What are the most current and topical regulatory developments with a consumer protection focus?

Introduction

Along with disclosure, financial literacy, and financial advice, financial services regulation is one of the four accepted pillars of financial consumer protection^[1].

Staying abreast – and ideally ahead – of regulatory developments is therefore a key responsibility of licensees and advisers, not purely from a legal/compliance perspective, but in order to demonstrate a genuine commitment to caring for their clients.

Advisers themselves know how rapidly the regulatory landscape evolves, and whilst the implementation of QAR recommendations may – or may not – signal at least a temporary pause in regulations directly affecting advice, financial advisers are just one part of a vast and complex ecosystem, and ongoing change across that ecosystem inevitably sees a significant volume of changes where the impact on advisers is more indirect, but nevertheless real.

In this article, we will examine some of the most current/topical regulatory developments with a consumer protection focus, with a view to providing advisers a practical, birds-eye view of the issues affecting them and their clients now and into the future. Areas explored will include ASIC, and their strategic and enforcement priorities, the federal government and its legislative agenda, and other members of the broader consumer protection system, such as AFCA.

Understanding where ASIC is coming from

Every year, ASIC publicly announces its enforcement priorities for the year ahead^[2].

For 2023, these priorities were:

• enforcement action targeting poor design, pricing, and distribution of financial products
• misleading conduct in relation to sustainable finance including greenwashing
• misconduct involving high risk products including crypto assets
• combating and disrupting investment scams
• protecting financially vulnerable customers
• misleading and deceptive conduct relating to investment products
• misconduct in the superannuation sector
• failures by providers of general insurance
• misconduct that involves misinformation through social media
• governance and directors duties failures
• manipulation in energy and commodities derivatives markets
• unfair contract terms (including insurance).

Tuning into the consumer ‘Zeitgeist’

At the time of writing, the 2024 enforcement priorities had not been released, however a glimpse at the above list illustrates the extent to which the focus areas very much evolve in line with key trends such as technology, consumer behaviour, and financial product innovation. That greenwashing, DDO compliance, crypto, scams, general insurance claims and finfluencers were all in ASIC sights very much reflects the zeitgeist of the last few years, marked by many major trends such as the surge in ESG investing, the rise of the finfluencers, and the growing scourge of online financial scams.

(This list itself is a handy primer for advisers considering all the issues that could be affecting their own clients).

Looking ahead, it is likely that ASICs future enforcement priorities will be extensively shaped by two key inputs, one being their own strategic priorities (which form part of their medium-term strategic plans), and the other on-the-ground market developments over recent times. We explore both these points further, firstly by examining ASIC’s published strategic priorities for the next few years, and then by revisiting the significant market and regulatory developments of the last year.

ASIC Strategic priorities

ASIC releases a 5-year corporate plan, on a rolling 12-month basis. This plan outlines its priorities over the next five years to protect consumers via a ‘fair, strong, and efficient financial system for all Australians’.

ASIC’s 2023 – 27 Corporate Plan^[3], released in August 2023 comprises 4 Strategic Priorities, and 6 current strategic projects.

Regulatory recap

Revisiting the most significant regulatory developments of the last year reinforces suspicion that the pace of change remains relentless. Amongst the developments attracting the most media attention, and likely being most impactful to advisers, were those in the areas of greenwashing, QAR, complaints and remediation, breach reporting, retirement incomes, and crypto currencies. Many of these were the subject of the more than 20 Reports issued by ASIC throughout the year^[5], notably:

• REP 760 Insurance in superannuation
• REP 762 Design and distribution obligations (Investment products)
• REP 766 Implementation of the Retirement Incomes Covenant
• REP 775 Insights from the reportable situations regime, and
• REP 763 ASICs greenwashing interventions.

Greenwashing in the headlines

Although research says that over 80% of clients want their adviser to present ESG options^[6], in reality many advisers are still reluctant to engage in ESG conversations with their clients. In some cases this could be due to a fear that conversations about ESG might stray into conversations on divisive political topics (climate change for example).

In other cases, it might be through fear of greenwashing. Indeed, in a recent survey of financial advisers by Investment Trends, 47% said greenwashing was increasingly challenging their ability to recommend responsible investments^[7]. This fear might be justified given the increasing number of fund managers and superannuation funds being pursued by ASIC after falling foul of the law.

Two high profile cases detailed in the above-mentioned ASIC REP 763 are those against Vanguard and Mercer^[8].

More recently, ASIC also took action against superannuation fund Active Super^[9].

Having already taken court action against these three, the corporate regulator is warning everyone that they are actively trawling through websites, disclosure documents, and marketing materials, searching for instances where the investment reality doesn’t live up to the marketing ‘spin’.

Indexed products and investments outsourcing a problem

In the cases of both Vanguard and Mercer, it was discovered that products described as being ethically screened (the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and Mercer Super’s Sustainable Plus options), in fact invested in companies involved in gambling, the production and distribution of alcohol, and the production of fossil fuels).

In the case of Active Super, ASIC’s action was against the overall fund, rather than a specific investment option.

In a media release^[10], ASIC said Active “represented on their website that they eliminated investments that posed too great a risk to the environment and the community, including tobacco manufacturing, oil tar sands and gambling” and that they had added Russia to their list of excluded countries, following the invasion of Ukraine.

Despite this, ASIC is arguing the fund’s holdings include holdings in tobacco packaging, gambling, Russian entities, and companies involved in the mining and oil tar sand industries.

While in all three cases poor processes and controls (rather than deliberate deception) seem to be the root cause, all cases highlight the risks involved when funds rely on outsourced investment management, and/or invest fully or partially in indexes, where the make-up of that index is not directly in their control. While screening out undesirable investments should still be possible in both scenarios, the involvement of external parties and the loss of direct control over investment selection introduces an extra layer of complexity and therefore risk, and herein lies a big lesson for advisers in choosing ESG options.

Just how much control does the fund manager have over the underlying investments?

Sadly, this problem is only going to get bigger.

