New compliance obligations resulting from Tranche 1 QAR reforms are now law.

In recent times, few topics have dominated adviser consciousness – and industry media coverage – as much as the Quality of Advice Review (QAR), one of the most significant consumer protection agendas seen in years.

When Michelle Levy handed down her final report to the Government in December 2022^[1], there was a sense of optimism that many of the barriers to accessible, affordable financial advice would come down. Since then, it is fair to say some of these hopes have faded somewhat, due the actual legislative response to and articulation of her recommendations, and the tortuously long-time frame to bring this response to life.

So long and convoluted has been this response – broken into Tranche 1 and Tranche 2 reforms, that advisers and licensees could be forgiven for any confusion and lack of awareness of the current state of play with the changes – changes which represent the most significant reforms to advice since the FOFA reforms of a decade ago.

In July 2024, the first Tranche of Reforms – in the guise of the ‘Delivering Better Financial Outcomes (DBFO) legislation finally came into effect^[2], with practical implications for advisers and AFSLs to be aware of.

This article will provide readers with a practical guide to the changes, including their details, their effective dates, and any relevant guidance from ASIC. To give this framework its full context, this article will also explore the background to the changes, the industry response and associated media coverage, as well as a reminder of the Tranche 2 reforms the Government intends to flesh out in the second half of 2024.

From QAR to DBFO

Six months after the QAR report was handed to the federal government, in June 2023, the federal government announced it was happy to accept 14 of Levy’s 22 recommendations^[3], 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 reform less than three weeks before Christmas 2023^[4].

By the time these changes found themselves presented to parliament as draft legislation – in the Delivering Better Financial Outcomes Bill – some of the tranche 1 changes had been delayed until tranche 2. Among the delayed changes was the one of the headline reforms – the scrapping of SOAs^[5].

Tranche 1 of DBFO is now law

The DBFO legislation received Royal Assent on 9 July 2024, although its passage was not without controversy, particularly around s99FA relating to advice deductions from superannuation (more on that below).

Change 1: Deduction of Advice Fees from Superannuation

The purpose of this change is to clarify the legal basis for trustees to pay advice fees agreed to by a member. Legislatively this required the repeal and replacement of s99FA of the SIS Act, and amendments to the Income Tax Assessment Act to ensure these fees are a deductible expense of the fund and not treated as an assessable benefit to the member.

Trustee obligations around advice fees include the following:

• ensure that the advice given is personal
• ensure the cost of the advice aligns with the terms of the member’s written consent
• ensure the appropriate consent requirements are met, including those ongoing fee arrangements (as per the Corporations Act, requiring a single annual consent form explaining the services provide and fees charged for the 12 months ahead).

While Advisers and other stakeholders will welcome the intent of the Minister to approve a standardised consent form, the drafting of this particular change has remained mired in controversy.

Controversy over s99FA

The drafting of this particular change proved extremely controversial and forced last minute amendments to ensure its passage through parliament. While most welcomed these amendments^[6], some experts believe the clarity hoped for by trustees was not achieved.

Specifically, there was widespread industry concern that the initial wording would require trustees to scrutinise every single SOA before agreeing to a fee deduction. This was clearly sub-optimal on many fronts, raising fees of delays, and a high rate of rejection.

Under the hastily rewritten rules, which did not prescribe the approach to be taken, trustees are now allowed to take a risk-based approach (for example, spot checks conducted by trustees themselves, or by a third party).

While these amendments were widely accepted as having fixed the issue – an issue ASIC said wasn’t actually an issue anyway – dissenting opinions still exist. One prominent Kings Counsel – Bernard Quinn – believes the legislation is still problematic as the original intent of the applicable QAR recommendation was that the law enabled trustees to pay fees “on the direction of the member”. It did not contemplate any compliance role for trustees other than to ensure a member’s consent had been obtained^[7].

In Quinn’s view, the drafting of the legislation – as a prohibition with a suite of exceptions, rather than as a general permission – could be construed by courts strictly, “so as to continue to require trustees to scrutinise aspects of the SOAs provided by financial advisers to fund members”.

How trustees respond remains to be seen, however expect this issue to remain a hot media topic.

Change 1 start date: January 2025

These amendments apply to fees charged on or after the legislation start date, which is 10 January 2025.

Any one-off, complying advice arrangements in place before that date can remain in place until the earlier of:

• when the advice is terminated, varied or renewed, or
• 10 January 2026.

Change 2: Ongoing Fee Arrangements

Another change under Tranche 1 is to ongoing fee arrangements, effectively giving advisers much more flexibility around timing and format.

In summary, the changes:

• remove the requirement to provide clients with a Fee Disclosure Statement
• codify the requirements into the Corporations Act (Division 3 of Part 7.7A)
• repeal civil penalties for failing to advice third party account providers when consent had ceased
• require advisers to obtain client consent for ongoing fees via a standardised written consent form
• replace “anniversary date” with “reference date” for determining the renewal period, with a new consent required between
  • up to 60 days before, and
  • on or before 150 days after the reference date.

(This last change introducing far more flexibility than the current 120-day period commencing on the anniversary date of the arrangement).

The legislation empowers the Minister to approve one or more forms in relation to entering and renewing an ongoing fee arrangement, and deduction specific consents, meaning that we could see one or multiple standard consent templates.

At the time of writing this article, no templates had been released, and there was no clarity around when they may become available.

Change 2 start dates

As with other Tranche 1 reforms, the new rules apply to:

• new ongoing fee arrangements on or after 10 January 2025,
• existing arrangements on or after the first anniversary falling after 10 January 2025.

For ongoing advice in force immediately before the start date, modified renewal dates will apply from the later of:

• 10 January 2025, or
• 60 days before the anniversary date of the renewal^[8].

As an example, a client with an anniversary of March 15^th would have 150 days beyond that date (12^th August 2025) to provide fresh consent, failing which the arrangement would terminate. If that arrangement continued, then in the following year, the consent could be renewed up to 60 days prior to the reference date (the original date the arrangement was first entered into).

Change 3: More flexible FSG requirements

While Financial Services Guides are still required, advisers can now choose to provide an FSG via their website, where it must be publicly available (not requiring any logging in or registration to access). The same requirements as apply to written FSGs will also apply – namely they are approved by the adviser’s ASFSL, and:

• comply with Corporations Act requirements
• are up to date and carry a preparation date.

