Getting the Right Advice in a Digital Economy

One of the promised benefits of digitising retail banking was the ability to tailor very specific financial solutions to specific customers. 

A retail bank carries, arguably, more personal and private information about Australians than does any other institution, including the government. When you add the power of digital platforms to the enormous databases that banks collect, matching people and products should be an achievable goal of our major banks.

Standing in opposition to this has been a financial advice regime that imposed such a regulatory burden on ‘personal advice’, that just about every financial institution has resiled from tailoring advice to customers and instead taken shelter in giving only ‘general advice’ about products.

This reluctance is widespread despite the adoption of very powerful digital platforms, investigations of AI systems and even investments in FinTech start-ups.

Recently, the Department of Treasury commissioned Sydney lawyer Michelle Levy to write a consultation paper on the regulation of financial advice, called Quality of Advice Review. 

She concluded that the current regime, is poorly suited to financial institutions (banks, insurers and superannuation funds) that may want to and may be asked to give personal advice to customers. 

As a consequence, financial institutions are reluctant to give their customers helpful personal advice and actively avoid using the information they have about their customers when they are asked for advice.

The crucial point in Levy’s summation is the banks’ avoidance of using customer information when asked for advice, in case it amounts to ‘personal advice’. 

However, Levy’s solution is to eliminate the ‘general advice’ category of the current regime and to impose a ‘good advice’ test on a much-expanded category of personal advice. 

The new category of ‘personal advice’ is so broad that, it applies whenever a recommendation or opinion is provided to a client about a financial product (or class of financial product) and, at the time the advice is provided, the provider has or holds information about the client’s objectives, needs or any aspect of their financial situation. 

All financial institutions hold information about a client’s financial situation, and they offer opinions about products when dealing with customers.

It’s early days yet, and there are other iterations of the review after the consultation paper. But if banks are drawn into the ‘personal advice’ net because they try to find the best product for their customers, then the goals of the Quality of Advice Review – to improve the accessibility and affordability of financial advice – might prove elusive.

The retail banks could apply next-generation digital platforms to their large databases and product suites, allowing customers to self-select appropriate products without crossing the ‘personal advice’ boundary. This model keeps costs low and guides customers towards products appropriate to their circumstances.

So, it is imperative for the banks that recommended changes to financial advice regulation are fit for purpose.

Retail banks’ main non-business product offerings are home loans, credit cards, term deposits and transaction accounts. These are a very different level of complexity from, say, superannuation planning, life insurance and trading platforms. 

For many bank customers, basic bank products are what they need advice on; how to operate a mortgage offset account; whether to take a fixed or variable rate home loan; which term deposit suits which goals; credit card limits and strategies etc.

There are many Australians who don't have complex retirement savings plans or estate planning needs. But they do expect their bank to use the power of digital systems, and their own financial information, to suggest the best products to their customers. 

This is what was promised with the coalescence of customer knowledge and digital enablement: calibrated offerings targeted to those who need it and who are not the asset-rich target market of the financial advice industry.

It would a shame if in our rush to create accessible and affordable financial advice, we delivered neither because we made it too hard for most Australians to receive basic product advice from the financial institution who already knows their situation: their bank.

Author: Narelle Smythe (Partner).