CPD: Do longer SOAs break the law? When is an ROA more appropriate? (And other key questions about the communication of advice)

11 Nov 2024

From AdviserVoice - this Regulatory Compliance and Consumer Protection CPD article is proudly brought to you by Russell Investments

Understanding the pitfalls (and theoretical illegality) of lengthy, compliance-driven Statements of Advice (SOAs) and why concise communication improves client trust and comprehension.

Introduction

Disclosure is recognised as a key pillar of financial consumer protection. Transparent communication around product features, fees, and investment performance obviously helps consumers make informed choices when deciding to acquire, or retain, a financial product.

But too much of a good thing, can actually be bad.

The shortcomings of an over-reliance on disclosure was recognised by policy makers as far back as 2014, with the final report of the Financial Systems Inquiry stating:

“Disclosure can be ineffective for a number of reasons, including consumer disengagement, complexity of documents and products, behavioural biases, misaligned interests and low financial literacy.^{” [1]}

Royal Commissioner Kenneth Hayne was of the view that the Safe Harbour steps had led to a ‘tick-a-box’ approach to advice^[2] – where the determinant of quality, compliant advice, was that a handful of ‘safe harbour’ steps had been adhered to, and the individual needs of the client were considered secondary.

Similarly, it can be argued that Statements of Advice (SOAs) have been viewed by many as a compliance, box ticking exercise, rather than a critical opportunity to communicate the advice itself, and more broadly deliver a positive, meaningful, and valuable advice experience.

The compliance-led (as opposed to client-led) approach to SOAs is flawed in two respects:

a longer SOA does not offer more protection to the client, and
a longer SOA does not offer more protection to the adviser.

But, just like McMansions, SOAs have been supersized.

Studies^[3] have shown the average SOA length increased from 8 pages in 2011 to 72 pages in 2021. Despite views to the contrary, a longer SOA is more likely to contravene:

section 947 of the Corporations Act – which requires that the information included in an SOA “must be worded and presented in a clear, concise and effective manner”, and
Standard 5 of the adviser Code of Ethics, which emphasises the importance of the client properly understanding the advice and recommendations you give, and their implications.

The reason a longer document is more likely to fall foul of these requirements is quite simple: consumers are far less likely to read or understand, long documents full of legalese and financial services jargon.

As attendees at one industry event were told, SOAs have become “big, alienating, and defensive documents that are more likely to increase the anxiety of consumers who are accessing advice for the first time”.^[4]

Research shows less is more

Queensland adviser and PHD candidate conducted research^[5] to demonstrate how shortening the SOA could improve both customer comprehension of, and their trust in, the advice been given.

Neilsen took an industry standard template and removed all non-mandatory content.

“The recommendations went from some 12 pages to two,” he explained^[6], adding the concise document included hyperlinks to Government websites like MoneySmart and the Australian Tax Office to provide additional timely information for clients.

When Nielsen approached over 160 financial planning clients and registered advisers with the concise document, his condensed SOA recorded higher levels of comprehension, value, and trust compared to the standard industry document.

“All we’re doing is putting together a method by changing the language and the size [of the document] and making smarter people as a response,” he said^[7].

In the QAR/DBFO cross-hairs

Recognising the need to streamline much of the red tape in advice compliance, SOAs were very much in the cross-hairs of Michelle Levy when she conducted her Quality of Advice Review, and Recommendation 9 of her final report recommended their replacement:

“The requirement to provide a statement of advice (or record of advice) should be replaced with the requirement for providers of personal advice to retail clients to maintain complete records of the advice provided and to provide written advice on request by the client. Clients should be asked whether they would like written advice before or at the time the advice is provided and a request for written advice is required to be made before, or at the time the advice is provided.”^[8]

While the Government accepted this recommendation in principle, they stopped short of agreeing to the ‘on request’ element, instead seeking to replace SOAs with a ‘record that is in plain English and provides helpful information to make an informed decision’^[9].

With tranche 2 of the QAR recommendations expected at the end of 2024, the exact requirements are as yet unknown.

Concise and clear – what needs to be in an SOA, and what doesn’t

ASIC’s guidance around the information that MUST be contained in an SOA is found in Regulatory Guide 175¹⁰.

In simple terms this information includes (but is not limited to):

The title Statement of Advice’ ‘at or near the front of the document’.
Name and contact details of the entity providing advice, and the details of the authorising licensee if applicable.
The actual advice itself.
Information about the basis in which the advice was given:
the subject of the assistance sought by the client
the scope of the advice
a summary of the client’s circumstances
the products and strategies investigated as part of the advice
the reasons why the advice is considered appropriate, and how the adviser has acted in the client’s best interests
the advantages, disadvantages and risks associated with the advice.
Information about switching products if recommended, including the fees and risks.
Remuneration and any benefits received by the adviser.
Details of any interests or relationships that could potentially influence that advice.
A warning if the advice was produced with incomplete information.

Importantly, ASIC also requires that the information be:

“Worded and presented in a clear, concise and effective manner”. (RG175.185)

Equally importantly, the format and length of the SOA, and the inclusion of charts, graphs, projections etc is NOT mandated by ASIC^[11]. Nor is the need to for a client to sign the SOA as an ‘authority to proceed’.^[12]

To the extent that charts and projections can help clients understand the advice been given, this means advisers can choose to provide these in a document/format separate to the SOA.

Myth busting – ASIC does not currently require SOAs to be written

As financial adviser Nathan Fradley told the audience of a recent industry event:

“The word clear appears 47 times in RG 175, concise 27 times, the word written does not appear once.”^[13]

Fradley noted that the law does not require the SOA to be a physical document, as is currently the common practice.