Change 3 start date

10^th July 2024.

Changes 4 and 5: Life insurance commissions and consent

Tranche 1 saw a new definition of ‘conflicted remuneration’ come into force, removing from the previous definition references to benefits given by the client to the advisers (which inadvertently impacted rules around paying for advice through super).

According to the Explanatory Memorandum^[9] accompanying the draft legislation, conflicted remuneration means:

• any benefit (monetary or not) that is given to a financial services licensee or representative of a financial services licensee, who provides financial product advice to retail clients; and
• that because of the benefit, could reasonably be expected to influence the recommendation or the advice given by the licensee or their representative to the retail client;
• but the benefit is not given or paid by a retail client (or on their behalf) to the licensee or their representative for financial product advice received by that client.

The benefits given by product providers to financial advisers are classed as conflicted remuneration, with exemptions given for commissions payable for life and general insurance and consumer credit.

For life insurance, this exemption only applies to commissions within the caps introduced as part of the Life Insurance Framework (LIF), i.e. 60% upfront and 20% renewal.

Additionally, as per recommendation 13.7 of QAR^[10], to ensure any commission does not work against the advisers Best Interest Duty, an adviser must obtain a client’s consent before they accept any commission.

The consent – a new document – must include the following information:

• mame of the insurer
• commission rate
• if more than one monetary benefit will be given in connection with the issue or sale of the relevant product, the frequency of giving those monetary benefits and the period over which monetary benefits covered by the consent could be given, including any renewals
• the nature of any services that the AFSL or authorised rep will provide the client in relation to the relevant product
• a statement that “it is a requirement of the law that client consent must be obtained before payment of an insurance commission”, and
• the fact that the consent is irrevocable.

Crucially, these guidelines mean that – provided the rate of commission on renewal does not exceed that disclosed in the initial consent – no further consents are required, meaning the consent is a one-off, for the life of the policy.

(If the client doesn’t consent, then the adviser can either agree to provide that advice in exchange for a fee paid by the client, or they can decline to provide advice. This is clearly something that needs to be addressed at the very beginning of the advice process).

Start dates for changes 4 & 5

These changes to the definition of conflicted remuneration commenced 10 July 2024.

The consent requirement commences 9 July 2025 (12 months after the date of Royal Assent), giving the industry up to a year for new standardised consents to be developed.

ASIC to update various Regulatory Guides and Information Sheets

By November 2024, ASIC plans to release new guidelines concerning ongoing fee arrangements and the consents required to deduct fees under non-ongoing fee arrangements, reflecting the changes introduced by the DBFO Act^[11]. ASIC also intends to publish a new Information Sheet regarding Financial Services Guides (FSGs) and the updated website disclosure requirements. This Information Sheet will replace the existing guidance found in RG 175.

Additionally, ASIC will revise RG 246, to reflect the updated conflicted remuneration obligations, as well as amending other related guidance.

Likely timing for Tranche 2?

In a statement shortly after the first DBFO Bill was passed, Minister Jones indicated^[12] that the second tranche of reforms, which include “the government’s commitment to reform statements of advice, modernise the best interests duty and remove the safe harbour steps, and increase the provision of advice by financial institutions” will be developed over the second half of 2024.

Needless to say many are sceptical, believing the current senate logjam, and the Government’s faltering popularity may mean other legislation may take a much higher priority. With some insiders believing the next Federal Election could be as early as December, the precedent set by Tranche 1 suggests we could well be looking the next electoral cycle (by which time we could have a new Government.

Either way, the uncertainty is frustrating, especially given the potential for the scrapping of SOAs and simplifying of Best Interest Duty to streamline red tape, significantly reducing the cost and compliance burdens on advisers.

Conclusion

The Delivering Better Financial Outcomes (DBFO) legislation represents a watershed for the financial advice profession, and broader financial services sector, with Tranche 1 already in effect as of July 2024 and practical implications expected to fully manifest in January and July 2025, and advisers must make themselves aware of, and prepare for, the new regulations, much of which ASIC hopes to clarify by November 2024, when it plans to issue updated Regulatory Guides and Information Sheets.

While the legislation aims to reduce barriers to accessible, affordable advice, the complex and staggered implementation has created confusion and disappointment among advisers and licensees. Controversies, particularly around the deduction of advice fees from superannuation, highlight ongoing industry concerns regarding the practical application of these reforms.

The pending Tranche 2 changes, expected to be developed in late 2024, hold the potential for further streamlining of red tape through the elimination of Statements of Advice (SOAs) and modernisation of the Best Interests Duty. However, political uncertainties may delay these developments, leaving the industry in a state of cautious anticipation. The full impact of these reforms – in terms of their objectives to make advice more understandable, affordable, and sustainable, will clearly not be certain for some time.

———–

References:
[1] https://treasury.gov.au/publication/p2023-358632
[2] https://asic.gov.au/about-asic/news-centre/news-items/asic-acknowledges-royal-assent-of-the-dbfo-act/
[3] https://insideadviser.com.au/soas-safer-harbour-steps-gone-as-government-takes-staged-approach-to-qar/
[4] https://treasury.gov.au/publication/p2023-471470
[5] https://www.smsfadviser.com/news/22974-industry-reacts-to-qar-draft-law-concerns-raised-around-soa-exclusion-3
[6] https://www.professionalplanner.com.au/2024/07/huge-victory-for-common-sense-senate-passes-dbfo-with-s99fa-changes/
[7] https://www.ifa.com.au/news/34628-poor-drafting-kc-reignites-s99fa-debate-in-expert-legal-opinion
[8] https://www.knowledgeshop.com.au/blog/what-does-tranche-1-of-the-quality-of-advice-review-mean-in-practice
[9] https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7180
[10] https://www.ifa.com.au/news/32330-minister-publishes-final-qar-report
[11] https://asic.gov.au/regulatory-resources/financial-services/regulatory-reforms/delivering-better-financial-outcomes-dbfo-package/
[12] https://www.ifa.com.au/news/34472-dbfo-bill-passes-tranche-2-unlikely-soon

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DDO is back in the spotlight with ASIC stepping up its enforcement of DDO compliance.