This could be embarrassing for some of the larger industry funds in particular, many who are known for pressuring companies to become greener, and yet don’t come out favourably when the spotlight is turned on them. Just recently, for example, Australia’s largest super fund, Australian Super, has been in the cross hairs of industry monitors Market Forces, who has accused the fund of backing a top fossil gas producer after they threw their support behind management at Woodside’s latest AGM^[11].

Complaints and remediation

In September 2023, ASIC released the findings of its review into the remediation processes of licensees^[12]. This review followed the late 2022 release of its remediation guidelines via RG 277.

The headline finding was that the remediation policies and procedures of some licensees were inconsistent with RG 277, and could lead to poor consumer outcomes.

Specific failures identified by the review included:

Remediation review periods: some licensees were found to have policies that could inappropriately narrow the scope of remediation review periods

Use of ‘beneficial assumptions’: licensees did not always consider beneficial assumptions as a mechanism to enable efficient remediations.

Foregone returns or interest: some licensees had pre-determined rates for specific products or scenarios, with inadequate controls to ensure they were appropriate in the circumstances.

Reasonable endeavours: licensees are expected to make reasonable endeavours to contact and pay affected consumers, with reasonableness to be determined on a case-by-case basis. The review found examples of prescriptive approaches, such as a predefined number of contact attempts, which may be insufficient in certain circumstances.

Oversight and controls: to ensure fair and timely remediation, licensees should have governance frameworks with appropriate oversight and accountability. The review found a general lack of focus on fairness in governance frameworks.

Commenting on the review findings, ASIC deputy chair Karen Chester flagged more scrutiny on remediation policies and outcomes in the future, saying: “Licensees need to be proactive, timely and fair in their approach to consumer remediation. Going forward, while ASIC will generally not oversee remediation programs, we will consider regulatory action where licensees fail to deliver fair and timely remediation to affected consumers”^[13].

AFCA has its say on complaints too

In November 2023, AFCA published its latest data on complaints^[14], including those relating to financial advice.

That data showed complaints about inappropriate advice and failure to act in a clients’ best interests were the most common types of complaint in the investment and advice category for the 22/23 financial year.

But while the trend in complaint volume was down (if those relating to one specific company were excluded), with the number of advice complaints closed 2257 – down over 20% from the previous year – the Authority remains concerned about the time taken to resolve complaints.

While the average time taken to resolve all investments and advice complaints was 125 days, advice specific complaints were taking around 230 days to complete, more than double the ideal of 90 days, and up on the previous year.

AFCA and the misclassification of wholesale/sophisticated investors

At the same time as releasing their 22/23 data, AFCA also clarified another issue of direct relevance to financial advisers and their clients^[15].

AFCA Financial Advice and Investments Ombudsman Shail Singh told AFCA members they are close to updating their operation guidelines, putting sophisticated and professional investors outside their remit, except in cases where it can be shown the investor was misclassified (using the example of a widow who inherits a wholesale investor portfolio and does not understand the consequences).

Crypto and QAR legislation watch

Rounding out our consumer protection regulatory digest, it is worth recapping the recent legislative endeavours of the Financial Services Minister Stephen Jones.

The Australian government released its long-awaited regulatory regime in October 2023, designing a framework designed to limit the scams and fraud seen as rife throughout the crypto industry^[16].

At the heart of the regime – the legislation for which is expected to be tabled in 2024 – is a requirement for all crypto exchanges to become AFSL holders, an obligation which experts say could wipe out the vast majority of Australian exchanges.

Finally, in the spirit of leaving the best until last, at the time of writing, Minister Jones has just released the first tranche of QAR-related legislation for consultation^[17].

This includes legislation relating to:

• Recommendation 7: clarifying the legal basis for superannuation trustees reimbursing a member’s financial advice fees from their superannuation account
• Recommendation 8: streamlining ongoing fee renewal and consent requirements and removing the requirement to provide a fee disclosure statement
• Recommendation 10: providing more flexibility on how FSG requirements can be met
• the retention of life and general insurance commissions, and permitting superannuation fund trustee to pay advice fees if requested by the client.

There were several notable absences from that legislation, including those that were expected (such as that relating to the provision of advice by super funds, which is slated for release in late 2023), and those that were unexpected (SOA simplification and the scrapping of safe harbour provisions).

Responding to criticism about the lack of SOA clarity (recently identified as the most discussed topic across the popular Ensombl adviser platform), Minister Jones reiterated that both SOA simplification and the Safe Harbour changes remained on the agenda but simply required more work^[18].

QAR timeline – 2025?

With consultation on tranche one closing at the end of 2023, final legislation won’t be expected to come into effect until at least the middle of 2024, and there is a sense among some observers that – given the lower priority generally attached to this type of legislation – even that may be optimistic.

Noting Jones’ comments about the SOA/Safe Harbour changes, Tahn Sharpe of Inside Adviser took a more pessimistic view^[19], suggesting that if Jones failed to meet his Christmas deadline, and factoring in the inevitable consultation required for those specific items, it was not far-fetched to suggest that Tranche 1 may not actually be passed as a complete package before the 2025 Federal Election. By which time, who knows?

Summary

Staying abreast and even ahead of the ever-evolving regulatory landscape is imperative for financial advisers committed to genuine client care. The article delves into recent and anticipated regulatory developments through a consumer protection lens, emphasising the multifaceted challenges faced by financial advisers in an intricate ecosystem.

The focus on ASIC’s 2023 enforcement priorities underscores the regulator’s commitment to addressing issues ranging from sustainable finance and investment scams to governance failures, reflecting the dynamic nature of market trends. Notably, the examination of greenwashing cases involving major players like Vanguard and Mercer highlights the growing importance of ESG considerations and the risks associated with outsourced investment management.

The spotlight on remediation processes, AFCA’s stance on complaint resolution times, and the evolving landscape of crypto and QAR legislation further underscore the need for advisers to stay vigilant and adaptable. As the regulatory tempo shows no sign of slowing, advisers must not only align with current priorities but also anticipate future shifts in the regulatory agenda, influenced by technological advancements, consumer behaviour, and market dynamics.

