Credit facilities should be regulated as financial products: Levy

As foreshadowed last week, Michelle Levy, the partner of Sydney-based law firm Allens, has told the government that credit facilities should be regulated as financial products and that brokers and financial planners should be regulated under the same regime.

Financial products and financial advice confusion

Writing in the terms of reference for the final QAR report, Ms Levy noted that not all financial products require the same licence to be advised upon. 

She highlighted that the Corporations Act outlines that a financial product includes bank accounts, insurance policies, an interest in a managed investment scheme, an interest in a superannuation fund, a derivative and a foreign exchange contract; but does not cover a credit card, a personal loan, a home loan or an investment loan (except to the extent the loan is a margin lending facility).

“A financial product does include credit facilities under the consumer protection provisions in the ASIC Act and for the purposes of the design and distribution obligations in the Corporations Act. And so, a person could provide financial advice that is not regulated at all or that is regulated but not under the Corporations Act,” she continued. 

“A mortgage broker is a good example.

“The broker provides advice to their client about a home loan. They may also provide advice about budgeting. In neither case will the broker provide financial product advice and if this is all they do, they would not need an AFS licence. However, if the broker’s advice about the loan amounts to ‘credit assistance’, they will need to hold an Australian credit licence under the National Consumer Credit Protection Act 2009 (NCCP Act) or be authorised to act on behalf of someone who does.” 

Ms Levy went on to explain that a financial adviser may also give advice about budgeting but would need an AFSL to provide advice about opening a bank account.

“[W]hen considering financial products and credit, there are different regimes that apply within the same industry. This adds more complexity for providers that issue, or provide advice to their clients about, credit facilities and financial products,” she said.

“It is also undesirable for consumers.

“It makes little sense for an adviser to have a duty to act in the best interests of their client for part of their advice but not to have the same duty for another part of their advice. 

“A better outcome would be for credit facilities to be regulated for all purposes as financial products under the Corporations Act. This could be done by replacing the definition of financial product in the Corporations Act with the definition of financial product in Division 2 of Part 2 of the ASIC Act. 

“In that way, a single licensing regime and a single set of obligations could apply to more of the matters that fall within the meaning of financial matters and the regulatory framework would truly apply to the provision of financial advice.”

The QAR author highlighted that commissioner Kenneth Hayne made a similar recommendation during the banking royal commission when he said that mortgage brokers should be subject to the same regulatory regime as financial advisers.

While Ms Levy flagged that while this recommendation was “outside[her] Terms of Reference”, she added: “But while I hold the pen I would encourage the government and the regulated community to think about whether there is merit in doing so.”

Elsewhere in the QAR report, Ms Levy said that several stakeholders had pushed for the removal of commissions being paid in financial advice but flagged that commissions are “sometimes not only tolerated, but preferred” such as is the case with mortgage brokers.

“Commissions paid to mortgage brokers are a relevant example. They allow smaller lenders to distribute their products and in the main borrowers understand them and for the most part like them,” Ms Levy wrote.

She went on to outline that while she “[worries] about the effect commissions and other forms of conflicted remuneration have on the quality of financial product advice”, she said that it was not “a sufficient reason to recommend that all of the remaining exceptions be removed”.

Instead, she said it was necessary to consider them on a case-by-case basis and concluded that “there are better reasons than not to retain insurance commissions and a number of the other exceptions”.

Key recommendations

Among the 22 recommendations of the 267-page QAR report are:

• Replacing the existing best interests duty for financial advisers with a ‘statutory best interests duty’ that “reflects the general law and does not include a safe harbour”
• Expanding the definition of personal advice in the Corporations Act to include all financial product advice given to a client in a personalised communication by a “provider of advice” who has information about their financial situtation or one or more of their objectives or needs
• Changing personal advice in the Corporations Act to provide that personal advice must be provided by a relevant provider where: a) the provider is an individual and b) either: i) the client pays a fee for the advice or ii) the issuer of the product pays a commission for the sale of the product to which the personal advice relates
• Enabling superannuation fund trustees to provide personal advice to their members about their interests in the fund including when they are transitioning to retirement
• Replacing the fee disclosure statement with a single consent
• Scrapping the requirement to provide a statement of advice (or record of advice) and instead have planners maintain complete records of the advice provided and provide written advice on request by the client
• Amending the conflicted remuneration provisions in the Corporations Act to explicitly provide that both monetary and non-monetary benefits given by a client to an AFS licensee or a representative of a licensee are not conflicted remuneration
• Retaining the exception to the ban on conflicted remuneration for benefits given in relation to consumer credit insurance

Assistant Treasurer and Minister for Financial Services, Stephen Jones, commented: “Australians need access to quality, affordable financial advice to plan for their future…

“We thank Michelle Levy for her work in leading this review and producing a detailed and valuable contribution.”

The government has said it will now consult on the review’s recommendations and urged “anyone with an interest in financial advice [to read the QAR report] and make their views known”.

Mr Jones concluded: “We want to see an industry with strong professional standards that’s accessible for more Australians and look forward to hearing views on achieving that goal.”

[Related: Merging financial and home loan advice regimes 'eminently sensible': Michelle Levy]