Hayne Implementation: Board Quality Review Terms of Reference Released

On March 11, 2022, the government published the final terms of reference for the planned quality of advice review.

Keys to go

  • Following consultations, the government has published the final terms of reference for the planned “quality of advice” review which is expected to be completed in 2022.
  • The review is being conducted in response to three Hayne recommendations: recommendations 2.3, 2.5 and 2.6. In addition, the review will also consider fee disclosure and consent requirements, including annual renewal of ongoing fee agreements (Recommendation 2.1).
  • The final terms of reference specify that the review will not take into account certain issues, including (among others) the definitions of “retail client”, “wholesale client” and “sophisticated investor”.
  • Timeline: The review will be led by Ms. Michelle Levy. A report will be submitted to the government by December 16, 2022.

Terms of reference published

On March 11, 2022, the government released the final terms of reference for the quality of advice review, due to be completed this year, and confirmed that Ms. Michelle Levy will lead the review.

Announcing the publication of the mandate, Minister for Financial Services, Superannuation and the Digital Economy, Jane Hume, said the review gives effect to the government’s response to the three Hayne recommendations, 2.3, 2.5 and 2.6.

For context,

  • Recommendation 2.3 recommended that a review of the effectiveness of existing measures to improve the quality of advice be completed “preferably by June 30, 2022, but no later than December 31, 2022”. Commissioner Hayne also recommended that the review include examining whether the “safe harbour” provision of section 961B(2) of the Companies Act 2001 (Cth) (Companies Act companies) must be retained. According to him, “unless there is a clear justification for retaining this provision, it should be repealed”.
  • Recommendation 2.5 recommended that ASIC’s planned review of conflicting remuneration related to life insurance products and the operation of ASIC Companies Instrument 2017/510 (Life Insurance Commissions) consider whether there is a clear rationale for keeping these commissions and that the cap would ‘eventually have to be reduced to zero’ otherwise. Minister Jane Hume confirmed that the review of the quality of advice “will cover the review of life insurance commissions which had been put forward by ASIC”.
  • Recommendation 2.6 recommended that the review referred to in recommendation 2.3 also consider whether “each remaining waiver of the prohibition on conflicting remuneration remains justified, including: waivers for property and casualty insurance products and non-life credit insurance products the consumption ; and exemptions for non-monetary benefits provided for in Section 963C of the Companies Act”.

The review of the quality of advice will include the review of fee disclosure and consent requirements, including reforms introducing annual renewal of ongoing fee agreements (Hayne recommendation 2.1).

Objective of the exam

The government identifies access to affordable, high-quality financial advice as the main objective of the review. Streamlining regulatory requirements and reducing the current cost/compliance burden for advisors, including through increased use of technology, is touted as an important aspect of achieving this goal.

Broadly, the review will explore:

  • the potential to “streamline and simplify regulatory compliance obligations to reduce costs and eliminate duplication”
  • the potential to reduce compliance costs by replacing rules-based regulation with principles-based regulation
  • whether documentation and disclosure requirements can be simplified to better meet consumer needs
  • whether “parts of the regulatory framework have in practice created undesirable unintended consequences and how these consequences could be mitigated or reduced”.

Details: Scope of Review

The review will include examining the legislative framework for financial advice, including:

  • Whether concepts such as ‘financial product advice’, ‘general advice’ and ‘personal advice’ could be ‘simplified’ or ‘more clearly delineated’, and how these terms are understood/used by consumers. The role and scope of so-called advice – “wide”, “intrafund” or “limited scope” – will also be considered.
  • Whether the safe harbor provision in s961B(2) of the Companies Act 2001 should be repealed (or whether there is sufficient justification for retaining it)
  • Existing financial advice documentation and disclosure requirements, including advice statements
  • Fee disclosure and consent requirements, including reforms to introduce annual renewal of ongoing fee agreements (Hayne Recommendation 2.1)
  • The impact of life insurance compensation reforms, and in particular, the impact of the reforms on insurance coverage levels
  • The remaining exemptions to the prohibition on conflicting remuneration in life and casualty insurance (Hayne Recommendations 2.5 and 2.6)
  • “The application of the advice framework to certain activities and professions, including consideration of recommendation 7.2 of the Council of Tax Practitioners review”. For context, recommendation 7.2 recommended that the government “initiate a specific review of the advice that accountants can and cannot give on superannuation and which accountants might ask to initiate a specific review of the advice that accountants can and cannot give in relation to superannuation and to which accountants it might apply”.
  • ‘Whether consent agreements for sophisticated investors and wholesale clients work effectively for financial advice purposes’.
  • Actions taken by ASIC, including regulatory guidance and class orders
  • The role of financial services entities and professional associations.

“Where appropriate”, the review will “also take into account” (among others): the potential for increased use of technology to enable “mass market adoption of low-cost advice”, opportunities to reduce compliance costs for the industry, structural changes in the sector and “other key regulatory developments”, for example the right to consumer data, the retirement income commitment and the obligations of design and distribution.

Offscreen

The review will not make recommendations on the following points.

  • New adviser disciplinary and registration systems (Royal Commission Recommendation 2.10); protocol for reference checking and information sharing (Royal Commission Recommendation 2.7); or requiring licensees to report serious compliance issues (Royal Commission Recommendation 2.8) and to take action when they detect that an adviser has been at fault (Royal Commission Recommendation 2.9)
  • Changes to the definitions of “retail client”, “wholesale client” and “sophisticated investor”, including income and asset thresholds. The draft terms of reference (previously viewed) proposed that the review examine “the processes by which investors are designated as sophisticated investors and wholesale clients, and whether consent agreements are operating effectively.”
  • Professional Standards for Financial Advisors
  • Terms of recourse for financial services
  • The application of tax and privacy laws to financial advice.

Hourly

The review will be led by Michelle Levy, supported by a secretariat within Treasury.

The deadline for carrying out the examination is the same as that proposed in the consultation. The final report will be submitted to the government by December 16, 2022.

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[Sources: Minister for Financial Services, Superannuation and the Digital Economy Jane Hume media release 11/03/2022; Treasury Quality of Advice Review; Terms of Reference]