The challenges and lessons outlined in this article underscore the ongoing commitment required to ensure effective consumer protection in the financial advice space.

———–

References:
[1] https://treasury.gov.au/sites/default/files/2019-03/02-Consumer-Financial-Protection.pdf
[2] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-302mr-asic-announces-enforcement-priorities-for-2023/
[3] https://www.allens.com.au/insights-news/insights/2023/08/ASIC-and-APRA-strategic-priorities/
[4] https://asic.gov.au/about-asic/corporate-publications/asic-corporate-plan/
[5] https://asic.gov.au/regulatory-resources/find-a-document/reports/
[6] https://www.moneymanagement.com.au/news/financial-planning/esg-imbalance-between-client-and-adviser
[7] https://www.ifa.com.au/news/33534-advice-improves-investors-esg-understanding
[8] https://download.asic.gov.au/media/ao0lz0id/rep763-published-10-may-2023.pdf
[9] https://www.lawyersweekly.com.au/the-bar/37919-asic-commences-proceedings-against-active-super-for-alleged-greenwashing
[10] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-215mr-asic-commences-greenwashing-case-against-active-super/
[11] https://www.investordaily.com.au/regulation/53943-australiansuper-targeted-over-clear-cut-case-of-greenwashing
[12] https://asic.gov.au/about-asic/news-centre/news-items/asic-calls-on-licensees-to-strengthen-remediation-procedures/#:~:text=Remediation%20review%20periods%20%E2%80%93%20RG%20277,caused%20loss%20to%20a%20consumer.
[13] https://www.professionalplanner.com.au/2023/09/asic-calls-out-lack-of-focus-on-fairness-in-remediation/
[14] https://www.professionalplanner.com.au/2023/11/advice-complaints-still-take-too-long-to-resolve-afca/
[15] Ibid.
[16] https://www.afr.com/technology/small-crypto-exchanges-to-suffer-wipeout-with-new-rules-20231017-p5eczw
[17] https://treasury.gov.au/consultation/c2023-462698
[18] https://www.professionalplanner.com.au/2023/11/qar-draft-legislation-tackles-fee-consent-and-super-fees-but-other-key-parts-missing-for-now/
[19] https://insideadviser.com.au/advice-reform-stalls-as-jones-dithers-on-soa-safe-harbour-changes/

The post Financial Advice Regulatory Digest – through a consumer protection lens appeared first on AdviserVoice.

Financial literacy of older clients is a key pillar of financial consumer protection.

Our ageing population represents one of the most significant policy challenges our nation has faced in decades. The burden on our health and social security systems will grow at the same time that the proportion of working, tax-paying Australians shrinks. Against this backdrop the focus by policymakers on retirement incomes and the superannuation system is understandable – in simple terms the more financially secure older Australians can become, the less reliant they will be on government safety nets.

The retirement incomes framework in Australia compares well to its international peers, with the compulsory superannuation system and the Innovative Income Streams legislation paving the way for more Australians to be able to live comfortably in retirement. Australia has amassed the 5^th largest pool of superannuation savings in the world^[1], and Australian retirees have access to an ever-increasing range of solutions that can help them optimise their retirement savings.

There is however, one major problem. The financial literacy of older Australians is poor, while the system designed for their benefit is complex. Recent research^[2] went so far as to describe Australians as being ‘financially illiterate when it comes to retirement’.

This article will explore the phenomenon of low financial literacy among older Australians. The most recent research will be discussed, along with its implications. The opportunities for financial advisers to help improve the financial literacy of older clients – and thus reinforce a key pillar of financial consumer protection – will also be examined.

The retiree financial illiteracy problem

Several recent research studies have laid bare the scale of the financial literacy problem among older Australians.

A 2022 survey^[3] of 3400 members of National Seniors Australia, conducted by Bond University, found that financial illiteracy among older Australians was at ‘dangerous levels’.

Around 90% of those surveyed failed to correctly answer all three questions, and around a third got all three questions wrong.

Also released in 2022 was research^[4] by the Centre of Excellence in Population Ageing Research (CEPAR). That study concluded that financial mistakes are more common in old age due to the complexity of information available lack of financial literacy, and cognitive decline.

Headline findings from that study included:

• less than half of all Australians have high financial literacy (which places us above the US, but below other countries, including Holland, Switzerland, and Germany
• financial literacy peaks at 54 and then declines
• at the same time, responsibility for making household financial decisions and overconfidence in one’s own financial knowledge increases with age
• between 5 and 20% of the population aged 60 and over is estimated to have mild cognitive impairment, characterised by problems with memory, language, thinking or judgement, which can affect complex financial decisions, and
• older Australians lose more to financial scams.

The general implications of poor financial literacy

Poor financial literacy is often associated with a wide range of adverse outcomes, both financial and psychological.

US financial literacy research^[5], for example, found that people with low financial literacy were less likely to plan, save, and invest in stocks, and as a result, accumulated lower levels of wealth. Similarly, those with lower financial literacy were more likely to have credit card debt, more likely to pay the minimum due amount, more likely to use higher cost credit facilities, and less likely to refinance their home loans.

Locally, the Household, Income and Labour Dynamics in Australia (HILDA) survey^[6] found low financial literacy usually translates to poor financial health. Poverty rates among the least financially literate are twice as high as the most literate group. Those with low financial literacy are also less likely to get involved in household budget decisions, have a lower propensity to save, and are consequently more vulnerable to experiencing financial stress.

Those with low financial literacy, and therefore less able to understand complex financial products, are also more susceptible to being taken advantage of, by scammers and unscrupulous product peddlers, and even by their own family members (a phenomenon we now understand as elder/financial abuse).

Looking through a retirement lens

The implications of poor financial decision making are greatly amplified in retirement when the ability to financially recover from mistakes is much lower.