From a consumer protection perspective, the Design and Distribution Obligations (DDO) regime, which came into effect in October 2021, represents one of the most significant regulatory reforms of recent years.

In the wake of ASIC’s recent review into the first year of the regime’s implementation – resulting in a ‘do better’ directive from the regulator – and with DDO-related recommendations an important plank of Michelle Levy’s QAR report, it is timely to revisit the DDO through an adviser lens.

DDO recap

Assumed by many to be a direct outcome of the Hayne Royal Commission, the origins of DDO can actually be traced as far back as the 2014 Financial Systems Inquiry (FSI).

Among the recommendations of the FSI Final Report was Recommendation 21:

“Government should amend the law to introduce a principles-based product design and distribution obligation. The obligation would require product issuers and distributors to consider a range of factors when designing products and distribution strategies.”^[1]

Although disclosure is generally regarded as one of the key pillars of financial consumer protection, there has for some time been a recognition that an over-reliance on disclosure can actually harm, rather than protect, consumers. This recognition was one of the catalysts for the game-changing DDO regime, which requires firms to take a consumer-centric approach to designing and distributing financial products.

DDO adopts an outcomes-based approach, bringing together product governance with distribution processes, to ensure financial products are fit for purpose and that they reach their intended target audience. Putting positive consumer outcomes at its heart, DDO in simple terms can be thought of as a constant, organic feedback loop, where:

• a product issuer articulates the target market the product is suitable for (via a Target Market Determination, or TMD)
• distributors (including AFSLs and their authorised representatives) provide data to issuers that help them assess whether the product design – or the definition of the target market – needs to change, and
• issuers then provide data to ASIC, for them to assess the appropriateness of products and product categories.

Adviser impacts

Although largely an intervention aimed at product manufacturers/issuers, DDO carried some serious, and potentially onerous, obligations for financial advisers. These centred around:

• the use of TMDs
• dealings outside notional target markets
• reporting of these dealings
• reporting of product related complaints, and
• reporting of other distribution data as required by the product issuer.

Reinforcing the intent of DDO to drive a better match between consumers and products is a ‘reasonable steps’ obligation, under which distributors must take reasonable steps to ensure distribution of that product is in accordance with the TMD.

While personal advice is exempt from this requirement (Best Interests Duty in essence being a proxy for this step), this exemption does not apply in general advice or execution only scenarios. The administrative burden on advisers implicit in these reporting requirements – and the associated impact on the cost to serve – was understandably condemned by many stakeholders. As a result, Michelle Levy made specific recommendations about DDO in her final QAR report. We will cover those recommendations – and the Government response – in more detail later in this article.

ASIC flags the next phase of DDO

Ahead of their 2023 report into DDO^[2], explored below, ASIC were already flagging that their focus on DDO was shifting from the introductory phase (focused largely on TMDs) to the compliance phase.

In November 2022, ASIC Deputy Chair Karen Chester told Company Director magazine:

 “Our regulatory focus has now shifted to compliance. Reducing the risk of harm to consumers — by bringing a DDO compliance lens across our work — is now a whole-of-ASIC priority.”^[3]

Chester went on to make two more points of particular relevance to advisers. The first concerned ASIC’s intention to focus more on the way issuers were monitoring distributors to ensure they were remaining within defined target markets. Her second point was around a heightened focus on data gathered from distributors:

“It is critical that companies get their TMDs and product governance settings right and have robust and meaningful data to test and monitor these settings. Firms must collect and understand data about the outcomes of their product distribution and who their products are getting to.”

2023 ASIC review of DDO implementation

In May 2023, ASIC released Report 762 – Design and distribution obligations: Investment products^[4].

Focusing their initial attention on investment products, where the potential for consumer harm was relatively higher than some other product categories, ASIC observed there was “considerable room for improvement” in issuers’ compliance with the DDO regime.

As a result of the review, ASIC noted it had issued 26 interim stop orders against 18 issuers for breaches of TMD requirements. (A stop order essentially means a product cannot be offered for sale while the order is in place).

Particular areas of concern noted in the report included:

• the use of inappropriate risk profiles in the target market (for example, stating that a high-risk product was suitable for clients with a medium risk profile) – a factor in 21 stop orders
• inappropriate investment timeframes or withdrawal needs – a factor in 18 stop orders
• defining a target market too broadly (15 stop orders)
• inappropriate or no distribution conditions and inappropriate use of a TMD template (13 stop orders), and
• inappropriate levels of portfolio allocation (10 stop orders).

ASIC summarised their findings and actions through three main ‘areas for improvement’:

1. Avoid over-reliance on TMD templates: Some issuers relied on a TMD template to drive the process of determining an appropriate target market for a scheme. A template may be useful as a starting point, if used properly. However, in all cases, issuers still need to critically assess a product.
2. Design products with consumers in mind: ASIC identified products with niche or unusual features where issuers had not given enough attention to designing the product with consumers in mind.
3. Assess product features on ‘absolute’ basis: Some issuers developed their TMD by assessing a scheme’s features relative to peers or a benchmark. ASIC makes it clear the TMD for each scheme should be assessed on its own merits, rather than in comparison with other products or against a benchmark.

FSC revises templates in response

The FSC was specifically called out in ASIC’s report for shortcomings in the TMD templates it had created for the use of its members.

For example, their template for investment products included options for certain types of consumers to be ‘potentially’ included in the target market. ASIC noted:

“‘Potentially’ including consumers in the target market can lead to uncertainty about who is in or outside it and is likely to result in a TMD failing to meet the appropriateness requirements. For example, an issuer that is unlikely to have any funds to pay distributions in the short term should not have consumers seeking income as ‘potentially’ in the target market.”

In response, the FSC announced in June 2023 that it had revised its templates^[5].

DDO and QAR

The operation of the DDO regime and its impact on advisers was an area of considerable focus for Michelle Levy in her QAR Final Report^[6].

From the very first consultations with stakeholders, advisers had made clear the extent to which it had created a burden which they were passing onto consumers:

“Financial advisers have told us that the design and distribution obligation reporting requirements are onerous and add an additional compliance burden and expense to the conduct of their practices.”

