Could legal interpretation make SOA reforms essentially redundant?

The last few years have seen considerable talk regarding what the statement of advice (SOA) will look like once reformed, from Michelle Levy’s recommendation in the Quality of Advice Review (QAR) that would see an SOA only required when requested by the client to others speculating it could be removed entirely.

However, the latest update on the Delivering Better Financial Outcomes (DBFO) reforms has largely squandered the hope that it will become less onerous as, beyond the change of name to a client advice record (CAR), there is arguably very little difference between the SOA and CAR.

Even so, Financial Advice Association Australia (FAAA) general manager of policy, advocacy and standards Phil Anderson has argued that, regardless of any changes that might be introduced, how the requirements are interpreted by the regulator and licensees will have the most impact on how it plays out in practice.

“Arguably, the core problem is not what the law currently requires or possibly what the new law might require, it’s how it’s interpreted and it’s how it has grown and expanded, and ASIC has contributed to that, but licensees have also contributed to it,” Anderson said on The ifa Show.

As it stands, advisers and licensees are often including unnecessary information in their SOAs out of fear of attracting the ire of the Australian Securities and Investments Commission (ASIC).

As such, Anderson said the process of reforming the advice profession is a change management exercise, arguing that advisers should be able to “rely upon their professional judgement” regarding what should be included in the advice document with the overwhelming sense of fear of the regulator that’s currently permeating the profession.

Demonstrating this, he explained that, under the current laws, advisers aren’t required to include projections about what the advice will mean over a period of time.

However, due to ASIC report 413, advisers are required to do so, which has only further exacerbated the issue of lengthy advice documents and fostered uncertainty among advisers as to what exactly they need to include.

Will the proposed changes even do anything?

While Anderson said that the main components of the CAR are “absolutely reasonable”, he suggested that the wording of the requirements could leave advisers with a document that is still weighed down by unnecessary details.

For example, one of the proposed requirements of a CAR is the need to explain the reasoning behind the advice given. This, he said, is a major concern as, depending on the complexity and amount of detail required, it could take anything from a paragraph to 30 pages to articulate.

“We’ve got no confidence from what we’ve seen so far that the expectations will be minimalist and that there’s no risk that those expectations will blow out and extend just the way that the assumed requirements for SOAs have expanded,” he added.

Based on the draft’s explanatory materials (EM), advisers will also be required to explain the scope of the advice in the CAR, including the potential consequences of the advice; however, Anderson said that this, too, could lead to a blowout of the document.

“As soon as you start to talk about explaining the consequences, how do you draw a boundary around that? Particularly when you’ve got the code of ethics there that talks about long-term likely client circumstances and long-term impacts and so on. How do you cleanly define scope without needing to get drawn into a lot of extra detail?” he said.

“The second part is what is the advice now? I think that part is probably relatively straightforward. It’s the third part that you go into which is the reasons for the advice and how it meets the client’s objectives, financial situation and needs. That is very open ended.”

Overall, the proposed reforms have been generally underwhelming for the advice profession, particularly after waiting so long for them, while seemingly also failing to offer any reprieve from onerous requirements and red tape.

“What we need is certainty about how you deliver that and certainty that it can be done in less than a page. It doesn’t need to be an extensive rationalisation and justification,” he said.

“What we want is something that is really succinct. What we also need is certainty around some of the things that have ended up in SOAs over the years that nobody knows for sure whether they need to be there.”

To hear more from Phil Anderson, tune in here.