In July 2020, the final report of the Retirement Income Review⁷ was handed to the federal government. That report found lower levels of financial literacy were associated with:

• lower super balances
• lower willingness to take financial risk
• shorter savings horizons
• being less likely to set up a retirement plan
• being less informed about pension rules
• paying higher investment fees
• not diversifying pension assets.

Consistent with the above, CEPAR^[8] found that among 45–54-year old’s, only 18% think beyond 5 years, compared to 35% among the high-financial-literacy group.

The Review’s findings have been reinforced by several, more recent, studies, which found many retirees were leaving a lot on the table, due to their lack of knowledge and understanding.

2023 research^[9] by AMP, for example, found that, of Australians over 50:

• 3 in 4 find the retirement system complex
• 2 in 5 don’t know if they’ll be eligible for aged-pension benefits
• 7 in 10 don’t know what an account-based pension is
• 3 in 4 have not sought financial advice for retirement planning
• 3 in 5 wish they’d started planning for retirement earlier in life
• 3 in 5 are ‘extremely concerned’ about the rising cost of living

The extent to which this lack of literacy is leading to sub-optimal retirement product selection was also found in research^[10] by SMSF administrator Class, showing that only half of APRA regulated super fund members over age 65 have taken advantage of rules allowing them to move into a tax-exempt retirement income product (compared to around 86% of SMSF members, the majority of whom would be advice clients).

Complexity is a problem

Efforts to improve the financial literacy of Australians have generally failed to shift the dial. But so have efforts to make financial products and documents simpler and more accessible.

The complexity of superannuation and retirement income products is especially problematic, and was also highlighted by the Retirement Income Review:

“System complexity prevents people optimising their retirement income. Navigating different parts of the retirement income system, combining income sources, and managing the multiple risks faced in retirement is challenging. People need assistance with complex financial decisions. Interactions between the retirement income system and other systems, such as the aged care system, increase complexity.”^[11]

Advisers themselves know all too well how complex rules around superannuation, tax, and Centrelink are, and how complex some of the newer innovative income stream products are. What hope does the average person have of navigating such a system.

The role for financial advice is obvious

Along with financial literacy, financial advice is seen as one of the four main pillars of financial consumer protection (regulation and disclosure being the other two).

For retirees, one could argue that financial literacy and financial advice are almost completely interdependent. The role of advisers is not just to help their retiree navigate a complex retirement landscape (comprising choppy investment markets and complex products and regulations), but it is also to educate their clients, to help them make better financial decisions, to help them feel more confident and in-control, and to prevent them making poor/irrational financial decisions.

This is not just a matter of adviser self-interest; it is also because – despite what is at stake with our ageing population hurtling towards retirement – the focus and resources devoted to the financial literacy of older Australians have been sadly lacking.

As far back as 2004, the Federal Government’s Consumer and Financial Literacy Taskforce (CFLT) identified the most critical cohorts to focus on as high school children, Indigenous Australians, and those of a cultural or linguistically diverse (CALD) background^[12].

Fast forward to today, and the complete absence of financial literacy resources aimed at older Australian is telling. Table 1, adapted from the CEPAR’s Financial decision making in and for old age report, analysed the programs designed to improve financial capability, and found that few, if any, were actually targeted at older Australians.

But advice anxiety among older Australians can be a barrier

In the same way that the possibility of embarrassment can be a barrier to individuals seeking medical assistance – even in the face of serious symptoms – so too do some people become extremely anxious at the thought of visiting a financial adviser.

Experts believe this ‘adviser anxiety’ stems from one of two different sources (or both):

1. Expectations of being negatively judged by the financial professional (what researchers refer to as evaluation anxiety), or
2. Feelings of discomfort at the prospect of sharing personal information with a professional adviser (disclosure anxiety).

Even if this anxiety doesn’t prevent an individual seeking advice, it can still cause them to be more guarded in the information they share with the adviser, which can lead to sub-optimal advice outcomes, and a less trusting, more shallow client/adviser relationship.

This phenomenon was studied in more detail by National Seniors Australia, and Productive Ageing Australia, in their paper The Role of Financial Literacy and Financial Adviser Anxiety in Older Australians’ Advice Seeking^[14]. Based on a sample of 2,200 Australians aged 40 – 74, the study set out to quantify ‘Adviser Anxiety’, via a range of detailed questions.

These questions, shown in Table 2 below, as well as helping capture the underlying drivers of respondent’s anxiety about seeking advice, also provide a ‘how to’ template for financial advisers seeking to make their clients feel more relaxed and at ease throughout their interactions.

The prevalence and outcomes of financial adviser anxiety

By asking respondents to rate their agreement with each of these 15 questions on a scale of 1 (low) to 5 (high), the study was able to quantify the extent of financial adviser anxiety.

Around 28% of the sample, with an average score under 2, were found to have little or no adviser anxiety. A further 46% were found to have mild anxiety, 21% were classified as moderate adviser anxiety, and 4% were classified as severe.

Who is likely to experience adviser anxiety?

Findings from the study revealed financial anxiety scores were significantly higher for those who:

• were less educated
• had limited financial knowledge
• were in the younger age groups of the sample
• had lower incomes, and
• had limited knowledge of retirement issues.

The study also found that adviser anxiety was negatively correlated with the likelihood of seeking retirement planning advice, and financial advice generally. This can be seen in Figure 1 below:

Implications for financial advisers

For many advisers, financial literacy has been a core part of their approach. Not purely a response to compliance obligations around informed consent, many recognise that a more financially educated client is more likely to understand, and appreciate, the value of advice. As such, improving the financial literacy of your clients can pay dividends in the form of more engaged, forthcoming, and trusting clients.

