Ethics code tightens screws on SoAs

FASEA’s updated Code of Ethics casts doubt over the future of templated SoAs with a warning for advisers over the use of generic documents containing irrelevant or overly complex information.

The message ramps up pressure on advisers to make statements of advice more bespoke, and could lead to potential conflict with licensees over the scope advisers have to tailor their advice documents.

Example 14 in the updated guidance relates to Standard 5, which deals with best interest duty and ensuring the client fully understands the advice. The example introduces ‘Frank’, an adviser using an SoA template provided by his licensee.

“At his licensee’s insistence Frank is only able to minimally tailor this document for individual clients, and never tailors or removes generic information that is not relevant,” the example states. “The resulting SoA document is unnecessarily long and includes complex language and concepts that compromise the client’s ability to understand the advice.”

The solution, given in the subsequent guidance on the example, is for advisers to firstly raise the issue with licensees, thus satisfying Standard 12 which implores advisers to “uphold and promote the ethical standards of the profession and hold each other accountable”.

Frank’s second duty, it explains, is to highlight relevant paragraphs in the document and tailor an explanation to the client, “satisfying himself that the client understands the advice and benefits, costs and risks of the financial products he recommends”.

The example is a departure from the original Code of Ethics guide, which, while it exhorts advisers to be satisfied that the client understands the advice according to the same metrics, does not include an example or mention licensees.

While the scenario is a fair illustration of how using SoA templates can lead to ineffective statements of advice, it raises some issues. In particular, questions will be asked of how much responsibility an adviser has to cull all extraneous or generic information from an SoA – and the cost to do so.

Also problematic is that advisers are being encouraged to report issues to their licensee, while their licensee is – temporarily, at least – in charge of monitoring the advisers’ adherence to the code of ethics until the government forms its own code monitoring body.

The example also raises the possibility of legal action; it’s feasible that clients could band together for class action suits if statements of advice are perceived to contain any information that is generic or irrelevant to the client’s individual circumstances.

Statements of advice have come under scrutiny recently, with ASIC highlighting their shortcomings in a paper produced in partnership with its Dutch counterpart entitled Disclosure: Why it shouldn’t be a default. The paper, which explores the role of disclosure as a default option to protect consumers, notes that disclosure can actually backfire and create consumer harm.

“…when disclosure is used to address problems it is ill-suited to solve, it can place an unrealistic and onerous burden on consumers,” the paper states, “…for example, expecting them to overcome complexity and sophisticated sales strategies.”