While there are rules laid out in the Corporations Regulations around when a financial adviser can provide a record of advice (ROA) rather than producing a new statement of advice (SOA), Holley Nethercote partner Samantha Hills said there is a lack of clarity around what level of changes in somebody’s circumstances warrants rewriting an SOA.
In November last year, the Financial Services and Credit Panel (FSCP) suspended an adviser’s registration for failing to comply with his obligations when providing advice to three clients, using ROAs that relied on SOAs that had been given to the clients up to seven years ago.
At the FAAA Roadshow in Sydney last week, Hills said the FSCP taking action on this issue highlighted that advisers need to ensure that there have been no “significant change in circumstances” if they are to provide an ROA.
“You can’t say that there’s been no significant change if that five-year period has elapsed,” Hills said.
“The panel also found that the record-keeping was not really ideal in this business, and so it made it harder to establish things like the best interests duty being met.
“The panel also invoked parts of the Code of Ethics, and we know the code of ethics has been slated for change, but there’s no sign of that happening yet.”
FAAA general manager policy, advocacy and standards Phil Anderson added that, under regulation 7.7.10AE, there are three areas that need to be met to rely on an ROA.
“It applies that where a provider has provided an SOA previously, and the provider could be either the individual or licensee, that the client’s personal circumstances have not changed significantly and the basis of the advice has not changed significantly,” Anderson said.
“There are three key parts to it: it’s got to be the same providing entity, the personal circumstances have not changed significantly, and the basis of the advice hasn’t changed significantly.
“Now, I think the real challenge is around the personal circumstances having changed significantly. I think that the time since the SOA was produced is more like a proxy for what might be reasonable.”
He added that while it would be “arguable” that a client has not changed anything in five years, when applying this time frame to most clients, many of their circumstances could be very different.
“Things do change. They change jobs, they might have additional children, their health may deteriorate, they may transition to a new stage in life. You’ve got to be really careful about that one,” Anderson said.
“I think that the change in the basis of the advice is a whole lot easier. If you previously gave super consolidation advice, I don’t think giving life insurance advice is going to be OK. You’ve got to have provided advice on that basis, it’s got to be in the same area.”
There are also external factors that can impact the basis of advice, such as changes in super legislation or the New Aged Care Act, for example.
“There’s no hard and fast rule here,” Hills said.
“I guess the take out that we’re supposed to take from this decision is that, in this case, the adviser had left five years and the panel said, ‘That’s just not cool’.”
The regulations, she stressed, do not specify a time frame.
“This is where [advice firms] need to make some judgement calls when you’re setting up your processes around when an ROA can and can’t be used,” Hills said.
“What do you think might be a reasonable time frame? But don’t get too set on that time frame. You’re giving advice to the client so that immediately the best interests duty is invoked, you’re going to need to find out things about the client’s circumstances, and what you find out that underpins your advice.
“That’s your information that you need to look at and say, ‘Is this significantly different from when I first gave the client a statement of advice?’ Now, you can give a large degree of discretion to your advisers, or you can try to formulate some broader principles that you’re going to follow consistently in your business around that.”
Why does a RoA even revolve around significant changes in personal circumstances? It should be left to the adviser to use their professional judgement as to whether the client requires further advice. There are plenty of instances where significant changes do occur, yet it doesn’t impact the existing advice, or after discussion with the client its decided no changes are needed. Half the problem is the legislation requires these cumbersome advice documents to be produced (SoA & RoA) for any small change to the existing advice.
I could be very wrong but I think more attention should be paid to the term ‘relevant’ circumstances, in the legislation. Like you said, there are plenty of instances where significant changes occur but don’t impact the existing advice. I’d say those changes are to circumstances which are not relevant, and therefore do not fall within the scope of the legislation. Using this interpretation you could say RELEVANT circumstances (whose relevance will change based on what kind of advice is being given), have not changed in this instance, which means an ROA can be done (provided the basis hasn’t changed significantly under that second limb).
I think people are misunderstanding this. There is no suggestion of a 5 year rule. Merely the point being made is that it’s highly likely that a clients relevant circumstances will change significantly in a 5 year period. Of course this depends on what phase of their journey they’re in i.e it’s more likely a 40-50 year old will experience significant changes to their circumstances compared to a 60-70 year old. Everything is case-by-case.
How could you ever rely on using a ROA if your record keeping is deficient whihc seems to have been the situation in this case!
and what of retirees, once retired for some clients their world wont change much age 60 to 75
I am been working with retirees since 1980
Yet another example of what a joke this industry has become with all the layer upon layer of red tape introduced by consecutive governments…
Surely the pertinent point in all this is HOW WAS THE CLIENT HARMED?
If there was no client harm, then arguing over RoAs and SoAs is just bureaucratic persecution for the sake of it. If there was clear client harm because the adviser failed to take account of relevant changed circumstances, then that is poor advice regardless of whether it was given as RoA, SoA, or any other form.