In the context of retirement planning being the largest single sector of advice – with around 90% of advisers actively advising pre retiree and retiree clients^[16], there are some specific considerations in relation to the challenge of low financial literacy among older Australians:

• When building financial education resources for your clients, it is worth prioritising your older clients, as their needs are arguably greater
• Consider the causes of financial adviser anxiety, discussed in Table 1 above, and ensure your processes and engagement style are designed to mitigate these anxieties
• Remember that client stress levels are compounded at retirement, as many grapple with a perceived loss of purpose, as well as loss of salary
• Consider the physical limitations of your ageing clients, and ensure educational materials are accessible, being easy to read and easy to understand
• Even older clients are reasonably tech savvy, so make your educational resources available through multiple channels
• Gamification can be a very effective way of educating clients on complex financial concepts
• Treat financial education as an ongoing journey, incorporating educational resources into client reviews and client communication (seminars, newsletters etc)
• Use your client surveys to determine which concepts your older clients would like to learn more about
• In addition to your own resources, tap into those from your licensee, product providers, professional associations, and freely available external resources, such as ASIC’s Moneysmart website.

In conclusion

In the words of ASIC, “Better informed investors make better clients”^[17]. Certainly, the incentives to strengthen your clients’ financial literacy are numerous, being positively correlated with:

• more accurate risk profiling
• more genuinely informed consent
• more likelihood of sticking to plans rather than panicking
• less likelihood of complaints related to misunderstandings, and
• more appreciation of the value your advice has added to their circumstances.

But as important as it is to educate all your clients, it is arguably even more imperative to invest in improving the financial literacy of your older clients.

Financial decisions around retirement come with much higher stakes, and low financial literacy and high adviser anxiety among older Australians, combined with the highly complex rules and products associated with retirement, amplify the likelihood of poor outcomes for retirees. Outcomes financial advisers are well equipped to mitigate.

———–

References:
[1] https://corporate.amp.com.au/newsroom/2023/september/australians-financially-illiterate-when-it-comes-to-retirement-
[2] https://www.professionalplanner.com.au/2023/09/over-50s-financially-illiterate-about-retirement-amp-research/
[3] https://www.savings.com.au/news/financial-illiteracy-among-older-australians-is-at-dangerous-levels
[4] https://cepar.edu.au/sites/default/files/CEPAR-Financial-Decision-Making-Brief.pdf
[5] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5445906/
[6] https://intheblack.cpaaustralia.com.au/business-and-finance/australians-struggle-financial-literacy#:~:text=For%20instance%2C%20poverty%20rates%20among,vulnerable%20to%20experiencing%20financial%20stress
[7] https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-udcomplete-report.pdf
[8] https://cepar.edu.au/sites/default/files/CEPAR-Financial-Decision-Making-Brief.pdf
[9] https://www.professionalplanner.com.au/2023/09/over-50s-financially-illiterate-about-retirement-amp-research/
[10] https://www.professionalplanner.com.au/2023/09/this-is-big-the-stark-difference-between-apra-funds-and-smsfs-in-retirement/
[11] https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-udcomplete-report.pdf
[12] https://www.firstlinks.com.au/financial-literacy-older-australians-gone-nowhere
[13] https://cepar.edu.au/sites/default/files/CEPAR-Financial-Decision-Making-Brief.pdf
[14] https://www.aph.gov.au/DocumentStore.ashx?id=6ea28a31-d0bc-482f-abfd-0251ea48542f
[15] https://www.aph.gov.au/DocumentStore.ashx?id=6ea28a31-d0bc-482f-abfd-0251ea48542f
[16] https://12ft.io/proxy?q=https%3A%2F%2Fwww.financialstandard.com.au%2Fnews%2Fretirement-income-covenant-a-win-for-advisers-but-for-how-179795726
[17] https://asic.gov.au/regulatory-resources/markets/resources/markets-articles-by-asic/educating-clients-is-good-for-business/

The post Consumer protection – the financial literacy challenge with older Australians appeared first on AdviserVoice.

The Retirement Income Covenant is the centrepiece of a framework intended to deliver better retirement income outcomes for Australia’s rapidly ageing population.

In July 2023, ASIC and APRA released the findings of their joint review into the first year of operation of the Retirement Incomes Covenant (RIC). That review concluded that super funds had exhibited a lack of progress and urgency in their embrace of the covenant over the past year. By extension, they were saying that super fund members, whose interests the legislation was intended to protect, were being let down.

Several years earlier, in 2019, regulations came into effect which saw Innovative Income Streams become a viable offering for product providers, financial advisers, and clients. Sometimes referred to as Comprehensive Income Products for Retirement (CIPRs), these solutions were given a significant boost by social security law changes that provide them with means testing concessions. While several large providers have released solutions, market awareness and adviser/client uptake remains, at the time of writing, relatively low.

The common thread linking both pieces of legislation is that both are intended to ensure the growing number of Australians approaching retirement were educated about – and given access to – a wider range of contemporary income stream solutions that would optimise their retirement savings and provide more certainty of income during ever their ever-lengthening retirement years. There was an explicit onus on superannuation funds to do more to help their members, by facilitating access to new products, self-help tools, and financial advice – whether that be from internal or external sources.

Many observers believe progress in respect of both pieces of legislation has been disappointing, for a variety of reasons. This means many Australians are planning their retirement in a sub-optimal context, a context that financial advisers are critical to shaping.

In this article, we will revisit the framework of retirement incomes policy and explore the findings of the ASIC/APRA review. We will explore the current retirement context, and examine the role of advisers in what could be a turning point for retirement incomes and retirement planning in Australia.

Pieces of the puzzle – Retirement Income Covenant and Innovative Income Streams

The Retirement Income Covenant (RIC), which became effective on the 1 July 2022, forms part of the SIS Act, and obliges trustees of super funds trustees (excluding SMSFs) to formulate, regularly review and give effect to a Retirement Income Strategy for their members.

This Strategy must be made publicly available, and must articulate how the fund trustees will help those fund members who are retired, or near retirement, to achieve the following outcomes:

• maximising their retirement income (considering the Age Pension and any other relevant income support payments such as veteran entitlements)
• managing the risks to the sustainability and stability of their retirement income, which could include outliving their savings, future inflation, and the uncertainties inherent in investment markets, and
• ensuring flexible access to savings during retirement (for example, to meet large costs such as medical bills, home repairs, or replacing a car).

