 2020, the ALRC review ‘Confronting Complexity: Reforming Corporations and Financial Services Legislation’ represents the most substantial attempt to overhaul and simplify financial services legislation ever undertaken in Australia.

The catalyst for this review was the Hayne Royal Commission, which recognised that the complexity of financial services legislation (the Corporations Act is over 4,000 pages long and contains more than 600 terms with multiple definitions) was a contributing factor to some of the sector’s failings.

The review had three specific areas of focus:

  1. Design and use of definitions: Including: the use of definitions, the circumstances in which it is appropriate for concepts to be defined, the appropriate design of legislative definitions, and the consistent use of terminology to reflect the same or similar concepts
  2. Legislative design and hierarchy: Including: the coherence of the regulatory design and hierarchy of laws, and how best to maintain regulatory flexibility to clarify technical detail and address atypical or unforeseen circumstances and unintended consequences of regulatory arrangements.
  3. Reframing of Chapter 7: Including: a review of how the provisions contained in Chapter 7 of the Corporations Act and the Corporations Regulations could be reframed or restructured so that the legislative framework for financial services licensing and regulation is clearer, coherent, and effective and ensures that the intent of the law is met.

While the contents of the report – and the government response – should be made public at some stage in 2024, some insight into the importance of the legislative overhaul can be gleaned from the recent speech[13] by the ALRC’s Dr Vanessa Ho, who highlighted the need for legislation to evolve in line with the rapid pace of technological change.

Relatively recent developments such as Buy Now Pay Later, Crypto Currencies, and Robo-advice represent a challenge for ageing legislation that is rules based, and which needs to become principles based.

ASIC and APRA letter to life insurers – another IDII style intervention coming?

The APRA intervention in the individual disability income market in 2021 was one of the most comprehensive regulatory involvements seen in life insurance in decades. It saw a complete reshaping of product design and pricing across the sector and helped put this category of products back onto a sustainable footing.

Advisers and policyholders were, and continue to be, significantly impacted.

Garnering less interest than it therefore should – no doubt lost in the QAR noise – was a move by APRA and ASIC at the end of 2023 which could signal some form of further regulatory intervention in the life insurance market.

APRA and ASIC sent a joint letter14 to all life insurers on 14th December 2023, summarising the findings of a 12-month review of insurer pricing practices, and setting out their regulatory expectations of life companies going forward, namely to:

  • have sound risk management and compliance assurance around re-rating practices and ensure any contract terms allowing for premium increases are transparent and not unfair
  • clearly explain how premiums are calculated and may change over the life of the policy, and
  • design and price life insurance products factoring in consumers’ need for premium stability.

The joint review of pricing practices identified several issues, including:

  • frequent re-rating (since 2017, 13 insurers have re-rated at least once and 7 have re-rated at least four times)
  • in some cases, changes to level premium rates were bigger than stepped rate increases
  • marketing disclosure issues with some insurers, including a lack of detail around the need for premium increases, and misleading graphs about level premiums
  • insufficient consideration of the consumer need for premium stability.

In the letter, APRA and ASIC say they will monitor the progress of life companies in meeting regulatory, consumer and community expectations of pricing decisions, marketing, and disclosure, as well as product design, to deliver better consumer outcomes.

They go on to say they will consider regulatory action if their expectations are not met.

Advisers actively recommending life insurance as part of their advice should definitely watch this space throughout 2024.

Summary

The financial advice regulatory big picture for 2024 remains crowded and complex. Several initiatives with the potential to reshape advice – across processes, sustainability, and client experience – are in play.

The challenge for advisers in 2024 is to try and make sense of the somewhat confusing state of play with the QAR changes , while also staying abreast of the other regulatory initiatives that are just as significant but have garnered less attention – including the ALRC review of financial services law, the potential for intervention in the life insurance market, and the new, and likely misunderstood, requirement for advisers to be registered in order to continue providing personal advice after February 16th 2024.

 

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References:
[1] https://insideadviser.com.au/soas-safer-harbour-steps-gone-as-government-takes-staged-approach-to-qar/
[2] https://treasury.gov.au/publication/p2023-471470
[3] https://smsmagazine.com.au/news/2023/11/14/draft-bill-to-enact-qar-changes-released/
[4] https://www.kwm.com/global/en/insights/latest-thinking/quality-of-advice-review-first-tranche-of-the-draft-legislation.html
[5] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/speech-parliament-house-canberra#:~:text=The%20exact%20level%20of%20education,the%20scale%20that%20Australians%20need
[6] IBID.
[7] https://www.minterellison.com/articles/quality-of-advice-review-roadmap-for-implementing-tranche-2-reforms-released
[8] https://www.ifa.com.au/news/33704-navigating-the-qar-reforms-timeline-when-can-we-expect-implementation
[9] https://www.professionalplanner.com.au/2023/09/new-adviser-registration-requirement-delayed-to-2024/
[10] https://asic.gov.au/regulatory-resources/financial-services/financial-advice/your-obligations-when-giving-financial-advice/faqs-registration-for-relevant-providers/
[11] https://asic.gov.au/about-asic/news-centre/news-items/asic-releases-guidance-on-the-registration-of-financial-advisers/#:~:text=From%201%20February%202024%2C%20financial%20advisers%2C%20excluding%20provisional%20relevant%20providers,This%20includes%20time%2Dshare%20advisers
[12] https://www.gadens.com/legal-insights/gadens-regulatory-recap-12-december-2023/
[13]https://www.ifa.com.au/news/33627-alrc-inquiry-puts-focus-on-robo-advice
[14] https://asic.gov.au/about-asic/news-centre/news-items/asic-and-apra-issue-joint-letter-on-premium-increases-in-life-insurance/

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