“You can’t say that there’s been no significant change if that five-year period has elapsed,” Hills said.
Sorry, but some people have dull and boring lives. If you saw a couple at say 35 and they had two small children at government schools,when you see them at 40 the kids are five years older and still in government schools, with no plans for private education. The P&I mortgage debt has not really reduced in five years, the salary has incrementally increased by CPI with the same employer, matched by the CPI in the lump-sum and IP benefits.The clientt is happy with his super fund and does not wish to change. The Will is still appropriate and properly executed and like most people they are struggling to save.They indicate they still want to be protected from the inevitable events of life and confirm that the cover originally recommended five years ago is still appropriate as it has CPI indexation.
To apply a five year blanket rule that requires a new SOA ignores the fact that for some people nothing changes.Surely it was up to the professional judgement of the adviser to recommend no changes and not have to provide an expensive SOA.The client won’t pay for that SOA and I do not blame them, and they certainly won’t read the document
The one thing I do agree with is that if the original SOA was written under the auspices of another entity i.e. there’s been a change of AFSL, or a change in adviser has occurred where there’s been a sale of a business, then a new SOA should be provided.
And it would be really nice if the FSCP published detailed reasons for their actions – nuts and bolts please. In other words, what was the claimed “significant change”. The FSCP should be in the business of educating all advisers
This a huge bugbear of mine, particularly with regard to insurance advice. ROA’s shouldn’t exist. If you’ve given a client an SOA on insurance then everything after that should be file notes. It’s ridiculous when you speak to a client about rising insurance premiums, you pretty well know what their options are and they’re happy to go ahead and make those changes, but all of a sudden they mention they’ve had a baby or increased their loan, then you’re up for an SOA. An SOA that the client will never read, is just regurgitating information purely for compliance purposes. The ROA regime is worse than the SOA in my opinion. The most ridiculous thing….you don’t even have to give them the ROA, just produce it, file note, move on. What a waste of time.
An ROA is essentially a filenote. It generally doesn’t need to be provided to a client and simply has to confirm basic elements of what you did and why. It only becomes a problem when Licensees (or advisers) recreate it as a mini-SOA or require it to be provided to every client.
It absolutely needs to be provided to a client as soon as you provide the advice. This is for any record of advice. Check the legislation
Let’s just do a new SOA any time the client reports they’ve been suffering a bit of seasonal hayfever so we can drive the cost of advice up a little more
It’s all well and good to suggest the client needs a new SoA every five years. Given that they cost around $1K to produce, we advisers have two choices; invoice the client for something they don’t want and get no benefit from, or build into our ongoing fees enough margin that we can justify doing these SoAs without raising an invoice.
If we stripped out most of the unnecessary info that is presently crammed into SoAs, maybe we could do them when we saw the need without having to charge for them.
$1,000 to produce ?
Where did you get that figure from ?
1. A new fully completed fact find.
2. File notes
3. Travel time to/from client if this occured.
4. Presentation of said SoA
5. Paraplanning fee if appropriate.
$1,000 – I don’t think so.
The Financial Services Panel stated;
” it was reasonably satisfied that the s961B and s961G obligations were not complied with for all three clients, explaining there was “not sufficient evidence” on the client files:
● That reasonable enquiries were made about the client’s relevant circumstances.
● That, of the enquiries that were made, the results of those enquiries were taken into consideration and advice scoped appropriately.
● That the clients’ strategic advice needs were taken into consideration.
● demonstrating why the previous recommendations in the SOA remained appropriate.
● that the relevant provider based all judgements in advising the client on that client’s relevant circumstances.
OUT OF THE ABOVE WE”RE NOW FOCUSING ON A FIVE YEAR RULE ?
I have been an adviser for 35 years and have seen the goal posts moved time and time again. It doesn’t take much longer for a limited scope SOA to a ROA. eg. change in risk profile is significant so a SOA is needed not a ROA. Changes can occur simply because of politician’s whim or grandstanding, so dumbing down SOAs too far under the proposals of ” good advice” which might be tested in the future by lawyers, so I suggest caution. Issuing ROA’s instead of SOAs and expecting to rely on file notes, when there is a line ball argument of significance to a change in circumstance, ought to tilt to the safer option of a SOA. Alan Tickle Taree
Phil Anderson I am deeply disappointed with this. The Panel cited several reasons, claiming the Adviser didn’t do a data collection for some time, and had not identified their goals. “and” yes the last SOA had been some time…You need to put this into context and not focus on a single aspect. This is like me saying it’s ok not to do a fact find in several years or check on a clients goals but you’d be all ok with a new SOA.
Frankly I would prefer an Industry body more focused on promoting ROA’s and not singling out a case where the adviser had not completed a fact find in several years.