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.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
3 comments on “Ethics code tightens screws on SoAs”
  1. I agree that advice documents would ideally be succinct and user-friendly for the consumer. But there is a balancing act required. The document needs to be robust enough to defend advisers and licensees in court. Good luck defending your position with a deficient advice document. The advice document needs to be a first line of defense. And the requirements to be included aren’t only determined by licensees. PI insurers are likely to want some input. And misguided regulators also stipulate onerous content. In my 17 years as an adviser, this has been a perennial debate and one that I suspect will continue unresolved as long as advice documents need to serve a number of purposes.

  2. For far too long licensees have ignored the request of advisers to produce succinct advice documents for the benefit of clients. We all understand the short comings of the current, overly complex and long winded documents currently being produced. Hopefully licensees will be more responsive to FASEA and ASIC.

  3. Finally some sense is prevailing in the matter of SoAs. For too long they have represented licensee wallpaper, and good luck finding any plainly written advice in it. Compliance is a necessary aspect of financial services but there are better ways to get it done rather than in the key advice document. This is possibly the single, major issue I suspect why Accountants baulk at re the licensing regime.
    It is embarrassing sending out SoAs as they stand today and frankly, Advisers talk to their recommendations more fully than they appear in the SoA, which is presented as a ‘compliance document’.
    Regardless of the impetus, I hope that there is genuine reform here

Leave a comment