To the extent these objectives compete with one another, the Strategy should also identify how members will be assisted to make these ‘trade-offs’, and the potential consequences on their retirement income of making certain choices.

Trustees are required to review the Fund’s Retirement Income Strategy once every three years. The individual Fund’s performance against the strategy needs to be reviewed at least annually.

In practical terms, the legislation is intended to have several outcomes.

At a high level, trustees are expected become more engaged with their members, more active in providing guidance and tools, and more collaborative and creative in their product offerings, pre and post retirement.

This could look like

• developing/and or offering specific retirement income products
• providing tools such as expenditure calculators to identify income and capital needs over time
• providing factual information about key retirement topics, such as eligibility for the Age Pension, the concept of drawing down capital as a form of income, or the different types of income streams available, and
• providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.

Importantly, there is also a recognition that retirement is complex, and therefore facilitating access to both general and personal advice is critical.

Innovative Income Stream legislation

Among the architects of the RIC, it was envisaged that the new products developed in order to comply with the covenant would include innovative income streams, or Comprehensive Income Products for Retirement (CIPRs), a product borne of the innovative income stream laws, which took effect in July 2019.

Three key features are required for a retirement income product to be considered a CIPR. These are:

1. Efficient and broadly consistent income
2. The provision of income for life
3. Some flexibility and access to capital.

The specific criteria that must be met are far more complex, including, but not limited to:

• benefit payments must not commence before the primary beneficiary has satisfied a specified condition of release
• benefit payments must be made at least annually throughout a beneficiary’s lifetime following the cessation of any payment deferral period
• after benefit payments start, there must be ‘no unreasonable deferral’ of payments from the income stream
• the amount available on commutation must fall within a ‘declining capital access schedule’ commencing from the retirement phase.

This complexity, and the need for education and advice that becomes necessary as a result, is a key theme of the 2023 ASIC Report 766.

Falling short of expectations

ASIC Report 766 – Implementation of the retirement income covenant: Findings from the APRA and ASIC thematic review^[1] – is in effect a report card by ASIC and APRA for the first 12 months of operation of the RIC.

In simple terms, the review found there was significant room for improvement in how trustees were meeting their obligations under the Covenant.

As already mentioned, the report card issued by ASIC and APRA for the first 12 months of operation of the RIC showed significant room for improvement.

Reminding us of the need for the RIC – our rapidly ageing population

At the beginning of the Review Report can be found data which powerfully sums up why the RIC is so important, illustrating the dramatic increase in member accounts and member benefits in the retirement phase. As can be seen in Figure 1 below, between 2015 and 2022, member benefits in retirement phase grew by almost 10% per annum to over $478 billion, while member accounts in retirement phase soared to over 1.3 million.

During the course of their review, ASIC concluded that effective implementation of the covenant centres on satisfying three core elements: understanding members’ needs; designing fit-for-purpose assistance; and overseeing strategy implementation, and their report was structured around those elements.

What did ASIC and APRA find?

The regulators’ report observed that, while licensees of Registrable Superannuation Entities (RSEs) were successful in expanding the assistance and support available to members in or approaching retirement, there was worrying “variability” in the approaches taken.

“Overall, there was a lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant to improve members’ retirement outcomes.”^[2]

Putting member assistance under the microscope

Arguably the most relevant part of the Review for advisers is that relating to the measures RSE Licensees were taking to assist members. This covers topics including self-help tools, educational resources, and access to financial advice.

The Review found that RSE Licensees were developing a range of measures to assist members in, or approaching, retirement, including:

• updating website content to provide information on a range of retirement topics
• tailored member communication, designed to provide information likely to be most relevant to each individual member’s needs and preferences
• self-serve options including digital tools and calculators
• assistance to access financial advice.

The gaps identified by the regulators include:

• some RSE Licensees did not have concrete plans for how they would implement the new initiatives they had identified
• did not appear to be robustly tracking member usage of the assistance offered, or
• did not have a good understanding of the extent to which members were receiving assistance about retirement income from external sources such as financial advisers

The topic of advice features in the Review several times. Three references in particular (shown below) are of relevance to advisers, referring to ways funds and advisers are interacting, and hinting at potential best practice on how funds and advisers may work more collaboratively for the benefit of members:

1. “Many RSE licensees did not have a robust way of identifying which members were receiving financial advice relating to retirement planning or using their superannuation for their retirement income. Most generally relied on data about which members joined through an adviser, or which have an active adviser fee arrangement in place on their superannuation account, to identify advised members. But this approach may not be accurate if a member is no longer receiving advice or is not receiving advice about retirement.”
2. “RSE licensees can be more confident in meeting their obligations under the covenant when they understand what assistance members receive from advisers and other third parties.”
3. “Better practices included RSE licensees having mechanisms in place to identify assistance gaps. This could be achieved by interviewing a sample of advisers to understand how they use the RSE licensee’s products, including demand for new products, or collecting feedback from some advisers to gain insights on their business and better understand the outcome of the advice provided to members in aggregate. Some RSE licensees also provided training to advisers in relation to the available products and various retirement topics.”

The current retirement context

The observed lack of progress by funds (ASIC and APRA surveyed the 16 funds who represent half of all superannuation members) contributes to an overall retirement context that is perhaps more complex and challenging now than it has ever been:

• market volatility and elevated inflation are likely to remain present for an extended period, exposing retirees to significant market risk and inflation risk
• new product development remains slow, as does take up of annuity style products (APRA data shows they only account for around 3% of retiree assets^[3]).

Furthermore, Australians lack ‘retirement literacy and even retirement confidence’.

2023 research^[4] by AMP, for example, found that, of Australians over 50:

• 3 in 4 find the retirement system complex.
• 2 in 5 don’t know if they’ll be eligible for aged-pension benefits.
• 7 in 10 don’t know what an account-based pension is.
• 3 in 4 have not sought financial advice for retirement planning.
• 3 in 5 wish they’d started planning for retirement earlier in life.
• 3 in 5 are ‘extremely concerned’ about the rising cost of living.