Levy had previously noted in her Proposals Paper^[7], issued earlier in the review process, that two reporting requirements in particular were problematic:

• the requirement for distributors to notify the issuer of matters specified in the TMD, which effectively allows issuers to impose legal obligations on financial advisers (and other distributors) ‘at will’, and
• reporting of significant dealings outside the target market, which she felt provided little value to issuers or consumers, given the DDO regime specifically acknowledges and permits a financial adviser to recommend a financial product to a client who is outside the target market for the product.

In the QAR Final Report, Levy went on to make two specific recommendations relating to DDO, shown below.

Recommendation 12.1 – DDO (Distribution Requirements)

Amend the DDO distribution obligations in the Corporations Act to limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers.

Where personal advice is provided by someone who is not a relevant provider, the AFS licensee should, like any other distributor, be required to comply with the distribution obligations and take reasonable steps to ensure the financial product is only recommended in accordance with the target market determination.

The objective of this recommendation is to ensure that, where personal advice is provided by a person who is not a financial adviser, financial products are distributed to consumers within the target market for the product.

Recommendation 12.2 – DDO (Reporting Requirements)

Amend the DDO reporting requirements in the Corporations Act to remove the requirement for relevant providers to:

• report significant dealings outside the target market to the product issuer
• comply with the additional reporting obligations specified by the product issuer in the target market determination, and
• report to the product issuer where there have been no complaints during the specified reporting period. 

These exceptions will not apply to someone who is not a relevant provider.

All providers of personal advice (including relevant providers) will need to report the number of complaints received during a reporting period (if there have been any), as well as a description of the nature of these complaints to the product issuer.

The objective of this recommendation is to ensure that the reporting obligations under the DDO regime are appropriate for relevant providers and do not impose an unwarranted compliance burden.

The government responds with ‘Delivering Better Financial Outcomes’ package

In May 2023, the Federal Government issued its formal response to QAR, in the shape of its ‘Delivering Better Financial Outcomes’ reform package^[8].

While the Government accepted 14 of Levy’s 22 Recommendations in full, or in principle, Recommendations 12.1 and 12.2 were referred for further consultation, along with:

• Introduction of a ‘good advice’ duty to replace the existing best interests duty (Recommendation 4).
• Broadening the definition of personal advice (Recommendation 1).
• Removal of the general advice warning (Recommendation 2).
• Allowing non-relevant providers to provide personal advice (Recommendation 3).

The consultation process, which will operate alongside the review of the FASEA Code of Ethics, is expected to conclude by the end of 2023^[9].

Where does that leave financial advisers?

The deferral of Recommendations 12.1 and 12.2 means the DDO regime will continue to operate in its current form until at least the end of 2023.

The challenge for advisers in this regard is that with ASIC stepping up its enforcement of DDO compliance, product issuers will feel themselves under increased scrutiny and increased pressure to ensure watertight adherence to the obligations. Some of this pressure is likely to be referred onto distributors, including advisers.

Importantly, many experts expect ASIC’s approach to enforcing compliance with the DDO will evolve in the next 12-18 months¹⁰, focussing less on TMDs and more on the adequacy of governance processes around the product design and review process. In terms of products, ASIC has said it will prioritise those where it sees the most chance of consumer harm, including Managed Funds.

To the extent that distributor reporting is an important input into product design processes, advisers should expect issuers to be increasing, and more strictly monitoring, their reporting requirements.  Issues product manufacturers are likely considering at present include:

• How they are collecting and understanding product distribution outcomes.
• What data and metrics are being used, and the timeliness of measurement.
• How they are collecting, assessing, and responding to data relating to consumer outcomes.

It is possible that some issuers may extend their requirements beyond the mandatory complaints and significant dealings data, to other data they deem relevant to their product governance processes.

For advisers offering General Advice and execution only services, extra scrutiny should also be expected in respect of the Reasonable Steps obligations, with ASIC using Report 726 to flag its concerns with the overreliance on Investor Questionnaires.

The widespread inadequacies with TMDs identified by ASIC should also put advisers on alert as to their own reliance on these documents. Although legislation does not mandate that TMDs are given to clients¹¹ (only that they must be available on request), it is likely some advisers may be seeing these as an additional way of supporting their recommendation of a particular product. The increasing issuance of stop orders, and the concerns flagged by ASIC with templates previously issued by a major industry association, suggests advisers should tread with caution.

In conclusion

When it first came into effect in October 2021, the DDO regime represented one of the most significant financial consumer protection reforms in many years. The intent of the DDO regime is to reduce consumer harm by ensuring a better match between financial products and consumers, and whilst largely seen as matter for product manufacturers, product distributors are also central players in this matching process.

The onerous reporting burden on financial advisers associated with DDO – and their consequent impact on the cost of financial advice ­– have been widely condemned, a point recognised by Michelle Levy in the QAR Final Report. The widespread optimism that her recommendations to reduce the DDO burden on advisers – without compromising consumer protections – would be accepted, were dashed when the Government released its formal response.

Whilst Levy’s recommendations have not been rejected outright, but rather are subject to further consultation, the resulting state of limbo actually creates more challenges for advisers, as it comes against a backdrop of ASIC stepping up its enforcement of DDO.

For the time being, this is likely to see product issuers under increased pressure and scrutiny, some of which may well be referred onto advisers in the form of more onerous and more strictly monitored reporting requirements.

———–

References:
[1] https://treasury.gov.au/publication/c2014-fsi-final-report
[2] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[3] https://asic.gov.au/about-asic/news-centre/articles/product-design-and-distribution-the-consumer-is-key
[4] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[5] https://www.moneymanagement.com.au/news/funds-management/fsc-builds-updated-ddo-template-fund-managers
[6] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[7] https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf
[8] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/delivering-better-financial-outcomes-roadmap-financial
[9] Ibid.
[10] https://hsfnotes.com/fsraustralia/2023/05/29/asic-lifts-its-game-on-ddo/
[11] https://www.dwyerharris.com/blog/tmd-available

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Michelle Levy

The SMSF Association has scored a major coup in having Michelle Levy, Allens Partner and lead author of the Quality of Advice Review (QAR), discuss the Federal Government’s response to this groundbreaking report at its Technical Summit on the Gold Coast on July 26-27.

In one of her first public appearances since the Government’s response, Levy will be joined by SMSF Association CEO Peter Burgess, Financial Service Council Executive Director (Policy & Advocacy) Spiro Premetis and BT Financial Group Head of Financial Literacy & Advocacy Bryan Ashenden, to dissect a report that will have major ramifications for the advice industry.

