ASIC drops ROA guidance, sets 'significant change' parameters

November 10, 2021

ASIC has released the first real output stemming from its consultation on access to affordable advice (CP 332), publishing a guidance on Record of Advice usage including long-awaited examples of situations whereby advisers are able to use ROAs instead of Statements of Advice.

The guidance follows a one-page infographic ASIC released on 1 July outlining the industry’s response to the original consultation which saw the regulator ask the industry what the main obstacles were to providing affordable advice to consumers.

One of the emergent themes from that consultation was that more use of ROAs would reduce the cost of advice. Of the 466 submissions received in the consultation (242 from advisers), 146 respondents supported greater use of ROAs, with “SOA preparation” identified as an inhibitor to cost-efficient practice.

In response, ASIC’s guidance attempts to clarify when to use ROAs, how to prepare them and, crucially for advisers and compliance teams, clarification on the kind of “significantly different” client circumstances that preclude ROAs being rather than SOAs.

“This is the first of ASIC’s initiatives developed in response to the financial advice industry’s recent feedback on our consultation to improve consumers’ access to affordable advice,” ASIC commissioner Danielle Press said. “We expect this practical guidance and information will provide clarity and certainty to financial advisers about when and how they can use ROAs.”

The guidance essentially takes Reg. 7.7.10AE from the Corporations Act (Situations in which a Statement of Advice is not required) and makes it more digestible, with accompanying examples to illustrate the intent.

The key message from the regulator: use the ‘further advice’ dispensation for ROA usage at will, but also use professional judgement to ascertain if the client’s situation has deviated enough for an SOA to be warranted.

“If the client’s relevant circumstances at the time you provide further advice are significantly different from the circumstances that you considered when providing the previous advice, you cannot use an ROA and must give the client an SOA for the further advice,” the guidance states.

Examples of relevant circumstances that may be considered significantly different, ASIC continues, could include:

a new mortgage or significant increase or decrease in debt
divorce or separation from a partner
a new baby
significant home renovations
redundancy or job loss
a significant increase or decrease in income
inheritance
sale of business
significant health events (i.e. terminal illness, disability or trauma)
retirement
death of a partner, and
a move to aged care.

In a separate table, the regulator provides examples of when changes to a client’s relevant circumstances may be significant under the ‘further advice’ ROA usage banner.

A client earning $50,000 who experiences a $20,000 change in income would constitute a significant change, ASIC says, but someone earning $200,000 who experiences the same $20,000 swing wouldn’t.

An consistent income increase of five per cent over four years since the client’s previous SOA would be significantly different, while a two per cent increase over six years since the previous SOA would not be deemed signficant.

ASIC also reiterates that if the basis of the adviser’s further advice introduces “a new area or strategy”, this probably brings about significantly different circumstances and an SOA will be required.

Ultimately, however, and in keeping with its prediliction for more principles-based regulation, ASIC says the onus remains on the adviser to accurately assess whether an ROA can be given under the ‘further advice’ allowance or a change in circumstances warrants an SOA.

“You will need to exercise your professional judgement when considering whether any of your client’s relevant circumstances are significantly different from when the previous advice was given,” it states.

Compliance reality

The guidance is an attempt from the regulator to bridge the gap between the intent of regulatory settings in the Corporations Act and the risk settings of advisers, compliance specialists and licensees, many of whom remain wary of ASIC’s entreaties to write shorter and fewer SOAs.

It was only a year ago that Press, speaking at Professional Planner‘s Best Practice Forum, said “overly conservative” licensees were hampering the delivery of advice.

While some advisers say ASIC is disconnected from the reality of compliance, Press’s point was somewhat validated by the submissions to its consultation on access to affordable advice, which saw respondents identify “conservative licensee policies and procedures requiring compliance above what is required by law” as contributing to the excessive cost to serve.

While the guidance constitutes the first real output from the access to advice consultation it’s understood ASIC will be feeding the bulk of the findings from CP 322 into Treasury, which is due to conduct its retail advice review sometime in 2022.

asic, compliance, CP 332, Danielle Press, licensees, regulation, RoAs, SOAs

7 responses to “ASIC drops ROA guidance, sets ‘significant change’ parameters”

Martin Longden

August 17, 2022

The real world examples ASIC gives in relation to significant changes warranting an SOA in place of an ROA is contextually distorted.

E.g if I receive a 5% increase on my salary each year, then my projected cost of living expenses against a long-run benchmark wold be justifiably 3%p.a using the RBA’s modelling for the same benchmark.