The extent to which this lack of literacy is leading to sub-optimal retirement product selection can be found in research^[5] by SMSF administrator Class, showing that only half of APRA regulated super fund members over age 65 have taken advantage of rules allowing them to move into a tax-exempt retirement income product (compared to around 86% of SMSF members, the majority of whom would be advice clients).

As for a lack of confidence, the Natixis Global Retirement Index^[6] found that median retirement age for Australians is 65, compared to a global median of 61, and despite Australia being among the Top 10 countries around the world for retirement security.

Why advisers should feel confident about the RIC

Retirement planning is currently the most significant segment for Australian financial advisers, a fact underlined by research^[7] by Natixis Investment Managers, which found around 90% of Australian financial advisers are focused on servicing individuals between 50 and 60 years of age, namely pre-retirees.

But while some observers have predicted that the role for independent financial advisers in this space may decrease, as super funds gradually introduce simpler products, more self-help resources and even develop digital advice capabilities, others feel this may prove premature, if not totally misplaced. They put forward several reasons for advisers to feel confident:

• the innovative income streams legislation is arguably incompatible with simple products, requiring CIPRs to satisfy a comprehensive range of complex criteria in order to qualify, and therefore be eligible for tax-advantaged treatment
• the rules around Centrelink and tax are themselves also complex, and
• there is Federal Government recognition that the RIC can’t work without financial advisers, with Assistant Treasurer Stephen Jones telling attendees at a 2022 event:

“Unless the advice piece gets fixed, the Retirement Income Covenant will fail. Because people will not adopt strategies with which they are unfamiliar unless they have the confidence of someone they trust who says, ‘this is the best way for you to deal with your retirement nest egg’. It will fail until that advice piece is fixed.”^[8]

As to the idea that super funds themselves will develop their own advice capabilities, while that has been similarly encouraged by the Minister, as part of his response to Michelle Levy’s Quality of Advice Review (QAR), it is questionable whether all funds want to go down this path, or would prefer to build more robust partnerships with external advisers.

Afterall, building and maintaining a compliant and customer focused advice offering is a complex business, and many super funds have tried and failed in this space. One high profile example is Aware Super, who in late 2021 wrote down $1 billion in value from the advice arm it acquired from First State Super^[9].

Summary

The Retirement Income Covenant is the centrepiece of a framework intended to deliver better retirement income outcomes for Australia’s rapidly ageing population. Working alongside the Innovative Income Streams legislation, the RIC is intended as a catalyst for super funds to become far more knowledgeable about their members, in order to develop more contemporary and tailored retirement income products, and to provide more relevant and targeted education, self-help resources, and access to financial advice. However, a recent review into the implementation of RIC has revealed slow progress and room for improvement, at a time when the retirement context has never been more complex and challenging. As a consequence, the need for financial advisers to assist pre-retirees and retirees has never been greater.

———–

References:
[1] https://www.allens.com.au/insights-news/insights/2017/03/innovative-superannuation-income-streams—at-last/#Four_main
[2] https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-766-implementation-of-the-retirement-income-covenant-findings-from-the-apra-and-asic-thematic-review/
[3] https://www.financialstandard.com.au/news/retirement-income-covenant-a-win-for-advisers-but-for-how-179795726
[4] https://www.professionalplanner.com.au/2023/09/over-50s-financially-illiterate-about-retirement-amp-research/
[5] https://www.professionalplanner.com.au/2023/09/this-is-big-the-stark-difference-between-apra-funds-and-smsfs-in-retirement/
[6] https://www.professionalplanner.com.au/2023/09/australians-retiring-later-than-global-peers-natixis-data/
[7] https://www.financialstandard.com.au/news/retirement-income-covenant-a-win-for-advisers-but-for-how-179795726
[8] https://www.moneymanagement.com.au/news/financial-planning/advisers-crucial-retirement-income-covenant-success
[9] https://www.afr.com/companies/financial-services/aware-super-admits-defeat-on-1-1b-stateplus-purchase-20211104-p59623

The post The new retirement puzzle, ASIC puts advisers at the centre appeared first on AdviserVoice.

Practical guidance for advisers may create a closer alignment between your advice and the client’s true attitudes towards, and tolerance for, investment risk.

Know your client, know their true risk profile

Understanding the risk profile of your clients is one of the fundamental pillars to providing advice that is in their best interests. It is also an important consumer protection mechanism, minimising the risk of consumer harm by aligning their investment and product choices with their inherent willingness and ability to take risk.

And yet, as much as the importance of risk profiling is understood by advisers, the implementation of risk profiling methodologies has previously left a lot to be desired, and inappropriate incorrect risk profiling continues to be a major source of complaint to the Australian Financial Complaints Authority (AFCA).

In this article, we will explore both the concept and context of risk profiling within financial advice. We will examine the different methodologies, the inherent weaknesses in many risk profiling questionnaires, and offer practical guidance for advisers, such that they may create a closer alignment between their advice and the client’s true attitudes towards, and tolerance for, investment risk.

ASIC on risk profiling and personal advice

ASIC’s RG 175 references risk profiling, and its centrality in the personal advice process, in a number of different ways. One is in the context of Best Interests’ Duty, with para 264 stating:

“We expect that processes for complying with the best interests duty will ensure that, within the subject matter of the advice sought by the client: (a) the scope of the advice includes all the issues that must be considered for the advice to meet the client’s objectives, financial situation and needs (including the client’s tolerance for risk).^[1]

Another is in the context of products with an investment component, with para 319 stating that a client’s relevant circumstances may include:

“Tolerance for the risk of capital loss, especially where this is a significant possibility if the advice is followed”.

And yet….

Despite the assessment of a client’s risk profile being an obvious – compliant – step to undertake, historically the processes used to complete this assessment have proved problematic.

Indeed, 2015 data from FOS (from which AFCA was born) suggested 70 percent of cases escalated through them were due to inadequate or incorrect risk profiling of clients^[2].

