Not so simple for insurers as advice changes loom
General insurers are set to provide “simple advice on less complex matters” under a new model, as outlined in the Albanese Government’s ambitious bid to reform financial advice regulations.
The proposed reforms, announced last week, conclude the Government’s phased response to the Quality of Advice Review (QAR) final report. The year-long QAR examination of Australia’s financial advice regulatory maze – one of many recommendations from the Hayne royal commission – was completed last year.
At present insurers offer general advice in the direct channel, and for consumers who are after insurance that takes into account their personal circumstances, their best bet is a retail broker.
The Insurance Council of Australia (ICA) has responded positively to the new advice model plan, despite the lack of details at present around what “simple” guidance means and the minefield of overlapping compliance rules that are likely to accompany the changes.
“A common complaint of insurance customers is that their insurer is not able to provide advice based on their own circumstances,” the ICA said.
“This means that, other than when using a broker, when purchasing insurance customers have to make their own assessments about the suitability of a product without the help of professional advice.”
Others, like financial services law specialists, are more cautious. They say Treasury has yet to release draft legislation for consultation and until the legislative setup is finalised, it is difficult to know what it means, apart from the fact that insurers will be allowed to provide “simple advice”.
Law firm Minter Ellison says determining what is "simple advice" will be a challenge.
A spokesperson for ICA says the government is currently working on developing regulations and guidance for the provision of simple advice and that these regulations are expected to be finalised in 2024.
Financial Services Minister Stephen Jones says the new model – which will apply also to life insurers, banks and super funds – will deliver simple advice at scale that will be “high quality, helpful, and safe” for consumers.
He calls the move “a pragmatic step that will expand the provision of personal advice to improve consumer outcomes”.
“Under our model, there will be a new class of financial advisers who will fill the advice gap by advising on less complex matters.
“It is expected that this new class – to be termed ‘qualified advisers’ – will generally be employees of licensed financial institutions.”
Charging of fees and commissions are prohibited – as recommended by the QAR final report – and insurers will be solely responsible for the advice provided.
But Mr Jones, who is also Assistant Treasurer, has sought to assuage concerns of potentially weakened consumer protections under the new advice regime.
The decision to create a new class of advisers – as recommended by the QAR final report – will come with “important safeguards” that were not outlined in the QAR report. Treasury says the additional guardrails include legislated minimum competency standards for the adviser and compliance with a “modernised” best interests duty rule.
Treasury says the “modernised and flexible” best interests duty will apply to all providers of advice and that it will provide “clearer legislative support for scaled or limited scope advice where this meets the client’s objectives and needs, and for advice where the advice provider has limited, but relevant, information”.
Like the existing best interests duty rule, advice providers are still expected to act in the best interests of the client and to prioritise the interests of the client in the event of a conflict when the “modernised’ version commences.
The QAR final report had recommended creating a “good advice duty” but Mr Jones says “Australians deserve the best, not just good”.
“Some have suggested that the only way forward is to allow personal advice to be given that is not subject to the best interests duty. We disagree.”
ICA says the plan for a “modernised” best interests duty obligation will allow customers to benefit from “clearer conversations with their insurer, leading to better financial outcomes”.
“This is particularly important in the context of the growing protection gap, as customers will be better informed to be able to choose insurance that covers them against the risks they face.”
ICA CEO Andrew Hall says “modernising” the advice regime will allow for better interactions between insurers and their customers.
“Insurers share their customers’ frustration with the one-size-fits-all approach of the current regime,” he said.
“The regulations put in place following the Hayne royal commission recommendations were well-intentioned, but by seeking to strike out bad financial advice got rid of insurance advice for most ‘mum and dad’ consumers.”
McCabes Principal Mathew Kaley says details are scant at this stage but points out “it is notable that the Government states that the revised best interests duty will apply to “all providers of advice’”.
“This should be monitored closely,” he said.
Radford Lawyers Principal Solicitor Mark Radford says the structure of the reforms and approach appear “generally sensible”.
“However, until we see what is proposed regarding the best interests duty and how it will deal with limited or scaled advice and the obligations imposed on the new simple personal advice providers, we won’t understand the true impact,” he told insuranceNEWS.com.au.
“What they’ve done is to create a space in which people can give a limited form of advice, which will still need to be in the interests of consumers and appropriate for them.”
QAR Reviewer Michelle Levy is pleased with the Government response to her final report, even if her key recommendations – expanding the definition of personal advice and creating a “good advice duty” – were rebuffed.
As she sees it, the planned changes announced last week by the Government will help more Australians get financial advice when they need it.
“It was and is my view that personal advice which takes into account the recipient's personal circumstances is usually more helpful than advice which does not do so,” Ms Levy told insuranceNEWS.com.au.
“Having said that, I suspect that as institutions have more and more personal information about their customers and members, it will be more likely that much advice they [have] given them will be personal even without the change of definition I recommended.”