Friday 3 April 2020
ASIC finds advice is generally appropriate but says there’s room for improvement.
Superannuation funds are important sources of advice for many Australians. ASIC’s Senior Executive Leader — Financial Advisers, Kate Metz, discusses the regulator’s recent report on financial advice by superannuation funds, which found that members are generally getting appropriate financial advice, but there’s still room for improvement.
Today’s consumers often make financial decisions in a complex environment. Many consumers are ill-equipped to make financial decisions that are in their interests and would benefit from being able to access good quality financial advice at key points in their life. A growing number of superannuation funds have responded to this need by offering financial advice services to their members.
Aware of this trend, ASIC considered it timely to conduct an in-depth examination of the ways in which superannuation funds provide financial advice to members, and the quality of that advice.
Late last year, ASIC published the findings of this project in Report 639 Financial advice by superannuation funds (REP 639) along with some practical tips funds can use to help improve the quality of their advice. ASFA has also circulated these tips to its members.
We surveyed 11 retail funds, 10 industry funds, two corporate funds and two public sector funds. Four of these did not provide personal advice to their members. We also reviewed 233 member files to examine the quality of advice provided to members from the 25 funds.
The survey results offered some interesting insights into financial advice provided to members of superannuation funds.
Types of advice
Members most often sought advice on investment choice, contributions and retirement planning. The people most likely to seek advice were retail fund members aged between 18-24, and industry fund members aged 65+. Least likely to seek advice were members of retail funds aged between 34-44, and industry fund members aged between 18-24.
The most common delivery channels for providing advice to members were in-house call centres (37 per cent) and advice providers employed by a related party (26 per cent).
The results further show that:
- 49 per cent of general advice was provided by in-house call centres
- 30 per cent of intra-fund advice was provided by member-directed digital advice tools that generate Statements of Advice, and
- 72 per cent of comprehensive advice was provided by advice providers employed by a related party.
Funds were keen to increase their use of digital advice tools, which is interesting given the slow uptake of digital advice in recent years. In fact, 61 per cent of funds stated that they intend to increase their use of member self-directed on-line tools that can generate Statements of Advice.
We have provided guidance on digital advice in Regulatory Guide 255 Providing digital financial product advice to retail clients (RG 255). When done properly, digital advice increases members’ access to advice, which is a good outcome for all consumers.
Quality of advice
From the advice review, we found that the quality of personal advice provided to members was generally appropriate, and was similar across retail and industry funds.
Overall, the advice review findings were better when compared to our previous large advice review projects, and the quantum of detriment concerns was considered low. However, it is clear that compliance with the law still needs to be improved across the board.
Just under half (49 per cent) of the files reviewed complied with the best interests duty and related obligations. Of the remaining files, 36 per cent failed to demonstrate full compliance as a result of procedural, disclosure or record keeping deficiencies, and 15 per cent indicated that the member was at risk of suffering financial detriment or non-financial detriment as a result of following the advice provided.
We found that the two main causes of files being assessed as non-compliant were that the advice provider failed to identify the subject matter of the advice, the member’s objectives, financial situation and needs, and that the advice provider failed to conduct reasonable investigation into financial products and base all judgements on the member’s relevant circumstances.
Where there was an indication that a member was at risk of suffering financial or non-financial detriment, we have contacted the advice licensee about our expectation that they will review the advice and, where required, remediate those affected members.
Where is improvement needed?
Superannuation funds have the potential to improve access to advice for many Australians, but the quality of advice still needs improvement. We have included in our report a number of practical tips that trustees, advice licensees and advice providers can use to improve the quality of the advice that they provide to superannuation members.
- Keep good records. Licensees and advice providers should ensure that their files contain a comprehensive record of any discussions with the member, the advice provider’s workings and any other information that is pertinent to the advice. Our advice review saw instances where poor record keeping hindered our ability to conclude that the advice was compliant with the best interests duty and related obligations. Just over one third (36 per cent) of files that failed to demonstrate full compliance with the best interests duty and related obligations had failed to demonstrate full compliance as a result of procedural, disclosure or record keeping deficiencies.
- Regularly review outsourced arrangements. Superannuation trustees need to regularly review the appropriateness of outsourced arrangements and remuneration arrangements for advice providers. Advice providers must also have a rigorous process for selecting the products on their approved product lists.
- Exercise judgement when scoping advice. Advice providers must use their judgement when deciding on the scope of the advice. The scope must be consistent with the member’s relevant circumstances and the subject matter of the advice they are seeking.
- Have strong governance and oversight processes. Superannuation trustees need strong governance, risk management and oversight processes to ensure that only authorised and appropriate advice fees are deducted from a member’s superannuation account. In particular, under the sole purpose test, not all financial advice can be paid for from a superannuation account.
Further areas for improvement can be found in Section C of the report.
What else is on ASIC’s radar?
Last year, ASIC and APRA issued a joint letter to superannuation trustees to reinforce the importance of undertaking appropriate oversight of fees and other charges being deducted from member accounts for payment to third parties such as financial advisers. The letter highlights a range of issues to be considered in trustees’ oversight practices to address the erosion of superannuation balances. Work considering reviews by superannuation trustees undertaken in response to this letter is ongoing but has confirmed that trustee oversight practices vary.
Separately, the Financial Services Royal Commission recommended legislative changes to address significant problems in the financial advice industry. For example, charging of fees for services that were not provided, giving inappropriate advice because of conflicts between an adviser’s duties to their clients and the adviser’s own interests, and erosion of superannuation balances by inappropriate advice fees.
Treasury consulted on exposure draft legislation to implement Royal Commission recommendations in February. Comments closed on 28 February 2020.
Under the exposure draft legislation, ASIC will have the powers to make certain legislative instruments in relation to advice fee consents and independence disclosure. We are currently consulting on draft instruments made under these new powers, as well as guidance about ongoing fee arrangements. We welcome industry feedback as part of this consultation.
- Report 639 Financial advice by superannuation funds (REP 639)
- Media release 20-096MR ASIC consults on proposals about advice fee consents and independence disclosure
Kate Metz is ASIC’s senior executive leader — financial advisers.