FAAA puts professional judgement at the heart of DBFO 1.5 response

When now-former financial services minister Stephen Jones released the exposure draft for the next stage of the Delivering Better Financial Outcomes (DBFO) reforms just before the election was called, it essentially became an information-gathering exercise to provide the next minister with a base of feedback to inform the final design.

The Financial Advice Association Australia’s (FAAA) initial response was particularly strong, with chief executive Sarah Abood outlining concerns and stating the association “cannot support it without substantial change”.

Having now released its submission to the consultation on the draft bill, the FAAA has outlined its issues in far greater detail – with a need for greater recognition of professional judgement underpinning its recommendations.

What is the FAAA asking for?

In broad terms, the FAAA wants to ensure the advice reforms increase access to advice, including through super funds, but consumer protection and competitive neutrality need to be driving principles.

This, it said, is particularly important when it comes to any level of personal advice being provided through the new class of adviser (or new class of provider, as the FAAA terms them) and that collective charging be limited to simple advice only.

The recommendations include:

• Retirement planning advice will always be complex and costly advice and should not be provided on a collectively charged basis.
• Consumer protection is paramount in the provision of super nudges, particularly with respect to retirement planning, and members should be made fully aware of the implications of acting upon these nudges.
• Super nudges should not be provided to superannuation fund members with an external financial adviser or at least should be subject to a notice to disregard the nudge if they have already obtained financial advice.
• The financial advice regulatory regime should be principles based and permit professional financial advisers to rely upon their professional judgement. ASIC guidance and enforcement must reflect this design principle.
• The opportunity to utilise a record of advice should be substantially expanded to better enable the use of this streamlined form of financial advice.
• Every effort must be made to sensibly rationalise what needs to be included in an advice document, including with respect to eliminating the prospect of additional obligations being added at a later time through regulation or ASIC guidance.

Professional judgement paramount

Legislation needs to recognise the substantial changes within the advice profession not just since the royal commission but going all the way back to the Financial Services Reform Act more than 20 years ago, the FAAA argued.

“Enabling professional financial advisers to demonstrate professional judgement and not be required to follow prescriptive and restrictive regulatory checklists in all cases, is a critically important change required to our regulatory regime,” it said in the submission.

“This is appropriate in the context of the obligations that apply to professional financial advisers – i.e. relevant providers registered on the ASIC Financial Adviser Register.

“Financial advisers now have to pass an exam, achieve a degree-level education standard, act in the best interests of their clients and operate under a ban on conflicted remuneration. Critically, professional financial advisers must adhere to the Code of Ethics, which includes a legal mandate for advisers to use their professional judgement to meet the standards.”

However, even in the face of these reforms, there has been no change to the “core obligations” of disclosure in statements of advice to “reflect the ability of and requirement for a financial adviser to demonstrate professional judgement”.

“The time has come to closely review the obligations around disclosure to better reflect the professional status of financial advisers. In the absence of Part B of this package, it appears that this fundamental adjustment to the regulatory regime has not been delivered in these Tranche 2, Part A changes,” the FAAA said.

“A more principles-based approach and reliance on professional judgement in the law will legally put clients, not compliance, at the forefront of the provision of financial advice.”

Indeed, the explanatory memorandum for the draft bill explains that the “requirements are intended to bring a client-centred focus to the CAR and allow providers to have flexibility in providing it in a way that is responsive to the client’s needs”.

The FAAA added, however, that the ability to transition to a more principles-based approach and reliance on professional judgement in legislation would also require a “clear directive to ASIC”.

“Historically ASIC and, in turn, licensees and AFCA, have interpreted the primary legislation by adopting a heavily prescriptive compliance-focused approach to guidance, supervision and enforcement,” the submission said.

“This must change to allow a principles-based approach and enable reliance on professional judgement to be implemented in a client-focused manner.”

In order to get to a principles-based approach, the FAAA recommended the legislation clearly:

• State the intent of the legislation to be principles-based, with clear discussion in the explanatory memorandum of the intent to move away from current prescriptive obligations.
• Permit reliance on professional judgement for an adviser to determine what needs to be included in an advice document, specifically for professional financial advisers.
• Give clear guidance to ASIC that regulatory measures to enforce the legislation must be consistent with the objective to achieve the provision of clear, concise and effective information to consumers.