Watchdog says documentation is key amid SOA debate

While the reduction of statements of advice (SOAs) has been referred to as a “no brainer” by the Minister for Financial Services, Stephen Jones, opinions within the industry remain divided.

Speaking at the AFCA Member Forum, Shail Singh, the acting lead ombudsman for investments and advice at the Australian Financial Complaints Authority (AFCA), highlighted the significance of documentation, stating that although the treatment of SOAs in the Quality of Advice Review (QAR) is a government matter, documentation remains important.

“This is a matter for government, and we will need to respond to it. We’ll be adjudicating disputes if something goes wrong, and so documentation is important to understand that,” Mr Singh said.

“Going through a step process to understand how advisers have got to a good advice standard, or a best interest standard, will remain something that we need to look at.”

Acknowledging that “it is still not clear what the outcome of this will be”, Mr Singh said AFCA would continue to “talk through” its approach and seek feedback.

In its submission to the QAR prior to the release of the proposals paper, AFCA endorsed the simplification of SOA requirements and emphasised the need for SOA content to prioritise informing clients’ decision making.

As of mid-2022, the authority recommended that SOAs be restricted to addressing the advice itself, its rationale, the methods by which objectives will be met, and a summary of the associated benefits and risks. 

It also suggested that any recommendation made by the QAR lead should encourage the AFS licensee to think of the document as “a document designed to assist the consumer’s understanding of the advice”, rather than a compliance document, noting that “the two purposes can contradict each other”.

In her proposals paper and then subsequently the final QAR report, the lead of the review, Michelle Levy, recommended replacing the requirement of providing an SOA or a Record of Advice (ROA) with a new requirement for personal advice providers to maintain complete records of the advice given, and to offer written advice upon a client’s request.

And while it’s been suggested that Mr Jones would likely heed Ms Levy’s advice on SOAs, opinions are divided on the future of documentation.

Recently, Asendium chief executive Scott Miller told ifa that “licensees are not doing away with SOAs”.

“Every licensee that I have spoken to, from the largest dealer groups to the smallest AFSLs, have said they are keeping SOAs. Even if the Quality of Advice Review does away with them, licensees are still of the belief that they should be stored on file,” he said.

However, speaking to ifa, chief executive of Lifespan Financial Planning Eugene Ardino said he doesn’t believe it would work for licensees to require advisers to create SOAs if they are not legally required to do so.

Instead, Mr Ardino suggested that licensees may require written disclosure of certain information for specific types of advice, depending on the complexity and associated risk involved.

“In my mind, I would be thinking that when any practitioner (financial adviser or otherwise) is providing advice, they want to disclose to their client all the information needed to make an informed decision plus anything that a client could accuse them of not disclosing, that had they disclosed it, could have caused them to not proceed with your advice,” he said. 

“Much of what is disclosed could actually be standard documentation that is not necessarily personalised such as ATO info on SMSFs of general risk information if you are recommending a balanced portfolio to name a few examples.”

In addition, Mr Ardino emphasised that even in the absence of a requirement for an SOA, advisers would still need to keep records of advice provided, and he suggested an efficient approach to accomplish this while also ensuring necessary disclosure to clients is to create an ROA. 

“You also have to remember that despite not needing an SOA, you would still be required to keep a record of the advice. In my mind, the most efficient way to kill two birds with one stone is to create the ROA in such a way as to be able to provide it to your client as the abovementioned piece of disclosure and this will be much less onerous for everyone,” Mr Ardino said. 

“Licensees will all have different risk-based approaches trying to balance risk mitigation with allowing advisers to benefit from the new less onerous framework. Having said that, it will require some more thought and it could be that while SOAs are abolished, some form of disclosure is required.”

Commenting on whether the removal of SOAs exposes licensees to risk, Mr Ardino stressed that SOAs do not provide protection for advisers or their licensees in the event of poor advice and added that implementing a supervision and monitoring program is more effective.

“If I am restructuring a supervision and monitoring framework without SOAs, the focus then turns to the file or certain parts of the file as the framework becomes focused on only the advice rather than disclosure obligations,” he said.

“Therefore, if it is structured in such a way that advisers can follow, it will actually be easier and probably more thorough because remember, you will also have an ROA and more time can be spent on assessing the quality of the advice not needing to be so concerned about disclosure. 

“Furthermore, in a complaint situation, AFCA and the courts will generally focus on the file particularly to establish what occurred as they know that often clients don’t read SOAs.”

Ultimately, Mr Ardino said “different licensees will have different requirements”. 

“Advisers will choose one that meets their needs or get their own license. It is all going to be an interesting journey.”

Some form of documentation to remain

Conaill Keniry, the owner of small dealer group Cobalt Advisers, said he personally plans to embrace the change if implemented by government. 

“Advisers who give great advice are being held back by the rigid framework of the traditional SOA. Removing the structure will enable us to review our advice process and find better ways to reduce the time and cost of giving advice, while simultaneously increasing the clients’ understanding and value they receive from it,” Mr Keniry said.

He too, however, conceded that advisers would need some form of documentation.

“What that looks like will be up to the business, and their particular clients,” Mr Keniry said.

“Could it be a video explanation of the advice plus supporting documentation? Could it be a website that has links to the supporting documentation?

“Ultimately, the underlying process and documentation will still need to be there.”

Mr Keniry also agreed with arguments pointing to the possible issues the loss of SOAs could create for advisers looking for professional indemnity (PI) insurance.

Namely, SOAs currently play a significant role in an adviser’s defensive strategy. This is because a well-documented SOA can provide evidence that the adviser provided appropriate advice to their client and can help demonstrate that the adviser fulfilled their duty of care.

“If they remove or reduce the SOA without considering the repercussions — you’re going to have PI problems,” Mr Keniry said.

But he does see a solution.

“The advice process isn’t changing, best interest isn’t changing. Our record-keeping requirements aren’t changing. Advisers and AFSLs will need to articulate their entire advice ecosystem to their insurers. I believe if you can explain why the process is superior, creates better advice, and can be used as a defence in the event of a claim — I believe the insurers will get on board.”