There is little argument that consumers who receive high quality, professional financial advice feel more confident about their financial position. But achieving the balance between professionalism and access to advice is tricky, and there are many in the industry who believe the current regulatory framework has made advice more expensive, putting it out of the reach of many consumers. This is particularly the case when it comes to insurance advice.
Why is quality financial advice expensive?
The outcomes of the Banking Royal Commission into Misconduct into Superannuation and Financial Services Industry overwhelmingly moved the dial in favour of the customer.
Commissioner Hayne said there are 6 basic norms that make for creating a desirable culture within an organisation:
Obey the law
Do not mislead or deceive
Provide services that are fit for purpose
Deliver services with reasonable care and skill
When acting for another, act in the best interest of that other.
The recommendations made by the Royal Commission at the start of 2019 have influenced ASIC’s priorities and strategic direction since that time. In particular, the focus on remuneration, fee-for-services and appropriate financial advice became sharper, with the prioritisation of the needs of the consumer paramount.
What this also brought was a flurry of regulatory changes resulting in higher compliance requirements for financial advisers and, therefore, higher fees for consumers.
According to the AIOFP, (The Association of Independently Owned Financial Professionals), “Advice costs have tripled over the past 5 years due to the massive increase in compliance paperwork that needs to rationalised to eliminate duplication and irrelevant procedures.”
Good quality financial advice is becoming out of reach for the average Australian.
Consultation Paper 332
To address the issue of affordable financial advice, on November 17 last year, ASIC released its Consultation Paper 332, Promoting access to affordable advice for consumers (CP332), seeking input from industry participants and relevant stakeholders. The paper seeks to understand:
The issues and impediments relating to the supply of good qualify affordable personal advice,: and
The practical steps that can be taken by ASIC and industry to improve consumer access to good quality affordable advice.
Scaled advice or limited advice have been flagged as ways to reduce the cost of advice fees, however licensees have been reluctant to provide this due to the greyness of the regulations. There is a degree of ambiguity around the situations where scaled advice is acceptable and those encounters where an adviser should seek further information, thereby triggering the full suite of personal advice compliance requirements.
Financial Education Professional’s submission
As an RTO developing training for financial services, we have long been of the opinion that certain financial products fit snugly under the scaled advice umbrella, especially when it comes to the division of regulators in the insurance sector.
Regulatory and environmental challenges faced by those providing insurance advice include:
Divergent regulation – Life insurance advisers are subject to FASEA requirements as well as the Future of Financial Advice (FOFA) regulations, and while people who provide advice about general insurance are exempt from these requirements because the product falls outside the scope of this legislation. This means providing advice across both insurance types can be problematic and confusing.
Structural barriers – The best interest duty requirements, remuneration regulations and FASEA standards are geared towards financial planning, making them difficult for risk-specialist advisers to comply.
Overly burdensome compliance – Some insurance products are only accessible to consumers via an intermediary, such as an adviser or broker, but the current framework does not encourage the servicing of such clients as compliance requirements are burdensome and/or expensive.
FEP concedes that personal advice in complex products like securities, derivatives, managed investments, superannuation, foreign exchange and margin lending to retail clients does require greater legislative protections and regulatory oversight, but we do not believe this level of supervision is required for standalone insurance advice that is not part of a full financial plan.
While it makes sense that additional checks and balances should apply to life insurance advice that is part of a comprehensive financial plan OR where the life insurance contains an investment component (such as having a surrender value or is an investment bond or annuity), this does not reflect the environment in which insurance advisers currently work. In particular, .most retail life insurance products offered in Australia no longer have an investment component. Further, the complex nature of many of the risk products that are available mean they can only be distributed by an intermediary, many of whom choose to specialise in the provision of insurance advice. Therefore, the current treatment of life insurance products in Corporations law and ASIC’s regulatory guidance is not inconsistent with how these products have evolved over time.
Our submission argues that leaving consumers at the mercy of general advice distribution models (which are also being more heavily regulated at the moment), denies consumers choice and leaves them unable to obtain a higher standard of advice at reasonable cost, which reform, as we’ve proposed in our submission, could bring.
Allowing simple Life products to be regulated by ASIC, not FASEA would go a long was to resolving this dichotomy.
Further, if limited scope advice in life insurance were to be exempt from the comprehensive financial advice regulatory framework, there already exist a number of provisions beyond RG 146 that would protect consumers, such as the new Design and Distribution Obligations and misleading and deceptive conduct obligations in the ASIC Act.
Submissions to ASIC closed on 18 January, 2021. The regulator plans to hold industry roundtables in the first quarter of 2021 to discuss the issues raised in the submissions. We await the outcome of this review and hope that it results in clear guidelines on scaled advice for licensees, which will ultimately reduce the costs passed on to consumers.