My net increase leading to discretionary capacity is only 2% p.a over 5 years, and as such, accords itself to the acceptable standard given by ASIC in the same example it used for the 5% increase on the same salary level.

This is an example of a transactional and ‘data rational’ approach to creating regulations which are clearly dichotomised from the reality of actual, behavioural financial experience represented by millions of Australians every year.

On this, it could be easily argued before any Federal Court judge in support of my approach in providing an ROA when the wider context of the client’s aggregated factors contributing to their financial situation with the 5% increase in salary is considered, and therefore in that wider context, is actually insignificant over the same period against ASIC’s ‘Obiter Dicta’ – expressed opinion on the legality of their view, without either statute defining this specifically, or case law setting a precedent upon a tried case using this scenario to arrive at a recorded legal judgement.

This is simply a stated observation in ASIC’s considered opinion as the standard by which this regulation could be considered being adhered to, yet remains an opinion, as there is no existing statute or case law which has defined their opinion as a legal standard.

Hence, the confidence of my position in satisfying both the legal requirement of this regulation, and supporting the fulfilment in the client’s best interests duty with regard to their free, prior, and informed consent.

ASIC must do better.

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Jason Bragger

April 26, 2022

The commercial reality is that doing a new SOA because the client gets a decent pay rise every time or the mortgage rate increase by 2% or they borrow $30K to renovate their Kitchen is not viable unless the client has significant complexity that needs advice or a large portfolio that the necessary fee can be absorbed into. The regulation simply isn’t fit for purpose. I have two different clients who want me to advise their children this week. One (22) got a $20K inheritance from grandma and the other is 14 and has saved $7K. Full SOAs required which would cost our practice around $2K to produce. I could do this advice and implement in less than an hour if it wasn’t for the red tape. Instead the regulation expects me to simply lose money helping the kids out or refuse to assist. Qualified, educated planners have to be trusted to like all other professionals. Its the only way forward. Throw the book at those who abuse trust and ban conflicted (aligned) advice. Then let us do our job.

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David Smith

November 11, 2021

Overly conservative licensees are a part of the regulatory problem, and ASIC’s efforts attempt to address this. For those of us who already knew when to use an ROA, the guidance is of no benefit. It does nothing to reduce the regulatory burden or the cost of advice.
In fact, it is a cop-out. What I was hoping to see from ASIC was action to reduce the actual regulatory burden – which is the real problem. The silence on this matter is deafening, but predictable. ASIC’s absence of strategic insight is mind-numbing.

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Wayne Leggett

November 11, 2021

I’m glad you think it’s clear guidance, Kym. It’s a good attempt, but at what point do you decide that the client’s “consistent increase in income of 5% a year” warrants a new SoA; each year, or is the four years in the example meant to be taken literally? In the absence of clear guidance, we all know what will happen. Compliance auditors in AFSLs will err on the side of caution and mandate use of SoAs.

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1. Kym Bailey
  
  November 11, 2021
  
  Would depend on the clients position Wayne. 5% to some clients could significantly move the dial on their goal and objective pursuit. For others, it may just provide further discretionary spending. This is where adviser judgement is king. You know your client and whether 5%pa is significant or not.
Kym Bailey

November 11, 2021

This is welcome guidance from ASIC and pleasing that they are promoting the concept of the need for advisers to exercise professional judgement. This is a key (missing) element in the road to professionalism. Advisers are in the best position to understand whether there has been a significant change to a client’s circumstances and hence decide on the best form to provide the advice. The over anxious legal overlay will still dominate the decision around whether there has been a significant change to the basis of advice however, this test (for the use of RoA v SoA) is pretty black and white..
Good to see a materiality test being suggested in ASIC’s guidance, this is very relevant to the client in front of you and significance can’t be standardised.

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Jeremy Wright

November 11, 2021

When you look at the issue of providing either an ROA or SOA, it becomes a difficult decision, though weighed up with the potential risks to Licensees and Advice practitioners of not covering off on all possibilities, then the affordable advice goal becomes more distant.

The examples ASIC has highlighted as significant, such as a new baby, or an increase in pay, could be construed and argued by many as justification for either an ROA or SOA, which leads us back once again to a “safety first” strategy, which would involve the more time consuming and higher cost SOA path.

It is a difficult decision to decide which path to take, though when there is Legal implications and varying interpretations to consider, the current path seems to still be more complexity and costs that will be borne by all Australians seeking advice.

There is a consistent agreement from all parties that the current system is too complex and costly for all involved and it will take more time and negotiations to come to a position that provides comfort to Licensees and Advisers to feel safe enough to scale down the complexity and allow all Australians the chance to attain affordable advice.

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