ASIC themselves confirmed that they were technology neutral with regards to SOAs, with ASIC executive leader Leah Sciacca telling attendees at the 2022 FPA National Congress that the Corporation’s Act is “technology neutral” and did therefore not mandate format^[14].

She went on to say, “from an ASIC perspective, we encourage industry to explore technology and innovation that might lead to efficiency and benefit consumers.”

ASIC offers relief for digitally delivered advice documents

ASIC recognised the growing use of digital channels as far back as 2012 and issued RG 221 specifically to provide extra guidance and relief around those requirements of RG 175 that were clearly skewed towards text-based documents (for example, referencing ‘at or near the front of the document’).

ASIC sets out its aims for RG 221 as including:

explain how under the Corporations Act most disclosures can be delivered digitally
describe the relief available under the ASIC Corporations (Removing Barriers to Electronic Disclosure) Instrument 2015/649 to remove potential barriers to more innovative disclosure, and
set out a ‘good practice guidance’ on digital disclosure.

SOA or ROA?

While the SOA tends to be at the centre of any discussion around compliance and red tape forcing up the cost of advice, the Record of Advice (ROA) is perhaps deserving of more attention, partly because the format of the ROA could well be a pointer to future advice documentation requirements, and partly because the circumstances when an ROA is appropriate to use – instead of an SOA – are not always understood.

Indeed, the use of ROAs by an adviser – when SOAs were more appropriate – was at the centre of a recently reported Financial Services and Credit Panel (FSCP) determination.

In their August 5^th determination, the Panel issued a warning to an adviser for providing retail clients with Records of Advice, “in reliance on Statements of Advice that had been given to the clients by a different providing entity”.¹⁵

An ROA is much shorter and less formal than an SOA, with less information required.

To provide more clarity around when an ROA is or isn’t appropriate, ASIC issued Information Sheet 266, which includes a handy table with tips.

An ROA only needs to be provided if the client requests it in the first two cases but needs to be provided “as soon as practicable” in the final scenario

ASIC also clarifies, when giving further advice, what constitutes a client’s relevant circumstances as being “significantly different” and therefore requiring an SOA rather than an ROA.

According to Info 266, examples of significantly different relevant circumstances include:

A new mortgage
Divorce or separation
A new baby
Redundancy or job loss
Inheritance
Sale of business
Death of a partner

An SOA is also needed when further advice is given and that further advice is significantly different to the basis on which the previous advice was given – for example if the initial advice related purely to superannuation, and the further advice related to investing in ETFs.

Information to include in an ROA

Table 2 summarises the information required in an ROA, and how it differs based on the client scenarios described above.

As can be seen, many onerous requirements mandatory in SOAs, such as the need to scope the advice, thoroughly investigate all possible product solutions, document changes to client circumstances, and document the risks associated with following the advice, do not apply to ROAs.

ROAs can be video or audio recordings

Just like SOAs, there is no requirement for ROAs to be written documents, with Info 266 stating:

“You can keep an ROA as an audio or video recording, or in writing”.^[17]

In line with this, there has been growing usage of video-based SOAs among advisers. The FAAA even introduced a practical toolkit in 2022, to provide advisers with the tools to provide SOAs via video rather than written document^[18].

The recent uptake of AI tools – particularly for the transcribing of conversations and preparing file notes and other documents – is likely to give increased impetus to use of video and audio SOAs.

Will compliance teams be the handbrake to SOA reform?

While the second tranche of Delivering Better Financial Outcomes (DBFO) reforms is expected to clear the way for shorter, more consumer friendly, advice documentation, many industry experts believe the impact – and intent – of the reforms may be blunted by licensees who choose to maintain onerous SOA requirements, out of fear of breaching compliance requirements.

The likelihood of this safety-first approach will increase if, in the new regime, AFCA finds against an adviser on the basis of information excluded from an SOA (or whatever the new documents are called). Should this occur, many licensees may review their documents with a view to adding content back in.

Other stakeholders, such as professional indemnity insurers, will also have an influence.

As one expert told IFA magazine:

“Licensees will also be conscious of the risks that are involved in providing personal financial advice to a retail client and so will need to find the right balance. This may mean that they wish to retain a number of the disclosures and disclaimers that already exist in SOAs to minimise the risk of future claims for poor advice. It’s also important to remember that it’s not just about what the licensee wants. Professional indemnity providers may also be essentially forcing licensees and advisers down the approach of having many things in the SOA as the proof points to ensure coverage is provided.” Bryan Ashenden.^[19]

Summary

In conclusion, the current reliance on lengthy Statements of Advice (SOAs) reflects a flawed, compliance-driven approach that prioritises regulatory box-ticking over effective client communication. Research and industry insights demonstrate that more concise, client focused advice documentation enhances trust in – and comprehension of – advice, while remaining legally compliant. As the industry awaits further clarity on reforms from the Quality of Advice Review (QAR), there is a clear opportunity to transition towards more innovative advice delivery, including digital formats.

While the next tranche of reforms are expected to streamline advice documentation requirements, the success of these reforms will depend on balancing regulatory compliance with client needs. The cautious approach of licensees and insurers—motivated by liability concerns—may impede progress, but the industry must embrace change if the advice is to become more sustainable, and more valued by clients.

Ultimately, by streamlining advice processes and leveraging technology, advisers can provide meaningful, personalised experiences that foster trust, reduce client anxiety, and improve financial outcomes for all stakeholders.