Why it's time to standardise Statements of Advice

With research showing that Statements of Advice remain almost impenetrable documents for consumers, Bruce Keenan argues it could be time for a change. 

The ongoing administrative burden and frustration for Australian Financial Services licensees (AFSLs) (especially for advisers) of preparing a compliant Statement of Advice (“SOA”) suggests a need for a ‘standardised’ or regulated SOA document across the whole industry so that advisers can better focus on the best interests and needs of their clients.    

For well over a decade this industry has been held to ransom by the lack of accurate guidance, or to be precise, a regulated formatted SOA document.

In that absence, it has been hijacked by many including the media, lawyers and those in various ‘supervisory’ roles, and as a consequence, considerable and very valuable resources have been wasted on a wholesale scale at both the industry and regulatory levels trying to resolve the industry impasse.

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Has anyone calculated the ongoing industry configurations to COIN, XPLAN and other systems, staff, legal costs and numerous Australian Securities and Investment Commission (ASIC) regulatory guides? 

The other downside to this is that, during all this time, the key focus of this legislation has been totally lost. The client was never intended to receive a lengthy and complex SOA document, where because of its complexity and length it became unreadable and not fully understandable by the client.

How is a ‘complex’ document in the ‘best interests’ of the average retail client, when complex is defined as ‘not easy to analyse or understand’?

Did not the ASIC survey in 2010 reveal that 62 per cent of consumers had a preference for a written advice document not more three pages in length? If consumers (clients) know what they want and need, and ASIC can get it right (see below), then why can’t AFS licensees, advisers and others in the industry get it right?   

For those critics who believe a formatted SOA document would only lead to diminishing the importance and value of the advisory role, or for those in a more supervisory role who think that a wholesale ‘boiler plate’ approach to advice would evolve – they need to get their heads out of the sand and understand the law and the advisory role better. 

There are already plenty of examples of government-regulated, formatted documents in use throughout many sectors of all industries.

On top of that, AFS licensees now need to be mindful and become competitive against the migration of advisory services more accessible ‘online’ to an ever-increasing wider audience, where the documentation process is much more simplified.  

Most importantly, nowhere in the law does it state that a SOA needs to be an ‘essay’ of advice or a ‘paragraph’ of advice. Rather it expressly states the opposite in two key specific words, (i) ‘concise and (ii) a ‘statement’. Most have overlooked or do not understand this.       

The Oxford Dictionary defines  ‘concise’ as ‘giving a lot of information clearly and in a few words; brief but comprehensive’. It also defines a ‘statement’ as ‘a definite or clear expression of something in speech or writing, a formal account of facts or events¨’.  

These very basic definitions narrow what a concise statement should look like and not what is currently being produced by the greater majority of AFS licensees.

But what does the Federal Court say about lengthy documents? In Fraser v NRMA Holdings Limited (1995) 127 ALR 543 at 556: “The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than confuse. In complex cases it may be necessary to be selective in the information provided, confining it to that which is realistically useful.” 

I am sure there are other similar examples that equally or better define this issue. 

What guidance has ASIC provided about shorter SOAs?

In 2005 ASIC produced its first shorter SOA at 13 pages which drew some industry criticism. In 2009 ASIC RG 200 provided three further examples of two-to-three page sample SOAs.

In July 2011 ASIC released five SOA examples of two-to-three pages. In August 2012 it released ASIC CP 183 with a further 10 examples of two-to-four page SOA’s. ASIC’s latest example in August 2013 under RG 90 provided another 13-page SOA document.  

Whilst I am critical of ASIC for not being consistent in both its formatting approach and length of SOA document examples, in terms of creating an overall wider message to the whole industry they are to be congratulated on producing relevant guidance to the industry of how a shorter SOA might look. 

The regulatory inconsistency could have come from different ASIC staff interpretations over time. The point I make here is that the law has never changed, so let’s be consistent. 

The only other well known shorter example SOA came from the Financial Planning Association (FPA) in 2007 consisting of only eight pages. All of this should send a clear message to industry participants that an SOA longer than about 13 pages most probably sits outside the law.  

However, despite these shorter SOA examples, the greater majority AFS licensees are still producing over-lengthy 20, 30-60 page SOAs – contrary to section 946B(6), for failing to ensure the information is ‘presented in a clear, concise and effective manner’. To many, a Federal court decision on this specific issue would be welcomed.  

I have seen evidence of only one AFS Licensee who abides by the Corporations Law on this issue to date, by producing a ‘five-to-six’ page SOA.

Perhaps the majority of AFS licensees believe that a lengthy compliant SOA will protect them in any legal dispute.

They are wrong. No previous better-known legal decisions on ‘inappropriate advice’ were ever based on the actual content of the SOA document alone.  

How would an AFS licensee ensure they are abiding by the law in adopting a ‘concise’ SOA? There seem to be three important components to this issue. 

Primarily, a financial planner will be judged on his/her advice in terms of the strategy available and used; knowledge of available product/s and used; professional and industry qualifications; accreditations; training; experience; actual knowledge of his/her client’s needs and objectives; and what documentation the client received and understood.       

Secondly, in terms of a more definitive legal dispute, the key legal questions a court would be more concerned about might be:  

• Was the advice reasonable in respect to the needs and circumstances of the client? 
• What level of understanding was the client reasonably able to comprehend of the advice and documentation provided? 
• How was this advice conveyed to the client?   
• Under what circumstances did the client agree to this advice? 
• Did the SOA document address all of the legal elements under the law?  

All of the above questions can be easily explained in any court proceedings through the actual client interview process/documentation with adequate records of conversations, good file notes (either electronic – or written format), emails, and finally a brief summary of your advice in a ‘concise’ SOA document that a client can actually understand by the client.   

Thirdly, in the absence of a regulated formatted SOA document, a compliant SOA should always include all elements of the law, using terminology the client understands. A well constructed SOA may utilise common industry language and headings (always reflecting the law) such as: 

• The scope of advice/service 
• This is where you are now 
• This is what you want to achieve 
• This is how you get there 
• The advantages of the advice/service 
• The disadvantages/or risks you need to know about 
• What the advice/ service will cost you 
• Licensee information (by reference) to disclaimer, benefits, conflicts of interests and sunset statement  
• This will assist your decision making (reference to PDS, research etc) 
• What you need to do next.  
• The content of information (the statement) under each legal requirement above should be a concise summary of the specific issue. It can be very simple and even in point form, providing the client can understand it.   

What becomes critical is if, during the advisory process, an adviser believes any client wants or needs more technical detail/s on any specific issue (educational material, charts/graphs or, for example, how does Transition to Retirement work?), then they should be given outside the SOA document in a different format.  

These type of explanations, education or clarification/s can be recorded in file notes, emails with your clients or by reference to a specific education or other document/s. 

Finally, the law has never changed on the issue of a concise statement. Those AFS licensees who want to persist with 20, 30-60 page SOAs should try having the law changed from ‘concise’ to ‘lengthy’.

Bruce Keenan was a former senior ASIC officer with over 39 years of experience in law enforcement, regulatory service and the financial services compliance environment. He is now an independent consultant to the industry.