The olive tranche

We can finally declare a victor in the race between the DBFO's second tranche and the heat death of the universe.

It was a close call, sure, but Stephen Jones managed to eke out a win just as the last few celestial bodies were fusing into cold spheres of iron. Of the black holes in attendance, most were seen graciously accepting defeat before evaporating into the firmament. 

Now, strictly speaking, the factsheet Treasury released yesterday isn’t the actual draft legislation; it’s painted in broad strokes and leaves plenty open to interpretation. But this two-pager represents the clearest picture of the Government's advice reform agenda since its long-delayed response to the Quality of Advice Review back in June 2023.

So, let's not stand on ceremony – was it worth the wait?

Licensed to ill 

We’ll start where I left off last week: the “new class of adviser”. While they’re still effectively greyed out on the character select screen – they remain nameless, in other words – NCAs occupy a considerable amount of the factsheet’s limited real estate.

According to Treasury, NCAs will focus on simple advice that’s “quality, helpful and safe for consumers.” In practice, this means:

• they can only offer advice on products under APRA’s remit (such as those issued by banks, insurers and super funds)
  
  
• they’re limited to advising existing customers of a licensee, or new customers in cases where the new customer “initiates the advice request” 
  
  
• they can’t collect commissions or enter into ongoing fee arrangements
  
  
• they’ll need to complete an AQ5 level diploma to practice

Licensees that employ NCAs will be permitted to charge a fee for the “simple, episodic advice” they provide as long as it’s not recurring. On the other hand, they’ll be subject to additional supervision and monitoring obligations and can incur civil penalties for breaching them. 

(NCA advice will also have to adhere to the best interests duty – but let’s put a pin in that for now.)

If you hear a faint rumble as you’re reading this, it’s probably the sound of every trade journalist in a 100-kilometre radius rushing to point out that the devil is in the detail¹. And while it’s true that this conversation would benefit from the draft legislation being available, I still think Treasury’s brief description is momentous enough. 

When Stephen Jones floated the NCA concept (under a very different name) last year, it was explicitly designed as a channel for super funds to provide personal retirement advice to their members. In fact, the original version of tranche two (or “stream two” among friends) was entirely about super; banks, insurers and other advice providers were relegated to the third exploratory phase along with Michelle Levy’s most significant recommendations.

Based on Treasury’s update, though, it’s open season for anyone with an AFSL and an attitude. In theory, this would allow existing licensees to serve clients with simpler advice needs (as FAAA CEO Sarah Abood has previously discussed), but it might also mean the introduction of institutional players who can undercut those businesses down to zero. 

Give it to me straight

Fortunately, Treasury also aims to reduce overheads in advice businesses by removing the SOA – not just making it optional, to be clear, but replacing it with a “principles-based record that is in plain English and addresses the client’s needs.” 

While eliminating one of the most onerous pieces of advice documentation carries its own risks – Advisely board member Jenny Brown discusses them in this article from our archive – saving up to 12 hours per client is nothing to sniff at. Plus, the kind of “principles-based record” Treasury’s describing is much more in line with clients’ expectations than a document that’s grown so large it now qualifies as a lethal weapon.   

Curiously, tranche two also takes direct aim at one of the most controversial exclusions from the QAR’s terms of reference: the education and professional standards regime. Following on from the passage of the experience pathway legislation in September last year, Treasury now says it will "[review] the education pathway for professional advisers with a view to increasing flexibility in support of the growth and continuing professionalisation of the financial advice industry."

That’s not all, though. Following the “implementation of the [DBFO] package” – and here it’s not clear whether the factsheet is referring to tranche two or including the fabled tranche three as well – Treasury will review and update the Code of Ethics. 

As with the education pathway, the Code of Ethics will be updated to “align with the new regulatory framework” and the introduction of the NCA. 

Speaking of which, let’s talk about the best interests duty. (I told you we’d come back to it, didn’t I?)

But for the grace of God

According to Michelle Levy, the “good advice” duty was the linchpin of the entire QAR report. It, along with the expansion of the definition of personal advice, was the foundation of all the other recommendations and her vision of a regulatory framework that focused on “the content of the advice, rather than the conduct of the adviser.” 

You can imagine her disappointment, then, when the Treasury’s QAR response pushed good advice to the back of the queue – well into the maybe zone. Actually, you don’t have to imagine it: in June 2023, Levy told ABC News she was “somewhat disappointed” that the Government had deferred the recommendations she felt would “really help make advice more accessible to more people.”

However, it would appear that good advice lives on in spirit, if not in name. Treasury’s factsheet says tranche two will “modernise” the best interests duty into an “outcomes-focused duty.” The expected part of this process will involve removing the safe harbour steps (Tangelo discusses the implications of this here). 

The focus on “outcomes,” though, sounds a lot like the conduct-versus-content binary presented in the final QAR report. And no wonder: if NCAs are limited to prudentially-regulated products and "straightforward answers to simple questions," how can it be established that they’ve:

• identified a client's needs and objectives
  
  
• taken reasonable steps to obtain relevant information 
  
  
• determined whether they have the relevant expertise
  
  
• and, crucially, “conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter”?

Reworking the current law to focus on “outcomes” seems like a tidy solution to this problem – but as with the proposed good advice duty, it raises two important questions. 

The first concerns advice as a profession: would we expect a surgeon to be regulated primarily based on how many skydives a patient has left in them after a quadruple bypass? Does ATRA look askance at a music teacher when the proportion of their students selling out the O2 Arena falls below a certain threshold? 

Related to this, any assessment of outcomes requires a benchmark. Who determines the reference point for quality advice, and on what basis? Is it ever updated? Will it be subject to the whims of whichever political party has a current majority in the lower house? 

If you want an idea of what an outcomes-based assessment of advice might look like, consider AFCA and the CSLR. In that framework, determinations (and subsequent referrals) aren’t based on capital loss; instead, AFCA uses the “but for” test. 

As the complaints body recently explained in a submission, this test is premised on the following question: “‘But for’ the failure of advice, what would the consumer have invested in?” The reference point AFCA cited for one determination was a Vanguard index fund. 

We are, of course, getting into the finer difficulties of parsing out the scratch tracks for one of the most convoluted policy rollouts in living memory. 

Still, I think this idea of an “outcomes-based” framework merits some very careful consideration, especially if outcomes do end up being assessed based on the relative performance of different financial products. And then there’s the unenviable task of designing a benchmark that accommodates every kind of advice covered by the best interests duty.

I’m sure Treasury will get on that soon enough, though – there’s still time before entropy makes absolute zeroes of us all. 

^{1. Don’t worry – none of us are without sin.}