CAR v SOA: What’s in a name?

In releasing an exposure draft for the next stage of Delivering Better Financial Outcomes (DBFO) reforms in the late afternoon on Friday last week, Financial Services Minister Stephen Jones said the scaled back second tranche is about “cutting red tape that adds to cost without providing a benefit to consumers”.

One of the ways the government aims to do this is by removing statements of advice (SOA) – which have become increasingly unwieldy for advisers and clients alike – and replacing them with a client advice record (CAR).

A CAR, according to the exposure draft’s explanatory materials (EM), must include:

• The words “Client Advice Record” featured prominently.
• The scope of the advice.
• The advice.
• Reasons for the advice, including how it meets the client’s objectives, financial situation and needs.
• Cost of the advice to the client and benefits received by the provider, as outlined in below.
• The name and contact details of the providing entity as well as information on whether the providing entity is an authorised representative.

The EM added that the DBFO measures are “intended to support the increased delivery of high-quality, accessible and affordable financial advice for retail clients through clearer and more streamlined regulatory requirements”.

Does the new CAR meet this stated goal?

On the face of it, not a lot has changed between the SOA and the CAR, with the circumstances around when a CAR must be provided to a client remaining the same as for an SOA.

However, the format for its presentation and content requirements have been “modified to ensure the CAR supports the client to make an informed decision about the advice provided”.

“In line with the current arrangements for an SOA, a CAR may be the means by which the advice is provided or a separate record of the advice. This obligation is separate to the record-keeping and proof of compliance obligations discussed further below,” the EM said.

“Record-keeping requirements are also modified to encourage a risk-based approach to keeping records that appropriately support the provider’s ability to demonstrate their compliance with the Corporations Act.

“The record-keeping requirements are purposefully distinct from the CAR requirements to ensure that the CAR is focused on supporting the client to make decisions about the advice, rather than demonstrating the process the provider has performed to meet their regulatory obligations.

“This contrasts with the SOA which can, in practice, contain information relevant to record-keeping and proof of compliance.”

The warnings provided under section 961H that required for an SOA will also not need to be in the same format as a CAR.

Essentially, the changes are aimed at making the document fit for purpose and one that clients will actually read (though not necessarily “read”, specifically).

“The contents of the CAR must be expressed and presented in a manner that, having regard to clarity, conciseness and effectiveness, is fit for the purpose of assisting the client to make an informed decision on whether to act on the advice as a retail client,” the EM said.

“These requirements are intended to bring a client-centred focus to the CAR and allow providers to have flexibility in providing it in a way that is responsive to the client’s needs. It is meant to be technologically neutral as a CAR does not need to have the form of a written statement.”

All of that sounds like a massive improvement, however, it isn’t that far off the wording that already governs advice documentation.

Specifically, section 947 of the Corporations Act requires that information included in an SOA “must be worded and presented in a clear, concise and effective manner”.

In practice, that’s not how things have played out.

The EM does make it much clearer that the format a CAR takes can be flexible and is “expected to vary depending on the specifics of the situation, such as the complexity of the advice, to reduce the compliance burden on the provider”.

“For example, a written document may be appropriate when providing comprehensive advice with complex client circumstances to support the client’s ability to understand and act on the advice,” it said.

“It may be appropriate to provide an audio recording or email when providing relatively simple limited or single-issue advice that is easy to implement with minimal client considerations.”

‘Step in the right direction’

Association of Independently Owned Financial Professionals (AIOFP) chair of technical services Lionel Rodrigues was bullish on the impact of the CAR under the draft legislation, saying it is in line with what the AIOFP has “been putting to Minister Jones for the past two years”.

“Treasury has made it more difficult in the draft legislation than it has to be but it is a step in the right direction,” Rodrigues said.

“It is proposed to repeal the definition of a SOA. A CAR will have almost the same definition with fewer obligations.

“I think lawyers and licensees will tread carefully initially. My main concern is how ASIC will interpret the CAR and what their guidance will provide.”

Similarly, AIOFP executive director Peter Johnston said the explicit inclusion that the CAR can be in any form that suits the client is a “great outcome”.

The only downside, Johnston added, is the CAR will not come into effect until 12 months after royal assent.

“This seems rather odd, something that should be changed, we will speak with shadow [minister Luke] Howarth and the minister about it,” he said.

“Also, we need to make sure that ASIC does not complicate the outcome with their own unnecessary guidelines, which they have a bad habit of doing.”