Statements of Advice Has ASIC Done Enough? By John Myatt | March 2006
Background Ever since Chapter 7 was added to the Corporations Act to promote “confident and informed decision making by consumers of financial products and services” 1 there has been a degree of tension between the complexity of the legislation and the primary objective of facilitating informed consumer decision making. This tension has spawned a raft of measures to make aspects of the legislation work more effectively in achieving this primary objective. On 2 May 2005, the Parliamentary Secretary to the Treasurer released a Proposals Paper entitled Refinements to Financial Services Regulation. As result ASIC agreed to take the lead on 8 projects arising out of the 25 refinement proposals in the Federal Government’s paper. The first of ASIC’s 8 refinement projects was to issue further guidance on Statements of Advice (SOA), including releasing a model SOA. ASIC aimed to have the project completed by November 2005. A sample SOA was released in August 2006 but the industry is still awaiting further sample SOAs based on different planning scenarios. ASIC itself recently acknowledged that the response from industry groups to the sample SOA it had produced had only been “mutedly positive”. This may be a little too upbeat an assessment in view of comments from some segments of the financial planning industry. As a result of the lukewarm reception, ASIC spokesman, Deputy Chairman Jeremy Cooper, conceded there did not seem to be the same “fire in people’s belly” for the further new model SOAs as there was for the first example, delivered last August. The purpose of this brief paper is to provide information about the process that ASIC has been engaged in for those who were unaware of it, and to look at whether or not ASIC has really assisted the industry when it comes to designing better SOAs.
The Proposals Paper The paper released by the Parliamentary Secretary to the Treasurer in May last year covered a wide rage of potential refinements to the disclosure regime in Chapter 7. Very few of them dealt specifically with SOAs. They were identified in the summary to the paper as;
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ISSUES
PROPOSED REFINEMENTS
2. Statement of Advice 2.1. Amend regulations to exempt advice providers from the requirement to provide a Statement of Advice for information subsequent to the initial Statement of Advice, where: Some Statements of Advice provided in ongoing relationships between clients and providers of personal advice are unnecessary.
Information required to be included in Statements of Advice is considered to be too lengthy and complex.
there is an ongoing relationship between a retail client and a provider; and there are no significant changes in the client’s personal circumstances or the basis of the advice since the last Statement of Advice was given. The provider would instead be required to keep a record of the subsequent advice for seven years and provide it to the client, if requested. 2.2. Amend the regulations to clarify that advisors are not obliged to include in a Statement of Advice information on alternative products or strategies that are considered but that do not form part of the final recommendation given by the advisor.
An exposure draft of the Regulations was tabled in October 2005 and resulted in legislative amendments to the Corporations Act that took effect in December 2005. It is worth noting that a large number of submissions were received in answer to the exposure drafts which exceeded the scope of the refinements contemplated by the treasury paper and which were consequently not acted upon and deferred for later consideration. It is reasonable to assume that some of these submissions dealt with the key provisions that set out the substantive requirements of SOAs, such as the”needs analysis “or “know your client” provisions of Section 945A and the obligation to include “information about the basis on which the advice is or was given” which are contained in Sections 947B (2)(b) and 947C(2)(b). It is widely considered that the need to document comprehensive compliance with these provisions is one of the main obstacles in the way of reducing the length and complexity of SOAs.
ASIC’s SOA Agenda It is possible to learn a great deal about ASIC’s direction for SOAs and what it thinks is wrong with current models the industry is producing by examining the sample SOA it produced in August: click here to view.
The sample SOA was developed on the basis of a simple hypothetical financial planning scenario which ASIC says was developed in consultation with financial planning experts. It deals with very basic personal advice about personal insurance, investing in managed funds and basic deposit products. ASIC’s public statements around the sample SOA and the introduction of the Chapter 7 amendments in December are also highly instructive.