The Association has cautiously welcomed the Government’s response as a positive step towards ensuring Australians have greater access to high quality, accessible and affordable financial advice.

In particular, it has endorsed replacing Statements of Advice (SOAs) with a record of advice that is more fit-for-purpose and streamlining the ongoing fee renewal.

Other industry participants have been more critical of the Government’s response, arguing that the decision by the Minister for Financial Services, Stephen Jones, to only accept 14 of the 22 recommendations “in full or in principle” will fail to improve the quality of accessibility of advice for the millions of Australians who need it.

Levy, who has publicly expressed disappointment with the Government’s response, has argued that the recommendations that haven’t been accepted “are those that really address accessibility and will also help improve quality of advice.”

Burgess says Levy’s forthright views, when coupled with the insights of the other panellists, will guarantee a lively and informative Technical Session that will be of enormous interest and benefit for all the SMSF specialists attending the Summit.

“The Association always strives to make the Technical Summit topical and stimulating and having Michelle on this panel is in keeping with this tradition.”

Register for Technical Summit.

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John Maroney

The recommendations of the Quality of Advice (QOA) Review will make financial advice more accessible and affordable for consumers. That was the consensus of four industry experts at a Q-and-A session on the final day of the SMSF Association’s National Conference in Melbourne.

QOA Reviewer and Allens law firm Partner Michelle Levy said that the Review was not about keeping people happy. “It was about providing a framework in which financial advice can be offered in an affordable and accessible way – something I don’t think happens now.

“My recommendations are driven by consumer needs, and rest on a strong foundation of law that protects consumers. The reforms proposed will not open the door to the poor and harmful advice practices which led to the Hayne Royal Commission. Rather, they will lead to more consumers having access to personal advice that meets their needs – that is good advice.”

The QOA Review, an industry talking point for the past year, was the subject of a special plenary session, titled What happens next with improving the quality, accessibility, and affordability of the provision of financial advice? at the conference. The Inside Network’s Tahn Sharpe was the convenor.

The Review was instigated because of the complexity of the regulatory framework of financial advice, making it difficult to understand and comply with. Levy’s recommendations were handed to the Federal Government in December and released for discussion in February.

Financial Planning Association CEO Sarah Abood, describing the Review as a blueprint for the advice industry of tomorrow, said it proposed to take the industry from a tick-the-box approach to a principles-based system in which advisers are recognised as professionals and responsible. “It recognises the adviser is on the same side of the table as the client, and this can only be a good outcome.

“For example, we see the recommendation to abolish statements of advice (SOAs) as a positive step. These documents can be 100 pages long and are not read by most consumers. Indeed, the Review offers an opportunity to cut a lot of unnecessary costs.

“To reinforce Michelle’s (Levy) point, if a client rings up with a simple question, then they should be able to get a simple, low-cost answer. Certainly, we would suggest the quick implementation of some of the less contentious reforms as a matter of urgency.”

SMSF Association CEO John Maroney said the Review was a “once in a generation” opportunity to get a better financial advisory system that delivered better consumer outcomes.

“Although the Association has some reservations about the report, and, in particular, the pressing need for accountants to be included in the broader church of advice that the Review is advocating, we believe it has the potential to be a critical building block to a more professional advice industry.”

The professional services advisory company, AZ Next Generation Advisory CEO Paul Barrett, who believes implementing the reforms will immediately lift advice practices’ bottom lines 20 per cent, said professionalism was coming to the advice industry and it wasn’t waiting for the regulators or the policymakers.

“What this Review rightly does is challenge the regulatory thought process, of abandoning the tick-the-box mentality, and by doing so it is empowering advisers to be able to service their clients in a professional way – a brave new world. In my opinion, it will lead to advice practices that attract better talent, are bigger, more agile, and offer a greater array of services.”

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Peter Burgess

The Federal Government’s non-arm’s length expenditure (NALE) consultation paper fails to address the problems caused by the 2019 amendments, the SMSF Association’s Deputy CEO / Director of Policy & Education, Peter Burgess, told the National Conference today.

In his address titled What lies BEE-yond the horizon, Burgess urged the Government to repeal the amendments, telling delegates that the consultation paper did not adequately tackle the issues caused by the 2019 amendments and that they were “over-reach”.

“The solution floated in the paper will require SMSF trustees to determine if a general expense has been undercharged and by how much. This may sound like a simple task, but the reality is in a dynamic market like the SMSF sector there can be significant variation in the services provided, particularly when it involves related entities, so determining a ‘market rate’ can be difficult and often subjective.

“There is also the issue that trustees will need to do this even for very small ‘rats and mice’ amounts.

“We also note the potential for a maximum effective tax rate of 225 per cent to be applied to the general expenditure breach. While this is obviously not as severe as taxing all the fund’s income as non-arm’s length income, it is still a punitive and unacceptable outcome.

“We have no issue with the proposal that large APRA funds be carved out of the non-arm’s length income rules that apply to general expenses, but we don’t believe it is fair and reasonable for the same not to apply to SMSFs.

“It is difficult to justify why a member of a large APRA regulated fund can benefit from a reduced administration fee negotiated between the trustee and a related entity, while a member of an SMSF cannot not. We acknowledge SMSF members are in a better position to control or influence the expense arrangements of the fund but, for most, the monetary benefit is still likely to be small.”

Burgess said moving away from the long-established position of tax neutrality between the different superannuation sectors, which would be an outcome of the solution put forward in the consultation paper, was not an appropriate way of addressing the issues caused by the 2019 amendments.

“It’s worth remembering that the original problem that these reforms set out to tackle was zero interest rate Limited Recourse Borrowing Arrangements (LRBAs), and this issue was settled in 2016 when the ATO released their safe harbour parameters for related party loans.

“So, it remains unclear what mischief the Government is trying to stop and why the existing legislative machinery, which includes a range of penalties available to the ATO that existed before the 2019 amendments and still exist, is not sufficient.”

Burgess said all the scenarios presented in the paper could be adequately handled without the need for the 2019 amendments.

“For example, by treating the expense shortfall amount, where appropriate, as a contribution in accordance with the ATO’s contribution ruling TR 2010/1.

