Seminar on Disclosure Under the FSLAA Regime
Yesterday, MinterEllisonRuddWatts hosted a seminar on the proposed disclosure obligations for financial advice providers under the Financial Services Legislation Amendment Act 2019 (FSLAA). Financial Services partners Lloyd Kavanagh and Jeremy Muir were joined by panellists Simon Haines of Nikko Asset Management, JD Hall of Westpac and Michelle Corse-Scott of Milford Asset Management to discuss the proposals.
The key areas discussed at the seminar were:
- how the disclosure obligations fit within the overall regime
- the challenges of preparing for obligations that are not yet finalised
- the difficulties of future-proofing reform
- ensuring that the disclosure requirements do not prevent advice being given (in circumstances where full disclosure and/or record keeping are challenging), and
- endorsing the intent of the reforms to provide flexibility.
Some of the points raised in respect of each of these were as follows.
How the disclosure obligations fit within the overall regime
- The effective date of the new regime is only 150 days away (excluding weekends and statutory holidays). Significant adjustment will be required in that time, including training people and making sure disclosure materials are ready. This will be particularly so for businesses that currently do not have disclosure obligations (e.g. businesses giving only class advice).
- The market-wide focus on conduct provides the key context for implementing the regime. The Financial Markets Authority (FMA) has clearly articulated an emphasis on and its expectations around good customer outcomes.
- The FSLAA itself provides that disclosure requirements can be implemented for both retail and wholesale customers. The draft regulations, however, only require disclosure for retail customers.
- The draft regulations are a good attempt to simplify disclosure to a series of key messages given at sensible points of an advice process. As it is difficult, however, to draft an elegant solution to cover all possibilities, there is further work to be done (which has started through the recent consultation process to make it work in practice).
- In practice, all disclosure needs to be part of getting good advice to customers, but not stand in the way of that outcome. Speakers referenced the recent reportREP 632 Disclosure: Why it shouldn’t be the default issued by the Australian Securities and Investments Commission and the Dutch Authority for the Financial Markets which points out some of the problems with relying on disclosure, other than as part of a wider network of protections for customers.
The challenges of preparing for obligations that are not yet finalised
- The regulations have currently only been released in draft form, with no clear indication as to when the finalised regulations may be released. Although initial submissions on them have closed, it is still important for people to talk about them and get their views back to those responsible for finalising them.
- There are practical issues with some of the proposed drafting e.g. the requirements to disclose “reliability events” where the definitions will catch circumstances and actions beyond those which are directly material to the provision of financial advice. For some businesses, this may mean a lot of distraction for customers, and may put off customers from getting financial advice where it would still be in their best interests to do so. This may be particularly the case for digital tools where there is little ability to explain or put disclosures in context.
- The record-keeping obligations are also problematic for many institutions (where it may not be clear how advice interactions can be appropriately recorded). Organisations are unsure of whether they will need to invest in new systems and by the time the requirements are finalised it may be too late.
The difficulties of future-proofing reform
- The FSLAA regime is attempting to regulate some things, such as digital advice, that it has not yet actually seen and where the risks facing customers are significantly different. There was a suggestion on the panel that this could be solved by, in that case, allowing the design of processes rather than conduct itself to be the focus where there is less human involvement in the giving of advice.
- Particularly in relation to digital advice, the regime does not appear to have contemplated the related issues that could arise (for example, privacy and data-use concerns around linking personal information to digital tools in order to get tailored advice).
- The move to digital formats and user experiences could accelerate a move away from long pages of terms and conditions to alternative forms of disclosure, potentially including a greater use of tools such as chatbots, pop-ups or short videos.
Ensuring that the disclosure requirements do not prevent advice being given (in circumstances where full disclosure and/or record keeping are challenging)
- If compliance obligations appear too onerous, providers may be discouraged and decide to move to information-only activities and stop giving financial advice, which would have a negative impact on customer outcomes. With the time and resources required to develop new systems and processes, uncertainty around what form disclosure will take may lead to this outcome.
- There was some support on the panel for disclosure obligations to be pared back to the minimum possible.
- In certain contexts, such as around digital advice or call centres, the manner of interacting with customers is different, and applying the same disclosure requirements to them may not be practical.
- Organisations can be complex systems, and the more changes that they are required to incorporate to meet new obligations, the greater the risk there is of that impacting customer outcomes in other areas.
Endorsing the intent of the reforms to provide flexibility
- Speakers and panellists supported the intent behind the disclosure.
- The proposed disclosure does promote flexibility, but further work is needed to make it work in the wider set of advice circumstances where disclosure is now required.
The September 2019 edition of our Financial Markets Conduct Act 2013 and Financial Markets Conduct Regulations 2014 Roadmap can be found here. The current edition will be updated to incorporate the disclosure regulations once they have been finalised.
If you have any questions around these disclosure obligations, the FSLAA reform process, or the financial advice regime more generally, please contact one of our experts.