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Seeking the final word on consumer advice

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The Australian Securities and Investments Commission (ASIC) report on consumer confusion around general and personal advice is another step towards solving a problem that continues to cause angst.

The ASIC-commissioned research hardly breaks new ground, but it throws more light on the issue, as a range of inquiries tackle various proposals to improve the delivery of financial services.

“This consumer research is timely,” ASIC Deputy Chairman Karen Chester says.

It comes as the Government considers recommendations from Productivity Commission reports, while the financial system undergoes change following the Hayne royal commission and new advice and distribution business models are considered, she says.

The ASIC study reinforces the view that divisions between information-only models, general advice and personal advice are not serving consumers well.

In test scenarios, participants had difficulty distinguishing between “general advice” and “personal advice”, even when prompted with separate terms.

In one case, only 53% of participants correctly identified that generic advice was being offered, even after the “general advice warning” was given. Participants were inclined to view a scenario as personal advice just because they had shared their circumstances, even if the adviser did not refer to or comment on the information.

On the other hand, some study participants who were given personal advice mistakenly thought they were receiving general advice, because they were expecting more questions on their needs and long-term goals.

The report – Financial Advice: Mind The Gap – focuses on issues in the financial advice and life insurance sectors, with ASIC noting that problems must be addressed as the requirements of an ageing population moving into retirement up the ante.

“ASIC is seeing increased sales of complex financial products under general advice models – so not tailored to personal circumstances – leaving many consumers, especially retirees, exposed to the potential risk of financial loss,” Ms Chester said.

But the same concerns have been frequently raised in general insurance, as it becomes increasingly apparent that reforms introduced with good intentions have had unintended consequences.

Terminology distinctions introduced more than a decade ago to provide a more consistent regulatory regime have become a minefield for consumers and insurance providers alike.

Consumers who hear that advice is being provided are typically not on the lookout for semantic distinctions on the type of help on offer.

On the other side, providers are wary of straying into personal advice territory due to the greater regulatory responsibilities involved. Some opt for an information-only model in some sales channels, meaning consumers risk missing out on assistance that would be beneficial.

“The Insurance Council of Australia has consistently advocated that a clear definition between personal and general financial advice is required,” spokesman Campbell Fuller tells insuranceNEWS.com.au.

“Without this, general insurers are prevented from having effective discussions with consumers on issues, such as the appropriate sum they should be insured for.”

Other opportunities and approaches, beyond focusing on the terms, have also been suggested to avoid advice issues and ensure consumers receive the best products for their needs.

The National Insurance Brokers Association (NIBA) has previously said revisiting the standard cover regime may be part of the answer.

It has also noted that simply renaming general advice, as proposed by the Productivity Commission, is not enough and would carry compliance costs that could run into the millions.

The Productivity Commission inquiry into financial services competition says the term “advice” should be used only when personal circumstances are taken into consideration.

“A change in name of the service without any change in form or substance to the extent of service or information provided is unlikely to provide any real consumer benefits,” NIBA says in a submission.

The Consumer Action Law Centre said last year it has focused on new design and distribution obligations that look at suitability in general, rather than the advice wording semantics.

ASIC says the report it released last week is the first stage of a broader research project around consumer experiences with and perceptions of the financial advice sector.

“Additional research by ASIC will get under way [this year] to identify a more appropriate label for general advice and consumer-test the effectiveness of different versions of the general advice warning,” it says.

For some, changes can’t come fast enough. The ASIC report adds to the momentum, with the need for improvement widely accepted even as the solutions are yet to be found.