“If Treasury is concerned about the possibility of SMSFs incurring NALE to circumvent the caps, the issue can be adequately dealt with by amending Section 109 of the SIS Act to capture NALE for SMSFs and letting the auditor’s materiality test, and the ATO’s contribution ruling, do their jobs.

“This would be a much simpler, cleaner and measured approach to a problem, which in our view, is already dealt with by other legislative provisions.”

The SMSF National Conference, being held at the Melbourne Convention Centre, concludes on Friday with the Quality of Advice Review panel discussion featuring review lead Michelle Levy.

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While welcoming the clarity, many advisers are now refocusing their attention on how to make risk advice sustainable in a 60/20 framework.

Commissions retained but the challenge remains

The long-awaited final report for the Quality of Advice Review – authored by Michelle Levy – was publicly released at the start of February 2023^[1]. While the Government is yet to formally respond to the report (other than announcing a round of further public consultations), the report contained few, if any, surprises, with the substance of most recommendations made public some months earlier via the release of Proposals paper^[2], and as a result, most observers expect Levy’s recommendations will be largely accepted unchanged.

Amongst the 22 recommendations in the final report was the proposed retention of life insurance commissions at the current rates (60% up-front and 20% renewal). But while the clarity around the retention of commissions will be welcomed in most quarters (some consumer advocacy groups excepted), fixing the rate of commissions at their current levels (first introduced as part of the Life Insurance Framework reforms) means providing life insurance advice via traditional models can still be economically challenging.

Happily, an increasing number of advisers are recognising the ways risk advice can be made more sustainable, shifting their perspectives on areas such as:

• remuneration
• the risk advice value chain
• the use of technology
• referrals, and
• the design of advice processes,

to create a more optimal model. Such a model can create an uplift in both the financial viability of life insurance advice and the client experience.

In this article, we will explore the practical ways financial advisers can deliver life insurance advice on a more sustainable basis, within the context of recommendations contained within the QAR report.

QAR on life insurance

In the final QAR Report^[3], Michelle Levy recommended the government retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product.

“Commission and clawback rates should be maintained at the current levels”, Ms Levy said.

Expanding on this recommendation, Ms Levy expressed the view that life insurance advice would be beyond the reach of many people if commissions were scrapped. This view is certainly consistent with a great deal of research showing the disconnect between what people are prepared to pay for life insurance advice, and how much that advice could be delivered for. A 2019 study by Zurich, for example, found that around 55% of consumers are not willing to pay more than $250 for life insurance advice, and 27% are unwilling to pay a fee at all^[4].

Levy also had views on the extent to which the current system created genuine conflicts of interest causing consumer harm:

“Nothing we have seen suggests that life insurance advice is of poorer quality than advice on other topics and nothing we have seen suggests that financial advisers are recommending life insurance in circumstances where the client will not benefit from holding life insurance. The LIF [Life Insurance Framework] reforms also mean all life insurers pay the same rate of commission and so there is less incentive for an adviser to recommend a policy issued by one insurer over another. This is helpful,” Levy noted.

Levy did stipulate one condition around her recommendation:

“The condition to this is that the provider of personal advice to a retail client about a life risk insurance product must explain to their client that they will be paid a commission if the client decides to buy the product recommended by the adviser and they must ask for the client’s consent to accept the commission,” Ms Levy said.

In response to previous suggestions that this process could add extra complexity and therefore cost to the risk advice process, Levy clarified that:

• the consent shouldn’t be onerous and wasn’t intended to involve the same formality as an annual fee consent (the consent could be recorded via email if appropriate)
• the consent should specify the percentage rates of commission, not the dollar amounts
• consent could be obtained before or after advice is provided, but before the issue of a product
• no further consent is needed around trail commissions, and
• no new consents are needed when client portfolios are sold to another practice or transferred to a new adviser^[5]

Revisiting the cost to provide life insurance advice

In the same way consumer attitudes towards risk commissions have been the subject of numerous studies, so too has the cost of providing risk advice.

The same Zurich study referenced above found that even the simplest of risk advice could take around 8 hours to provide, and two-thirds of advisers would need to charge at least $2,000 to cover their costs when providing such advice^[6].

At a 60% commission rate, and a $2,000 cost, the advice is a break-even proposition (in simple terms) at annual premiums of $3333 (around $278 per month). While such premium levels are becoming increasingly common for clients in their late 30s and older with Sydney and Melbourne-size mortgages, and/or those taking out income protection coverage, they go hand in hand with increased consumer resistance, and as such do not mitigate the need to design a more efficient, sustainable model for providing risk advice.

Rethinking the advice value chain and remuneration options

Although recommending commissions be retained, Michelle Levy did express the view that “it is preferable for consumers to pay a fee for advice about life insurance like they must for other financial products”^[7]. But with consumer resistance to out-of-pocket fees for risk advice well documented – via research and actual market experience – many advisers dismiss out of hand the idea of charging a fee for service at any point of the life insurance journey.

Some advisers, however, have started to introduce fees to their insurance advice process, with numerous scenarios where consumers are likely to be willing – and able – to pay fees that fairly reflect the work done by the adviser. Examples of these scenarios include:

• Charging an initial one-off fee, payable regardless of whether the application is accepted or declined. Several years ago, one well-known risk specialist was charging a $500 up-front fee for risk-only advice. The fee was not refundable in the event that the client was declined at underwriting (mitigating the risk of doing work for no outcome), but was subject to a partial commission rebate if a policy was issued. Variations on this approach include not giving any rebate at all, or only rebating when the commission exceeded the adviser’s recommended fee.
• Switching to a fee-for-service approach for business insurance clients, or for cases involving very large premiums (and thus where the dollar value of premium discounts is more substantial). While not always the case, clients in a position to pay such large premiums will generally be in a better position to pay an out-of-pocket fee for advice.

Arguably the biggest opportunity comes however when we reconsider where in the risk advice value chain clients actually derive value.

The intangible nature of life insurance creates a disconnect between where a client sees value (for which they are willing to pay) and where traditional risk advice models assume value.

Traditional models assume the value to be at the start of the chain when the SOA is produced, and a policy is applied for. But from the client’s perspective, while there is work here, but no value to them. The client sees the most value – in both the adviser and the insurance itself – at claim time.

