The licensee “quality-of-advice” rating system is an industry-led initiative to be launched by Adviser Ratings. The ratings will evaluate a financial advice licensee’s ability to support their authorised representatives to deliver quality professional advice in the best interest of their clients. This will include how licensees respond to future legislative requirements arising from recommendations submitted by the Royal Commission.

Apart from internal benchmarking purposes, the ratings and supporting research will be relied upon by numerous stakeholders including government, regulators, financiers, insurers, industry vendors, other licensees, internal and external financial advisers, and consumers.

The Royal Commission advocated for increased information disclosure however the challenge for consumers is processing this deluge of information. This necessitates a carefully thought out and regularly updated summary measure of quality, particularly at the licensee level. By consolidating and synthesising a diverse range of information about how each licensee operates, these ratings should also provide useful signals to consumers, advisers, industry and regulators in differentiating over 2,200 licensee businesses comprising 27,000 financial advisers.

Under the Design and Distribution Obligations and Product Intervention Powers Bill, currently passing through the Senate, financial product manufacturers will also have a greater shared responsibility with the advice channel to ensure consumers are served in their best interests. It follows that licensee ratings will be an important reference point to help manufacturers meet these new obligations.

Adviser Ratings will apply a consistent and transparent methodology to assess licensees. This methodology will assess licensees across a range of areas critical to determining the principle objective of the rating system. This will involve both quantitative and qualitative measures. In the interests of transparency, it is anticipated that the assessment will include both an over-arching rating and component scores for each area. A key differentiator of the proposed rating methodology is that it will be backed up by a standing research capability designed to stress test the factors predicted to influence quality of advice as well as keep track of changing dynamics in the industry.

All licensees in Australia will be rated. The methodology and components of the rating system will be ultimately approved by the external ratings committee (see below) and published accordingly.

To provide some further insight into the construction of this methodology, please refer to the 2018 white paper.

An external ratings committee (ERC) has been formed to ensure the rating system is managed according to a reputable governance regime. It will report directly to the Board of Adviser Ratings and be chaired by Jerry Parwada, Professor of Finance at University of NSW and former Head of Banking and Finance at UNSW. Parwada led the development of the original terms of reference for the rating system through engagement with industry, regulators and government in 2018.

The ERC will be responsible for oversight of the development, application and maintenance of the ratings methodology, and to ensure it remains relevant as the industry evolves. The ERC will be supported by an internal ratings committee (IRC) that will be responsible for execution of the ratings process including assignment of rating outcomes.

The inaugural members of the ERC have been selected taking into account the diversity of technical areas to be evaluated under the rating system, their specialist knowledge and experience, and their excellent professional standing. The standing members of the ERC will also be supplemented where necessary with expert consultants (Panel Experts), particularly in areas like technology and artificial intelligence that will be central to the efficient operational execution of the rating process including data capture, processing and interrogation.