compliance
13 TopicsIs the SOA worth the paper it’s written on?
At more than 50 pages in length, statements of advice (SoAs) in their current form have become unwieldy documents that take at least 6.5 hours to produce and which many clients will never fully read. The shortcomings of the document are not lost on the industry, with a key recommendation of the Quality of Advice Review (QAR) being that SoAs are replaced with advice records that are fit for purpose. With consultation currently being sought on the final design of the replacement, we canvassed a number of advisers to get their thoughts on where SoAs fall short and what needs to change to ensure advice records actually provide value for both advisers and clients. Here’s how Mat Tenison of TiK Financial Group sees SOAs. “There’s a lot of stuff in there that’s not necessary. Clients don’t want or need that much detail. Advice should be around what clients want more than what the government thinks they need,” he explains. Tenison goes on to explain that he has to walk his clients through a statement of advice because clients rarely read through them. “I take time to take clients through the entire SOA, but it’s a running joke with clients that they will re-read it when they want to go to sleep.” “If you go to a doctor, you don’t expect them to go through every single health issue, they aren’t giving you a document on every virus and why they ruled them out. None of us want that and it’s the exact same for clients that come to advisers,” he continues. Costly and overwhelming The FSC came out in a media statement saying that the current SOA process is adding around $5,000 to a client's bill. Sufficient Fund’s James Millard points out it’s not just expensive, it’s ‘overwhelming’ for clients. “We encourage them not to focus too heavily on this, and ensure we're there to answer questions as they come up so they don't get lost in the details,” Millard explains. Shape Financial’s Shane Pestonji largely agrees, arguing a lot of the information in an SOA can be removed. “I personally feel SOA’s can be repetitive,” he says. “A lot of the information is quite extensive and difficult for clients to understand, especially those who have basic financial knowledge. How long should a SoA be? One of the main issues with how SOA’s are currently presented is the incredible length of the document. While Tenison still thinks it’s important to go through each page of an SOA to make sure the client actually understands them, it still is a time-consuming process. According to a report by the Australian Financial Complaints Authority (AFCA), these documents are too long and often contain language which a customer will not understand as well as other irrelevant information. “Template documents can be helpful, but the financial firm must take care to tailor the language used in the template to the client and delete irrelevant information,” the report says. Tension agrees, saying they should be around a 10-page summary with hyperlinks to more information. It’s no longer the wild west The number of rules and legislations to protect clients ‘from the wild west days in the past’ are no longer applicable, with the industry as a whole changing. “The game has changed… the obligations we have, the best interest duties, how we charge clients, it’s all different.” “Where if you had something short and concise, it would be better for the client, more affordable for the client and would stop advisers leaving the industry,” says Tenison. It has become clear that industry professionals and clients believe that SoA’s need to be reformed. This will not only help more Aussies get financial advice, it will help relieve the pressure advisers currently face.1.2KViews1like0CommentsThe legacy of the Storm collapse
This article has been taken from the NMP education library which has now moved to Advisely. The ALRC’s background paper, Risk and reform in Australian financial services law, addresses the ways in which financial services legislation has failed to adapt to “changes in regulatory philosophies.” This failure, the paper notes, has led to a complex web of “exemptions, conditions, notional amendments, obligations and prohibitions,” the by-product of which has been rampant duplication and redundancies. One example of this is the changing attitudes to managing product risk, and how those attitudes have both informed and been undermined by the legislative architecture of financial services regulation. The ALRC notes that in Australia, it is generally understood that market efficiency depends on a “reduction of information asymmetries” – in other words, consumers require adequate information about a product’s features, estimated return and risk/return trade-off in order for it to be priced appropriately. This philosophy was enshrined in the 1997 Wallis Inquiry’s position of disclosure being “at the core of any scheme to protect consumers as it allows them to exercise informed choice.” This position, the paper notes, went on to inform multiple reforms aimed at standardising product disclosure requirements in financial services, including subsequent efforts to make those standardised requirements easier for consumers to understand. Over time, though, these requirements became increasinglyprescriptive – and the paper suggests this may have been less due to consideration of consumer risk and more because “companies sought more detailed disclosure requirements in an effort to increase certainty as to their legal obligations.” At a certain point, one could argue, compliance and regulatory risk overtook product risk as the primary consideration. The paper suggests this has created a dangerous situation where “prescriptiveness can itself introduce risks of non-compliance by increasing the complexity and sheer scale of the legislation, thereby making it harder to understand and enforce.” Moreover, prescriptive disclosure requirements can create a sense of “risk shift” – where a product provider or distributor, having ticked all the boxes, “may feel it has executed its responsibilities” while letting its “broader conduct obligations” fall by the wayside. “In particular,” the paper adds, “an emphasis on prescriptive disclosure requirements, including as to the content and form of information, may focus compliance on black and white aspects of the law, rather than the more indeterminate requirements imposed by prohibitions such as that against misleading and deceptive conduct or the requirement that AFS licensees act efficiently, honestly, and fairly.” The paper cites two examples of this: the collapse of Storm Financial and the cases heard during the Royal Commission. These incidents, the paper says, “illustrate the way in which complying with disclosure provisions may create a sense of licence to disregard consumer interests or generally accepted norms of conduct, whether in the law or not.” It’s not just those who “disregard consumer interests” who are negatively impacted by prescriptive regulation, though. The ALRC notes that prescriptive content requirements for SOAs, for example, “may … simply reduce the time that can be given to actually providing advice, and add to the costs of [personal] advice. The fundamental obligations of an adviser – to act in the best interests of the client – can be overwhelmed by the disclosure obligations to which an adviser is subject.” These findings reflect the situation described by Story Wealth Management CEO Anne Graham where she argued that the primary problem for new advice clients is “how much time it takes to get the work done.” “If you’re a client or a customer and you’ve made the decision to purchase or get advice on something,” Anne explained, “you pretty much want it there and then. You’ve gone through the ‘will I or won’t I’ phase, you’ve done your fact-find on whether you think the adviser is trustworthy and whether you’re going to get value for money. You’re ready. And then it takes two months or so to actually get advice.” So how can this be resolved? The paper says that, to date, there have been no efforts to “comprehensively review and simplify” these laws, which means there are currently multiple “easy wins” available, including “consolidation of notional amendments and removal of the duplication, redundancy and unnecessary prescription that has crept into the legislation.” To fully rectify the issue and prevent further “amendment creep,” though, the paper recommends more fundamental simplification of the Corporations Act via “shifts in the law’s underlying policy and the development of a more consistent regulatory philosophy for regulating financial products and the risks they pose.”52Views1like0CommentsPutting the cart before the horse
The AFA believe many requirements under current financial advice legislation, including annual renewal and the use of financial services guides, as “additional layers of bureaucracy [introduced] with little consideration of the impact on clients19Views1like0Comments