This perception of value helps explain the growth and popularity of no-win, no-fee law firms in the life insurance claims arena. Clients appreciate that claims can involve hard work and negotiation, and are clearly happy to pay someone to advocate on their behalf (in some cases, up to 40% of the claim amount)^[8]. The appeal of this model is that claimants don’t actually pay out of pocket, they only pay out of the proceeds of a successful claim.

While traditional thinking has been that renewal commissions are in effect payment in advance for claims management, the reality is clients don’t see it this way. Indeed, one Australian survey of retail policyholders found many “expect to go direct to their insurance company in the event of a claim, irrespective of the channel through which they took out their policy”^[9].

Further providing impetus for a change is benchmarking^[10] which revealed how time-consuming claims could be:

• 34% of claims took 11-20 hours to manage
• 22% took between 20 and 30 hours
• 19% took more than 30 hours.

In other words, there is a very real chance that the cost of the adviser’s time in providing a high-quality claims service will often far exceed the remuneration they receive by way of commissions.

By charging a fee not just upfront, but also for claims management (with the fee to be paid from claims proceeds) advisers have the opportunity to ensure life insurance advice is not a loss-making exercise. Rather, it is a service for which they are appropriately remunerated, allowing them to deliver that service at the highest level possible, and in turn improving their client satisfaction.

Efficiency through technology

On the flip side of the sustainability coin is the cost to serve, and for many advisers, finding cost efficiencies in the risk advice process will be critical to ongoing sustainability.

One rich source of potential efficiency is in the technology that can be applied at 4 key stages of the risk advice journey:

1. Gathering key client information prior to the first meeting.
2. Conducting a comprehensive, compliant, and efficient Risk Needs Analysis.
3. Undertaking product research to find the best value-for-money policies.
4. Generating a compliant Risk SOA quickly.

Breaking down these 4 steps into further sub-steps, and matching them with freely available current technology solutions, we can see the scope to dramatically streamline the risk advice process, and at the same time improve compliance (by reducing the scope for human error), minimising duplication, and improve the client experience.

Process opportunities

In addition to technology, efficiencies can also be driven by investing in pre-work, in the form of field underwriting and pre-assessments, which can minimise surprises and thus minimise the rework that often accompanies unexpected underwriting outcomes.

In simple terms, field underwriting is gathering enough information about the life insured to be able to determine their insurability before they actually apply for cover. This generally means understanding whether there are elements of their health, occupation, family history, or other circumstances that could impact the willingness of an insurer to offer cover on standard terms.

Successful field underwriting therefore relies on an understanding of the client’s circumstances and the underwriting approach of the insurer, bridged by a base level of understanding of medical terminology and medical conditions. Having this understanding enables you to make a judgement of your client’s insurability before they even apply, which can help you narrow down your selection of suitable insurers.

Knowing which health conditions are likely to attract a loading or exclusion is also important, as it will help you set client expectations from the outset. Understanding how loadings and exclusions work, and in the circumstances in which their removal can be requested, it also important. 

Pre-assessments go hand in hand with field underwriting and involve getting an indicative sense of how a client is likely to be underwritten by an insurer. This can allow you to narrow down your choice of insurers as well as indicate those aspects of your client’s situation which may require more clarification and information gathering. Pre-assessments can therefore improve your efficiency as well as manage your client expectations.

Essential to a smooth process is honesty and openness on the part of your client, and this means your pre-assessment information gathering needs to be rigorous. In this sense the level of detail sought by insurers in their personal statements and – where applicable – their supplementary questionnaires, is a good benchmark.

Newer, more powerful technologies are just around the corner

A number of projects are underway to develop all-encompassing, risk-specific technology solutions that bring together electronic and process-based efficiency opportunities. One such project is LifeBid, supported by a number of insurers including Zurich and MLC.

Innovations such as LifeBid and others are likely to include a one-stop solution for steps including:

• client documentation
• compliance
• market analysis
• advice recommendations
• application
• pre-assessment
• underwriting
• policy issue
• renewals
• policy amendments.

With LifeBid aiming to reduce risk advisers’ cost to serve by 90%^[11], the potential for this and similar platforms to reshape the risk advice landscape – and make risk advice more accessible – is obviously significant.

Increasing volume drives learning and efficiencies

Increasing the volume of risk business, you write can drive scale benefits, and deliver an efficiency dividend as you repeat and become more familiar with the risk advice process.

Adviser Ratings estimates around three-quarters of advisers now write little or no risk^[12], meaning now could be the perfect time to drive volume by taking more risk referrals from other advisers. Amongst your network of adviser peers, the statistics suggest many of them will want to refer out any risk cases, providing the opportunity to develop an ongoing and cost-effective source of new business.

Closing the loop – QAR efficiency opportunities

Having started this discussion referencing the launch of the QAR final report, it seems appropriate to finish by mentioning significant efficiency opportunities that Michelle Levy, and indeed the whole advice sector, hope will be realised if her recommendations are accepted.

Although when first commissioned the QAR was intended to examine the quality of advice, the tectonic shifts to the advice landscape that saw adviser numbers fall and the cost of advice soar, shifted the emphasis of her review more on the accessibility of advice.

Her final recommendations are therefore largely designed to strip away much of the expensive red tape inherent in current advice processes (including the need for SOAs). If implemented, the sustainability and accessibility of all types of advice – including life insurance advice – should improve dramatically.

———–

References:
[1] https://www.afr.com/companies/financial-services/overdue-blueprint-for-winding-back-regulatory-overreach-20230207-p5cijn
[2] https://www.ifa.com.au/news/31698-the-changes-need-to-be-substantial-treasury-releases-quality-of-advice-review-proposal-paper
[3] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[4] https://advisers.zurich.com.au/resources/thought-leadership/risk-advice-disconnect.html
[5] https://www.ifa.com.au/news/32369-levy-s-life-insurance-recommendations-explained-what-is-required-for-consent
[6] https://www.personalriskprofessionals.com/2019/03/29/the-gap-cost-of-advice/v2-final_risk-advice-disconnect/
[7] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[8] https://www.murphys-law.com.au/faq/how-no-win-no-fee-works/
[9] https://www.afa.asn.au/wp-content/uploads/The-Value-of-Protection.pdf
[10] https://riskinfo.com.au/news/2020/11/24/poll-results-the-value-of-claims-services/
[11] https://lifebid.com.au/
[12] https://www.adviserratings.com.au/news/the-incredible-shrinking-risk-universe/

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John Maroney

The decision by the Quality of Advice Review to largely overlook the role of accountants in delivering financial advice will be a hot topic when a four-member panel examines the Review’s final report at the upcoming SMSF Association National Conference.

