Does Quality of Advice Review achieve its objectives?

Meanwhile, Insurance Business is doing the same and seeking out industry stakeholders for opinions on Levy’s 250 plus page report. Fred Hawke (pictured above), is a consultant for law firm Clayton Utz and faculty member of the Australian College of Insurance Studies (ACIS).

Is the bar for personal advice higher or lower?

Levy, Treasury’s independent reviewer, recommends expanding the definition of personal advice to allow, once again, superannuation funds and banks to give more than general advice to their customers.

Levy, a partner with international law firm, Allens, included new regulatory obligations aiming to ensure advice is given in the best interests of the customer. Those obligations include a new good advice duty (Recommendation 4) and a changed best interests duty (Recommendation 5).

One major concern from consumer groups was that the best interests duty in the regulations would be watered down. Hawke said, if anything, “she sets the bar for compliant personal advice somewhat higher.”

“It certainly is not a watering down and the net effect is probably to strengthen the existing obligation, which is one reason I am ambivalent about whether, taken overall, the recommendations in this report actually will do much for the availability, as opposed to the quality, of financial advice,” said Hawke.

Hawke, an insurance law and regulation expert, said Levy’s recommendations in the area of advice, particularly Recommendation 4, are grappling with a longstanding issue for all regulators.

“The problem with removing prescriptive regulation (often stigmatised as ‘box ticking’) is that you still must delineate the obligations you are imposing on people, and the only alternatives to detailed prescription are high level statements of principle,” he said. “The regulatory pendulum has been oscillating between these two poles throughout my working life.”

Hawke said that both Recommendations 4 and 5 could lead to better quality financial advice for consumers who can afford it, including insurance customers.

“They are unlikely to do much to reduce the cost for those who cannot [afford it],” he said. “The only thing that will do that is to grow the profession of financial adviser till it reaches a level where there is meaningful competition for clients.”

Levy’s recommendations: Successful to a limited degree

The objective of Levy’s review was to improve the accessibility and affordability of quality financial advice. Hawke thinks her recommendations will achieve this to a limited degree.

“Elimination of redundant paperwork, such as SOAs, and generally reducing compliance costs of advice providers would certainly be a positive step,” he said. “So will getting rid of the pointless and misleading general advice warning.”

Hawke said one of Levy’s other aims is to stop financial institutions “hiding behind” disclosure documents and general advice warnings and instead actively evaluate the suitability of their financial products for the particular customer’s situation.

He agreed with the aim but noted that Recommendation 1 does not explicitly limit its application to advice provided by a financial adviser or relevant provider and could apply to anyone, including product providers.

“That’s a bit problematic in my view,” said Hawke. “I can’t see any commercial financial institution, certainly not an insurance company, effectively assuming responsibility for determining whether the policy they are trying to persuade a prospective customer to buy or renew is the best insurance contract at a price affordable by the customer, available to meet that customer’s objectives or needs, which is what the proposed requirement to give ‘good’ advice (Recommendation 4) practically seems to mean in the context of insurance.”

He said the likely effect of this change in the insurance sector could be insurers avoiding “personal interaction or personalised communication” with their customers and instead focus exclusively on selling their products.

Hawke suggested that insurers will no longer be able to sell insurance policies under “the fig leaf of general advice” but will do “everything they can” to avoid providing personal advice in the way they interact with their customers.

“That can only increase the demand for it from relevant providers,” he said. Hawke also couldn’t see how the cost of advice could come down, which he said was probably why Levy decided to retain the commission exemptions for life risk, general and consumer credit insurance.

“Good advice doesn’t come cheap  – or, to put it another way, cheap advice is worth what it costs and in the insurance context at least, ultimately there is only one source of payment – the advice consumer,” said Hawke.

Could there be alternative models for financial advice?

Consumer groups also argued that alternative models of financial advice need to be considered for people seeking guidance, so they don’t need to rely so much on the vested interests of the financial services industry, including insurance companies. Hawke said the only reference to an “alternate model” for financial advice he could find in Levy’s report was to the UK’s Money and Pensions Service, a government agency which provides free advice to pensioners and self-funded retirees. The only comparable agency in Australia, she said, is Centrelink.

“The prospect of Centrelink advising Mums and Dads on how much insurance they can and should buy for their home and contents ought to strike terror into the heart of any responsible consumer advocate,” said Hawke. “Levy’s brief was to find ways to reduce the cost of quality financial advice, not to shift it to the taxpayers.”

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