Nudge-nudge: What should super prompts look like?

While the Delivering Better Financial Outcomes (DBFO) reforms have been formed on the back of the Quality of Advice Review (QAR), one inclusion within DBFO 1.5 that was not included in Michelle Levy’s recommendations is the ability for “targeted superannuation prompts” – or nudges.

However, it has formed part of the government’s response to recommendation 6 of the final report, which focused on allowing super funds to provide personal advice.

As law firm King & Wood Mallesons (KWM) explained, the nudges will effectively be deemed to be general advice, which means “there would be no obligation to comply with the personal advice obligations when sending a compliant nudge”.

“While the intention of allowing for nudges is to be commended, we question the take-up of the new regime,” KWM said.

“This is because trustees can already provide targeted information to their members without it constituting personal advice, the proposed compliance obligations surrounding the nudges regime are significant (including imprisonment) and the consequences of non-compliance could be significant.”

In its response to the latest bill, Financial Advice Association Australia (FAAA) said while nudges were not part of the QAR, there is “merit in investigating this issue” and the possibilities available to “better enable super funds (and possibly other product providers) to provide information to their members to assist them to identify the need to take action and to make financial decisions”.

“We are supportive of this in principle,” the FAAA said.

However, the association expressed some reticence around the actual form that the nudges will take, arguing the legislation as it stands allowing funds to provide “personal financial advice through nudges to classes of members, in a manner where the usual obligations of providing personal financial advice will not exist”.

Pushing for greater clarity on nudges, the FAAA said it needs to be mandatory that a super nudge “include a statement that the prompt does not consider the member’s individual circumstances, and that they should seek personal financial advice from a professional financial adviser before taking action”.

The submission also called for detail on whether members will have recourse available if they suffer a loss as a result of taking action based on a nudge.

How the prompts would interact with members who already receive advice was another area of concern for the FAAA, recommending that nudges “in the form of a specific recommendation” not be provided to advice clients of financial advisers.

“This is because the nudge could be inconsistent with advice that was provided by a financial adviser who has much broader visibility of the client’s objectives, financial situation and needs, and the ability to consider product options external to the fund,” the submission said.

“A conflict between the nudge provided by the super fund and personal financial advice provided by a professional financial adviser could undermine the member’s confidence to proceed with either.”

Similarly, the Institute of Financial Professionals Australia (IFPA) said the concept of life-stage nudges is “well-intentioned”, but its “practical application raises concerns”.

“Without access to key personal information – such as a member’s income, relationship status, or home ownership – it will be challenging for funds to segment their membership in a meaningful way or provide advice that is relevant and appropriate,” the IFPA said in its submission.

“Relying on broad group-level characteristics risks delivering advice that appears personalised but fails to reflect an individual’s actual circumstances.

“Moreover, because these nudges will not be considered personal advice, they will not be subject to the same legal and ethical obligations. This opens the door to advice being presented as general, when in reality it may blur into personal advice, creating confusion and potential risk for both members and trustees.”

Opening the door to adviser nudges?

An interesting addition to a number of the submissions that have been released so far is for the use of nudges to be broadened beyond just super funds.

Arguing that it would be consistent with its “overall principle of a level playing field or competitive neutrality”, the FAAA said financial advice practices “should also be able to provide nudges to their clients, where they would need to comply with these same rules”.

The Stockbrokers and Investment Advisers Association (SIAA) also raised this possibility in its submission, noting that the nudge provisions essentially exclude self-managed super funds (SMSF).

“Our members provide advice to many thousands of SMSF accounts and these provisions should be available to them,” the SIAA said.

“Advice licensees are in a particularly good position to use the information they hold on their clients to develop targeted communications to cohorts of SMSFs that can then result in those clients receiving personal advice.”

Additionally, the SIAA said the impact of collectively charged advice was disproportionately favouring older superannuation members.

“Superannuation fund members who pay to receive personal advice from an external advice provider are subsidising the costs of those fund members who receive advice via their superannuation fund that is collectively charged and essentially ‘free’,” it said.

“Due to the fact that the need for advice increases the closer one is to retirement, younger members end up subsidising older ones. If a member has opted out of receiving targeted superannuation prompts because they do not wish to receive advice from their superannuation fund, it is arguable that they should not be forced to contribute to the cost of other members receiving advice that is collectively charged.”

The SMSF Association also backed expanding the use of nudges to advice professionals.

“Of relevance though, the assessment framework only requires that a selected class consist of at least two members. The reasoning for excluding SMSFs therefore seems at odds with how the framework is drafted to operate,” it added.

“While we support excluding SMSF trustees from providing prompts or nudges to themselves as members, given that there are over 1 million SMSF trustees, this is a significant proportion of the working Australian community to be excluded from this framework.”

CEO Peter Burgess added that it would build on the trusted relationships advisers have with clients and their deep understanding of trustee needs.

“With more than 1 million SMSF trustees in Australia, it’s counterproductive to exclude SMSF professionals, who are uniquely placed to assist at key life stages, from being able to prompt clients to seek advice that’s right for them,” Burgess said.