Delegates to the three-day conference, being held at the Melbourne Convention and Exhibition Centre on February 22-24, will have one of the first public opportunities to ask Michelle Levy, Review lead and author, about her landmark report.

Due to the significance of this report for the advice industry, and the attention it has attracted since its release last week, the Association is also making this critical session open to members and other industry participants who register for virtual registration.

Association CEO John Maroney says: “It’s our view that accountants have been left in the cold in this Review, despite the fact we have a ready pool of specialists who are ideally placed to fill the crucial advice gap.

“In the context of improving access to quality advice we would have liked to see a greater focus on the role accountants can play, particularly in the SMSF advice space.”

“The limited licensing regime hasn’t worked and the accountant’s exemption before that also didn’t work so this has remained an unresolved issue for a long period of time, and we expect this issue to be fully aired at the conference.”

The session, on day three, will be facilitated by The Inside Network’s Managing Editor, Tahn Sharpe. Other members of the panel are Michelle Levy, Sarah Abood, CEO, the Financial Planning Association, Paul Barrett, CEO, AZ Next Generation Advisory and John Maroney CEO, SMSF Association.

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Eugene Ardino

Lifespan Financial Planning, one of Australia’s largest privately-owned financial advice networks, has welcomed key aspects of Michelle Levy’s Quality of Advice Review recommendations, and her bold approach, but says deeper scrutiny of proposed changes is needed.

Lifespan CEO Eugene Ardino said recommendations to significantly reduce regulatory complexity and duplication in the advice industry were positives, as were moves to improve access to personal advice for consumers.

“Under the QAR recommendations, anyone, including employees of banks, super funds and product providers who currently provides general advice to existing clients, would be deemed to be providing personal advice and so would be subject to a higher standard having to satisfy a ‘good advice’ test and show that the advice was fit for purpose and relevant to the client’s needs.”

“However, the risk and possible downside is that there will be scope for unqualified people to give personal advice. We’ll need to work through as to what standards and restrictions would apply to those who are not Relevant Providers and are able to provide personal advice under QAR recommendations,” he said.

Mr Ardino praised Ms Levy’s willingness to address some of the obstacles to advice delivery and problems with regulation head on.

“To make advice more accessible and affordable our compliance framework needs to be simpler. To achieve this there needs to be some radical changes – not just tinkering around the edges – and her proposals do just that. The question is, will those changes have the desired affect and what undesirable unintended consequences may they produce?”

“As government has already indicated there will be more consultation with stakeholders. We expect to see a great deal of lobbying from all stakeholder sectors as government grapples with the proposals and tries to work out what, how and when to implement.”

“The advice industry needs to really get its head around what is recommended, which is fundamental changes to cornerstone regulations. The industry needs to look at these from different and new angles with an open mind and while it may need time to do this it should be attended to as a priority.”

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Michelle Levy

The landmark Quality of Advice Review final report released yesterday will be the headline act at the upcoming SMSF Association National Conference where review lead and author Michelle Levy will head a four-member panel, to dissect its findings.

Other members of the panel are Sarah Abood, CEO, the Financial Planning Association, Paul Barrett, CEO, AZ Next Generation Advisory and John Maroney CEO, SMSF Association.

The session, on day three of the conference that is being held at the Melbourne Convention and Exhibition Centre on February 22-24, will be facilitated by The Inside Network’s Managing Editor, Tahn Sharpe and will be one of the first opportunities for the report to be dissected/discussed in detail with the author since its release.

Maroney, commenting on the report, says: “We thank the Assistant Treasurer and Minister for Financial Services, Stephen Jones for releasing the Quality of Advice Review’s final report, believing the issues surrounding access to affordable and quality financial advice have been well documented throughout the report.

“We look forward to consulting with the government on the review and discussing many of the 22 recommendations in this report.

Despite some aspects of the terms of reference limiting the scope of the review, the size of the report and the nature of issues addressed highlight the diversity and complexity of the financial advice sector.

These issues present challenges for financial and professional advisers in providing advice and for consumers getting timely access to the advice they require at an affordable cost.

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Stephen Jones

The Joint Associations Working Group, consisting of 13 financial services industry associations who share a common goal to make quality financial advice more accessible to the community, welcomes the release of the final report of the Quality of Advice Review. We say it’s time to fundamentally reform the advice regime to ensure consumers can get the advice they want and need.

The Quality of Advice Review sets the reform foundations needed to ensure consumers can access the affordable and high-quality financial advice they want and need. We want this review to be a trigger to finding a real solution to what is a growing problem for many Australians.

This report includes a comprehensive suite of recommendations, which together would address many of the current problems with the financial advice regulatory regime. This would enable more good quality financial advice to be provided to more Australians.

Importantly, the final report holds consumers’ best interests paramount.

In order to meet the advice needs of Australian consumers, we agree it’s time to think differently about who can provide financial advice and how that is advice is provided, while ensuring consistent consumer protections by all advice providers.

The current regulatory framework is a major impediment to consumers being able to access affordable quality financial advice.

Years of constant reform aimed at protecting consumers have resulted in a significant regulatory wall between the consumer and the opportunity to access the advice they demand.

Retaining the status quo will only increase the advice gap, denying more Australians access to the financial advice they need to improve their financial wellbeing.  This will be to the substantial detriment of many Australians.

We believe that it’s time for the regulatory regime to be fundamentally reformed to ensure the advice needs of Australians are finally met.

The Quality of Advice Review has challenged the thinking of many, presenting very different ways to address long-standing problems.  It was never going to be easy to address the problems which Minister Stephen Jones described as a “hot mess” in June 2022.  This report presents a framework to make those changes and to put the interests of consumers front and centre.

We thank Michelle Levy for her broad engagement and consultation with all stakeholders, and a report which provides the catalyst for a strong reform agenda focused on the consumer.

We look forward to working collaboratively with the government and other stakeholders to deliver real reform that will ensure Australians can finally access the quality, affordable financial advice they need.

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