SOA reforms won’t override importance of record keeping: Kirkland

Not everything that the corporate regulator sees from advisers is negative, according to the Australian Securities and Investments Commission’s (ASIC) Alan Kirkland, noting that it also sees many examples of good practice in financial advice.

Speaking at the FAAA Congress in Brisbane last week, Kirkland outlined the areas that ASIC believes advisers need to keep front of mind to “promote good outcomes for their clients”.

Among these areas is the way that advisers demonstrate that their advice meets the required standards.

“The best way to do this is, of course, by maintaining good records as part of the broader client file, beyond the advice document,” the ASIC commissioner said.

“This is an area where ASIC has seen improvements over recent years.

“As part of work completed for the Life Insurance Framework review, ASIC observed that record-keeping across the client advice files had materially improved between 2017 and 2021, helping advisers demonstrate that they had complied with their obligations.”

Kirkland added that the government’s proposed streamlining of statements of advice (SOAs) to be a “more fit-for-purpose, principles-based advice record” does not remove the importance of this shift to improved record keeping.

“The streamlining of these advice records will see record-keeping across the rest of each client’s advice file being as important as ever.”

“It will no doubt also stand advisers in better stead if advice files are scrutinised by licensees, the Australian Financial Complaints Authority, ASIC or the courts.”

The status of the second round of Delivering Better Financial Outcomes (DBFO) is up in the air following the flurry of activity on the final sitting day of Parliament for 2024, with speculation rife that the guillotine motion was a signal that pollies would not return from their holiday break before an election is called.

Speaking at the FAAA Congress on Friday, general manager policy, advocacy and standards, Phil Anderson, said that the association is still expecting to see a policy statement and then draft legislation, but “there is no way this will be passed because we think Parliament has probably sat for the last time.”

“It would be great to know what the government's plans are. That gives us confidence that they are intent on moving forward,” Anderson said.

George John, the FAAA’s senior manager of government relations and policy, added that even if there is a change of government, the draft legislation can serve as a “bedrock for conversations”.

“Treasury has already done hard work, they've already consulted with the sector. The sector is hopefully going to be in an agreeable level of agreement about the legislation, and then if the government does change, they can pick that legislation up and run with it,” John said.

The modernising of SOAs remains a key feature of the reforms when they are eventually revealed, with Financial Services Minister Stephen Jones saying last week that they should be something “mum and dad can read around the kitchen table, not something that is used as a defence for a product issuer or a licensee in a courtroom”.

Putting client interests first

According to Kirkland, ensuring that clients’ best interests are centred is also key to providing good advice.

“The best interests duty in financial advice is not new. But it is helpful to take a step back and focus on what it means and how to demonstrate that it has been applied,” he said last week.

“In ASIC’s view, this involves properly understanding your client’s circumstances and objectives and tailoring your advice accordingly.

“Applying your professional judgement, to identify appropriate strategies and products, taking those circumstances into account – with a focus on improving outcomes for each client.

“Explaining why the recommended strategies and products are appropriate, considering your client’s relevant circumstances. This includes providing reasons for recommending each course of action, and explaining why each recommendation meets their needs.”

It is also key that the advice is not being driven by what Kirkland called “one-size-fits-all business models”, which can lead to poor, “cookie-cutter advice”.

“Where we see large numbers of clients getting pretty much the same advice despite their different circumstances, clearly that's an issue as well,” he said.

The commissioner also highlighted the importance of a focus on product performance, however, he stressed that this should not end once the initial advice has been provided.

“It is also critical that advisers and advice licensees maintain an ongoing focus on the performance of the products held by their clients under advice – and their ongoing suitability for each client,” Kirkland said.

“This was a key message in the report we released earlier this year on superannuation choice products, examining the role of super trustees, financial advisers and advice licensees in situations where superannuation choice products had persistently underperformed.

“We found that there was often insufficient focus on performance and a lack of evidence around how trustees, licensees and advisers were considering persistently underperforming investment options.”

Advisers also can’t simply rely on research ratings or a product being on their licensee’s approved product list, Kirkland said – they “must investigate and assess those investments to detect and address underperformance”.

“Where underperformance is identified, an adviser must communicate why their recommendation is appropriate.”

“This applies whether an adviser is recommending to redeem, retain or acquire an underperforming investment.”