Michelle Levy’s Quality of Advice Review (QAR) recommendations would expand the definition of personal advice allowing superannuation funds and banks to, once again, give more than general advice to their customers. Levy, the Treasury’s reviewer, included regulatory obligations to give advice in the best interests of the customer.
Levy also said “nothing much will change” for insurance brokers but, she said, they will be bound by the same “good advice” duties and need consent from customers to get their insurance commissions.
According to news reports, some big super funds support the recommendations, including Australian Super, Australian Retirement Trust and Aware Super.
Some consumer advocates, like CHOICE, see Levy’s initiatives as a return to the bad old days before the Hayne Royal Commission when financial institutions, including insurers, were deploying their advice to sell products that went against the interests of their customers.
Insurance Business is consulting with industry stakeholders for opinions on Levy’s 250 plus page report.
Dr Ian Enright (pictured above) is founding chair of the Australian College of Insurance Studies (ACIS) and a lawyer, academic author and company director.
In the context of Levy’s expansion of the personal advice definition, Enright said the best interests fiduciary duty without a safe harbour and the requirement for good advice are “excellent recommendations.”
“Good needs to be tested not only by the circumstances of the customer but calibrated by what the customer has told the adviser,” he said.
Enright strongly supports the basic premise of the reviewer’s recommendations.
“Levy comments, correctly in my view, that we have allowed perfect to be the enemy of good,” he said. “The consequences have been enormously detrimental.”
Enright said, historically, financial regulation in Australia has often lacked balance because it’s a response to a crisis. This regulation, he said, is often too focussed on preventing another disaster, for example after the HIH collapse. Or, he said, too broad and ends up regulating areas it doesn’t need to, for example, the current licensed advice model.
However, Enright said Levy’s review falls into the camp of the country’s “better regulation” that comes from “considered reports based on good listening and practical wisdom.”
He said Levy’s QAR is “an excellent instance” of this approach. Another example, he said, is Michael Kirby’s 1982 Australian Law Reform Commission (ALRC) Report on insurance contracts.
After deregulation led to poor selling practices and poor quality advice during the 1980s and 1990s, Enright said the FSR changes in 2001 [Financial Services Reform Act 2001] created a licensed advice model, “which has advice at least trifurcated: no advice; general advice and personal advice.”
“The central issue is a social and commercial one for insurance,” said Enright. “What is the best way of enabling our citizens to protect their assets (life, health, homes and businesses) adequately and affordably?”
He said the price should not discourage sales and the levels of cover should not lead to underinsurance. Enright said the best way for insurance to achieve its purpose “clearly involves good advice.”
“But who is competent to advise, what is an acceptable quality of advice and who pays the cost of advice?” he said.
To help solve these issues, Enright would like to see Levy’s reforms go further.
Firstly, he said, general advice is about what a product is and does and is not a useful category of advice when disclosure is already highly regulated.
“The ALRC recommendation that the general advice category be abolished should be supported,” said Enright. “I disagree with Levy’s retention of this category in its current form.”
The ACIS chair would also like to see a focus on standardising legal terms in products to enable more effective comparison.
“An insurer can then say that it offers the standard home building cover plus, for example, a work shed or minus a pool house,” he said.
Enright said insurance contracts should also follow residential real estate sales and leasing and personal use motor vehicle sales that are all on relatively standard contracts.
Enright also called for a more subtle approach to digital advice.
“There is an argument, not considered by Levy, that simpler digital advice like the examples here [Enright discussed home building and life insurance calculators] and more complex digital advice like a full financial plan being developed by an algorithm, should be treated differently,” he said.
Enright suggested that Levy’s “good advice” requirement and other safeguards are a workable answer to customer advocates who reject the disclosure regime as a failure, at least in the life insurance sector.
However, he said, in terms of commission based advice, general insurance is a very different market to life insurance.
“Most consumer lines are now sold direct and the distribution of SME lines includes various types of insurer agencies,” said Enright. ”There is no evidence that broker bias from commissions or otherwise has created inadequate or improper customer outcomes.”
Like the Hayne reforms before her, he said Levy “is entirely correct” to single out the consumer credit sector for a ban on commissions.
Next week, IB will publish the view of insurance law expert Fred Hawke, a consultant with law firm Clayton Utz and also an ACIS faculty member.
What do you think of the QAR recommendations? Please comment below.
