If anyone had any doubt about the approach the Australian Securities and Investments Commission (ASIC) will take to regulation under choice of fund, they only have to look at the case of Brendan Moore.
In April, Moore became the first adviser to be singled out by ASIC’s super switching surveillance campaign after the regulator alleged that, almost a year earlier, he had failed to give four clients statements of advice (SOAs) when he’d helped them transfer their money between superannuation funds.
ASIC chose to press criminal charges, despite protests from Moore’s supporters, including his dealer group, Financial Services Partners (FSP).
While the case is still before the courts, Moore’s supporters claimed there were extenuating personal circumstances.
FSP managing director Geoff Rimmer came out publicly to state that none of the four clients lost money, they all requested the switches, and were still happy with Moore’s service.
Whatever the facts, and ultimate outcome, of the Moore case, it has highlighted one certainty — ASIC is unlikely to be pulling any punches come super choice on July 1.
ASIC director of enforcement Jan Redfern says any other adviser who fails to issue an SOA, and doesn’t alert ASIC to their actions immediately, will probably suffer the same fate as Moore — no matter what the excuse.
“[An SOA is] evidence of the advice and that’s a really important thing. We need to have evidence of what was discussed, a bit like having appropriate and proper books and records of a company,” Redfern says.
“So ASIC sees it as an important provision and clearly the legislature thought it was important because they put it in there as a strict liability offence.
“If this was a situation where you had someone who didn’t provide the SOA and they then said ‘well look it was difficult at the time but I’ve since provided them with an SOA’ — and it was a short period of time, and nobody suffered prejudice — we wouldn’t be going around prosecuting people.”
For any advisers who haven’t issued SOAs, the message is clear – get on the phone to ASIC now.
Once choice of fund is introduced, the pressure on advisers from the regulators will only increase. ASIC’s next shadow shopping exercise, which will form the brunt of their investigations under choice, will not only look at whether SOAs have been issued, but also their quality.
ASIC penalties
So what will happen to an adviser who gives clients the right disclosure documents but doesn’t include the right information within them? Could they face criminal prosecution too? O’Donnell says that will depend on the type of offence committed.
More serious cases that show a ‘total disregard for the rules’ — like giving out an extremely poor SOA that intentionally doesn’t give the client enough information — will result in ASIC resorting to “harder-edged enforcement remedies” especially if the adviser has something personal to gain.
“But by and large, where people have tried to do the right thing, then we’re happy to just talk to them about it and say ‘well next time we would prefer you to do it this way’.”
Where the line will be drawn between ‘not fully understanding’ the obligations and ‘showing a total disregard’ for them is difficult to ascertain. ASIC can’t comment on what could happen in specific hypothetical situations, stating that each case will be treated individually, as it happens. But O’Donnell has indicated which part of SOA documents ASIC will focus on.
Although the official results of ASIC’s super switching campaign are yet to be released, she says it turned up some hot spots where advisers are faltering. Areas which will be the focus of any future surveillance programs.
“That would include things like if you’re actually telling people to take money out of one fund and put it into another, are you actually looking at the benefits and the various costs that are associated not only in the funds you’re putting people into, but also the funds which you’re suggesting people leave.”
Compliance
A number of advisers checked out by ASIC in the surveillance campaign forgot to detail their client’s previous superannuation arrangements in disclosure documents. To date this offence hasn’t resulted in any criminal prosecutions, but O’Donnell says ASIC will come down harder on repeat offenders.
Planners should also keep in mind that when a client switches super funds, relying on information provided by the client’s word-of-mouth won’t be good enough for ASIC.
Documents that provide details of the original fund arrangements must be obtained when possible.
Another issue to come out of super switching that O’Donnell says ASIC will pay increased attention to in future surveillance operations, is conflicts of interest.
That means any commission, preferred platform and buyer of last resort arrangements, equity schemes and alternative remuneration (otherwise known as ‘soft dollar’ benefits) must all be clearly disclosed.
And none of these requirements should take the adviser too much time, according to O’Donnell.
“We are not trying to push 80-page SOAs. We would much rather see people looking at an SOA as to whether or not it communicates properly with the client and it’s when it doesn’t do that we will start to be concerned.”
For those advisers still unsure exactly what information is needed to communicate properly with their client, ASIC says it will release an model SOA by August, one month after choice is introduced, which it claims will be kept to 20 pages.
This move has been pre-empted by several dealer groups, most notably Financial Wisdom, which has shown its advisers how to generate a 30-page SOA, mostly by excluding generic information that will be sent to clients via separate fact sheets.
Industry and DIY funds
Advisers should also be extra careful when switching a client’s cash from an industry fund into a retail fund. It is widely understood that the reason the corporate watchdog was sniffing around Brendan Moore’s quarters in the first place was because TasSuper, the industry fund that two of his client’s money were transferred from, had requested it.
TasSuper had lost the accounts and wanted to know where it was going, so it asked ASIC to step in and have a look. ASIC obliged and came up with Moore, and the $10,000 he moved out of TasSuper at the request of two of his clients.
Switching clients money into a self-managed super fund (SMSFs) should also be done with extreme care. ASIC has indicated it will check whether clients have been adequately informed of their duties as a trustee and whether they have enough money in the first place to make establishing an SMSF worthwhile.
But if recent claims by the SMSF Professional Association of Australia (SPPA) are anything to go by, it is accountants, not financial advisers, who are at the biggest risk of falling foul of ASIC in the SMSF space.
“Because accountants are one of the large channels into SMSFs, then that’s obviously why they will get some particular focus from us,” O’Donnell says.
SPAA representative David Ruddiman says while most are aware of their obligations under the Income Tax Assessment Act, he fears that more inexperienced accountants do not have an adequate understanding of the Superannuation Industry Supervision (SIS) Act.
A point confirmed by Dixon Advisory and Superannuation Services director Alan Dixon, whose group specialises in providing SMSF advice.
“Of the 970 funds we’ve taken over in our business, we’ve taken over quite a large number of funds from accountants and there have often been significant problems with the way their records have been kept,” he says.
This is why both Ruddiman and Dixon are calling for compulsory SMSF specific adviser accreditation, mainly for accountants but also for financial planners.
Assistant Treasurer Mal Brough has heard these calls, and if ASIC turns up any accountants or financial planners failing to properly audit SMSFs, it is not just those at fault who could end up paying the penalty. Most advisers who want to offer SMSFs could end up having to go back to school.
And the same rule could apply not just to SMSFs. If ASIC’s surveillance in the choice environment shows systemic adviser incompetence, ASIC has also indicated that recent roll-backs to the Financial Services Reform Act currently being proposed by the Federal Government could end up on the back burner.