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For instance, ASIC expressed the view that the principal focus of the refinements is “better communication with consumers, through allowing product information and financial advice to be provided to consumers when they feel the need for it, rather than expecting them to digest a large volume of material upfront”. ASIC consequently wanted to move the financial services industry away from the production of “excessively lengthy and complex documents (or, in the case of oral disclosure, excessively lengthy verbal “scripts”) and that changes to the rules “allow primary attention to be paid to the legislation’s requirement for information to be presented to consumers in a ‘clear, concise and effective’ manner”. The justification for the latter remark is questionable, in relation to SOAs at least, bearing in mind the minimal impact that has been made upon the substantive requirements these documents must comply with. ASIC’s press release on 31 August 2005 sums up the regulator’s feeling pretty well. “ASIC agreed to develop an example SOA in response to the Federal Government’s paper,which identified a need for more guidance on SOAs’, Mr Jeremy Cooper, ASIC Deputy Chairman said. ‘In doing this project, ASIC’s aim was to publish an example of an SOA that was clear, concise and effective in 20 pages or less. We did better than that. Our example SOA is only 12 pages long’, Mr Cooper said. ‘ASIC’s example shows that you don’t need a great pile of paper to meet the SOA requirements and can provide comprehensive information in a much shorter format. This example reinforces our concerns about 80-page SOAs issued by some advisors’, Mr Cooper said. “ Apart from brevity (and no doubt assisting to achieve it) ASIC has pointed to the other benefits of its’ sample document including the fact that “there are no ‘weasel words’ (for example, lengthy disclaimers and exclusions)”. Of course, one person’s “weasel words” are another’s risk management strategy. ASIC claims that the sample document also “is written in simple, plain English”, provides “adequate disclosure of conflicts, fees and commissions”; and gives “a clear explanation of the scope and limitations of the advice.”
Voices of Dissent ASIC is looking to work with the industry to produce other sample SOA in specific areas such as advice on establishing a share portfolio, a ‘whole of life’ financial plan and an SOA focused on superannuation issues. It has indicated it will release further sample SOAs, depending on the extent to which the industry is willing to help take the process forward. Judging by reports in the Financial Press there will not be a queue of financial planners at ASIC’s door. The policy committee of the Financial Planning Association (FPA) is reported as responding to the initiative by signalling it was “not opposed in principle” to the development of further model SOAs, but wanted clarity about what the exercise would achieve. The Securities and Derivatives Industry Association said more bluntly that it was “hesitant about creating further documentation”.
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Why all the cold water? Partly, the lack of enthusiasm may be due to some reservations about the perceived benefits of the exercise and a level of uncertainty about what it was intended to achieve. The introduction to the sample SOA makes it very clear that ASIC does not really expect to see it being used by anyone without very substantial modification. The sample SOA is not, for example, being promoted by ASIC as template and ASIC has stated it will not be used to assess any advisor’s SOA in a compliance review. In a recent article that appeared in the electronic “Money Management” newsletter Scott Andrews, the Technical Services Manager of Fiducian Portfolio Services and Lucille Bennetto, the Head of Compliance at Lonsdale Financial Group, gave a useful critique of the sample SOA from an advisor’s perspective. The relatively brief article is worth reading 2 and points out the type of concerns a careful advisor would be expected to voice about the clear lack of any real personal understanding of the client and personalisation of the advice, which is perhaps understandable seeing it was a hypothetical planning exercise. However it is clear there are more critical liability issues that are left begging. For example Scott Andrews observed that “Those advisors providing risk advice may take issue with the throwaway line on trauma insurance “being discussed but decided against”. I would not want to defend the insurance claim at the Financial Industry Complaints Service (FICS) if the client had a heart attack.” Lucille Bennetto also points to some major tensions in the sample document between the brevity of the information, reasons for advice that is recorded in it and the need to adequately record that information to comply with the Corporations Act and to protect the advisor from suits for bad advice. For instance, Ms Benetto noted a recommendation for an asset between “income” assets and “growth” assets, without bothering to explain the difference, and there was a general lack of information for the insurance recommendations. In particular she points to the failure to explain why a particular level of cover was selected, and what the cost of each cover will be. She also noted that there was no indication detailing how the client is going to afford to pay for the level of cover recommended. Nor was the planner apparently required to indicate anything more than that the cover has been placed where it will be cheapest. No reference was made to policy definitions either. The sample SOA has some other remarkable gaps. For example, it does not explain to the client for example why the recommended insurance cover should be held through superannuation rather than by the client personally.
SOAs - Has ASIC Done Enough? Most commentators are grateful for the fact ASIC has provided some guidance which may enable licensees to trim their SOA templates. However the brevity of the ASIC’s sample SOA has clearly been achieved at the expense of both a compliance and litigation risk to the advisor.
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It is arguable that in particular, the sample SOA falls short of the requirements of section 945A(1)(b), which is a dangerous precedent for a regulator to set. Many advisors will rightly think that the sample SOA favors brevity at the cost of exposing them to legal liability and though some trimming of their template can be achieved they would be unwise to risk taking the same approach to real client that ASIC has taken to a hypothetical one. In short, the tension between the complex provisions of Chapter 7 and the desire to promote conďŹ dent and informed decision making by consumers is untouched by ASIC’s efforts. Perhaps a sounder way forward can be found in an examination and rationalisation of the substantive provisions themselves, or at the very least, recognition by ASIC that there is a valid role for risk management in documents of this kind. (Footnotes) 1 Section 760 A 2 At http://www.moneymanagement.com.au/articles/8C/0C03638C.asp
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