Will licensees maintain onerous SOA requirements despite DBFO changes?

The unwieldy length of statements of advice (SOA) requirements have been an ongoing issue within the advice profession; however, the second tranche of Delivering Better Financial Outcomes (DBFO) reforms is slated to remove much of these excessive requirements.

Specifically, Financial Services Minister Stephen Jones said in announcing the details of tranche two that the government would replace SOAs with an “advice record that provides clients with helpful information in plain English”.

However, in an earlier conversation with ifa, Katherine Hayes, director and financial adviser at Hayes and Co Insurance Services, raised concerns that licensees could maintain onerous SOA requirements out of fear of breaching compliance regulations, negating the potential benefits of the legislation.

“Let’s say we get what we want and we no longer need a statement of advice. It doesn’t mean that we won’t need to have the research and the evidence in the background. We’re still going to need that,” Hayes said.

“My concern is that licensees will still want to continue to have something along those lines purely as a compliance record for their own protection, rather than for the benefit of the client, and then we lose the efficiencies that we gained through the reforms.”

Hayes added: “The law always says one thing, but then you’ve got the overview of licensees who may put extra layers that go beyond what’s required.”

In response to these concerns, head of financial literacy and advocacy for BT, Bryan Ashenden, told ifa that licensees will likely maintain at least some additional requirements if SOA regulations are reduced. However, as a draft has yet to be released, he said this is purely speculative at this point.

“I would expect most licensees would want to accommodate any potential reduction in the length of existing SOAs where possible. That is, I don’t believe they would be deliberately setting out to block the effectiveness of any changes,” Ashenden said.

“However, licensees will also be conscious of the risks that are involved in providing personal financial advice to a retail client and so will need to find the right balance. This may mean that they wish to retain a number of the disclosures and disclaimers that already exist in SOAs to minimise the risk of future claims for poor advice.”

He said that even if SOA requirements are reduced as hoped, advisers will still need to be mindful of keeping clear records of their activities to protect themselves professionally.

“They will need to continue to ensure their client files are complete and accurate to provide the extra support (in the event of a complaint) around items no longer disclosed in the new advice document,” Ashenden said.

Echoing a similar sentiment, financial services lawyer Emma Johnson pointed out that as licensees are legally responsible for financial advisers, they are at greater risk of ramifications if something were to go wrong.

“The issue for the licensee is that they are responsible for the advice being provided by those people that they’re authorising, so they will need some kind of controls and that is why a kind of formula-driven statement of advice is the preferred method at the moment. It provides a framework with which the people they’re authorising can give that advice,” Johnson said.

“So, some kind of documentation will be required by the licensee, whether it’s a modified statement of advice or a more stringent letter of advice, we don’t know, and that’s something licensees are going to have to grapple with when hopefully these new changes come in.”

Ashenden added that licensees may be, in a sense, forced to maintain requirements beyond the legislative requirements in order to meet the standards of other related parties.

“It’s also important to remember that it’s not just about what the licensee wants. Professional indemnity providers may also be essentially forcing licensees and advisers down the approach of having many things in the SOA as the proof points to ensure coverage is provided,” he said.

Ashenden further noted the role that bodies such as the Australian Securities and Investments Commission (ASIC) and the Australian Financial Complaints Authority (AFCA) have in licensees’ ability to take advantage of reduced requirements.

“It will also be about the approach/interpretation of the regulators like ASIC, and how these documents might be interpreted/viewed in a complaint by bodies like AFCA,” he said.

“Imagine a scenario where a complaint was made to AFCA that involved the new format of the advice document, and AFCA made comments to the effect that more information in the advice document might have been better for the client (even if not legally required). Such a comment may then result in licensees reviewing advice documents to see if anything needs to be added back in.”

However, he added that it would “be a shame if the intent of this reform is not achieved”.

“It will take time to achieve, as licensees and others become more comfortable, as increasingly more existing content is removed,” Ashenden said.

“If advisers aren’t happy with the approach of their current licensee, it could lead to some advisers considering whether they want to change to a different licensee with a different approach.”

Johnson concluded: “We haven’t had those conversations with what a new statement of advice or a letter of advice might look like because we haven’t seen any draft legislation.

“So, it’s really just speculative at the moment. But yes, it’s expected that licensees would require some kind of formulated documentation to be provided.”