One of the “under the radar” recommendations from the second tranche of the Delivering Better Financial Outcomes (DBFO) is the removal of the safe harbour steps (SHS).
We fully support the removal of the SHS and believe that, if effectively managed by licensees and the broader advice industry, it can significantly empower wary financial advisers.
Here’s why:
The SHS were introduced as part of the Future of Financial Advice (FoFA) changes to provide greater structure and framework for providing and assessing advice, particularly in relation to whether the advice meets best interest requirements.
Most licensees and compliance providers have a supervision and monitoring framework. Its core component is generally an audit or compliance review, which uses a scorecard based on the SHS (among other criteria).
While this approach provides a useful structure for reviewing the quality of financial advice, its real-world implementation presents two key problems:
- The seven steps of the SHS in no way reflect how an actual advice conversation occurs. By their very nature, these conversations should be more fluid than formulaic.
- Advisers have received negative audit outcomes due to process-related issues, even when the overall advice is sound. This has created a hailstorm of angst, work, remediation and cost, which may not have actually benefited the client nor been the result of inappropriate advice.
Fast-forward to the Quality of Advice Review, in which Michelle Levy sensibly recommended removing this requirement. Agreeing with her recommendation, the government has signalled its intent to remove the SHS as part of the DBFO reforms.
Should this legislation pass, advisers will still need to provide advice that meets a best interest requirement (and adheres to the Code of Ethics). Crucially, though, how they get there will matter less than the final result.
The advice industry has been broadly supportive of this proposal, with two caveats:
- Some licensees who have heavily relied on the SHS as the cornerstone of their supervision and monitoring framework are concerned that, without it, there will be less structure for their advisers to follow and therefore less rigour in the way they assess their advice.
In an environment where advisers are seeking black and white responses, some licensees may err on the side of caution.
- Even if the legislation passes and the SHS are removed, parts of the SHS will still need to be addressed by the adviser.
The critical one is confirming the scope of advice, which is already a problematic area; some advisers, for example, are scoping out insurance from super advice (and vice versa), even when one has a material impact on the other. This will still need to be addressed thoroughly and appropriately, even in the absence of a prescriptive SHS.
We won’t know for sure until we see the draft legislation, but it looks like we will have a principle basis for advice (informed by the best interests duty, Code of Ethics and advisers’ professional judgement) rather than a prescriptive framework in the not-too-distant future. If this is the case, I think we should see this change as a gift.
It’s an opportunity to treat advisers as professionals and empower them with tools, training and support to help them better-evidence what they are already doing. Now, let’s determine “how” of what this means for the industry:
- We acknowledge that the industry has been through the regulatory ringer and (post-FoFA, FASEA, Hayne and DBFO) advisers are already professionals by any measure.
- We focus more on the need to make the advice the “hero” and dial up how we can better-evidence the advice itself, i.e. via professional judgement (using tools, training, templates, process improvements and AI)
- We instill trust by building confidence; we already have most of what we need. Our focus should be on giving advisers the confidence to demonstrate best interest.
This can be achieved by ensuring advisers’ files clearly demonstrate the journey to their recommendations, using fact-finding, file notes, advice records and working papers to tell that story.
In short, we already have everything we would need to evidence professional judgement. The alternative, of course, is to embrace process prescription and perceived safety (at a time when advisers are looking for the freedom to do what they do best).
The other side of challenge is opportunity and how we handle and think about this change will have a big impact on the final result. If the legislators pass this gift to the industry, will we be too nervous to step forward?
We hope not: let’s go.