And according to analysis by risk management specialists Fourth Line^[3], the problem seems to have persisted well into the AFCA era, with around 18% of all advice related complaints falling into the ‘know your client’ category, to which risk profiling problems were a major contributor (along with other failures to determine a client’s relevant circumstances).

According to AFCA data^[4], roughly two thirds of their determinations relating to ‘know your client’ failures found in favour of the complainant, with one particular finding reinforcing that the biggest red flag for advisers is not the failure to complete a risk profiling or risk tolerance questionnaire (RTQ), but rather it is the inherent flaws in those questionnaires themselves, in terms of whether clients understand them and the extent to which they accurately reflect a client’s true risk profile.

Case Study – AFCA finds risk profiling questionnaire ‘too complicated’

One AFCA case related to a complainant who had been advised to switch their super to another, higher cost, fund. One of the foundations of that advice was a risk profiling questionnaire which, according to the advice firm, considered the client’s investment experience when categorising them as ‘balanced’ investors.

The complainant on the other hand argued that their lack of financial literacy meant that they found the questionnaire used was too complicated, and they were unable to understand some questions.

Upon reviewing the questionnaire, AFCA found the answers were not a reliable indicator of the complainants’ risk tolerance, particularly as they had answered having ‘limited knowledge’ of investing.

In its determination, AFCA noted:

“Given the inadequacies of the risk profile questionnaire, it is up to a prudent adviser to assist the complainants understand and comprehend the questions to identify and understand their relevant circumstances. In this instance, the adviser has not discharged his ‘know their client’ obligation”.^[5]

The flaws in risk profiling questionnaires (RTQ’s) are not new news

For many readers, the flaws in risk profiling questionnaires, and the dangers in placing too much reliance on them when determining a client’s attitudes to risk, will be a familiar narrative.

As far back as 2013, ASIC, in Report 362^[6], investigated advice industry practices in several areas, including the use of risk profiling questionnaires.

The report noted that nearly all of the licensees surveyed used risk profiling tools to assess their clients’ attitude to risk, with the number of questions in the tool ranging from six to 27. The average number of questions in each tool was 13.

The report went on to say that:

“Risk profiling tools should not be the only way an adviser determines the client’s attitude to risk. We are concerned that mechanically allocating a risk profile based on the outcome of a survey may not identify the most appropriate strategy for the client. For example, where the client does not fully understand the questions, or the client has a high-risk appetite but does not actually have sufficient resources to absorb the level of risk, the results of the risk profiling exercise may be misleading.”

So, what exactly are the flaws in risk profile questionnaires?

The last two decades has seen numerous studies into the flaws inherent in many risk profiling questionnaires, and by extension, in risk assessment processes which rely – partially or totally – on their results.

One study^[7] published in the US Journal of Financial Planning in 2015 for example, found that RTQs to be a poor predictor of actual investor behaviour.

Also published that year was a paper^[8] for the CFA Research Institute by Joachim Klement, which observed “increasing evidence indicates that the current practice of using questionnaires to determine investor risk profiles is of limited reliability”.

Perhaps the watershed research in this area though is the 2010 Santa Clara University study^[9], “Beyond risk tolerance: regret, overconfidence, personality and other investor characteristics”.

In their paper, researchers Carrie Pan and Meir Statman concluded that typical risk questionnaires used to assess a client’s risk profile were deficient in 5 ways.

1. Every individual investor actually has a multitude of risk tolerances for each of their mental accounts (such as retirement planning or saving for a holiday) and trying to zero in one ‘umbrella’ tolerance will fail to identify these multitudes.
2. The links between answers to questions in risk questionnaires and recommended portfolio allocations are governed by opaque rules of thumb rather than by transparent theory.
3. Investor’s risk tolerance varies as investment markets rise and fall. Exuberance from the rises inflates risk tolerances, while sliding markets being fear and deflated risk tolerances.
4. Risk tolerance varies when assessed in foresight or hindsight. Moreover, hindsight amplifies regret. Investors with a high propensity for hindsight and regret might claim, in hindsight, that their adviser overstated their risk tolerance.
5. Other propensities such as trust, and overconfidence, play an important role, yet are not addressed through traditional questionnaires. Trust makes clients easier to guide, while overconfident individuals tend to overstate their risk tolerance.

The underlying premise of the questions can also be problematic

Fundamental to understanding the likely efficacy of a RPQ is to understand the three underlying components that make up an overall risk profile – risk appetite. risk capacity, and risk tolerance.

1. Risk appetite

Risk appetite is the amount and type of risk that an investor is willing to take in order to meet their financial goals. Importantly, an individual can have different risk appetites for different scenarios, and these may change over time.

2. Risk capacity

Risk capacity is an objective measure of the amount of risk that the investor can take in order to reach their stated financial goals. Knowing the goal and timeframe and potential rates of return allows projections to be made which can help investors decide about the level of risk to take.

3. Risk tolerance

Risk tolerance is a subjective measurement of your attitude toward risk and your willingness to accept potential investment loss in search of greater investment gain. Risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty (market volatility) that an investor is mentally comfortable with. Cognitive biases can feed into risk tolerances, for example our tendency for loss aversion, where the negative emotions associated with a financial loss are greater than the positive emotions resulting from a gain of equivalent magnitude.

These concepts of risk are clearly different, tolerance and appetite are psychological concepts, while capacity is a financial concept.

A wealthy person with modest spending habits may have huge financial risk capacity, but little tolerance for volatility. Conversely, someone else may have huge psychological tolerance for risk, but lack the financial means to absorb adverse outcomes.

It can be problematic therefore if a risk profiling questionnaire mixes these concepts and attempts to come up with some sort of ‘average’ of them all, rather than trying to identify which concepts are more important for that client.

That’s not to say questionnaires – and tools – aren’t improving

Notwithstanding their widely recognised flaws, RPQ’s are still seen as effective and important, especially when compared with the alternatives. Indeed, one study found that adviser’s relying on a conversational interview alone had only a 0.4 correlation to the client’s actual measured risk tolerance^[10].

For that reason, the last decade has seen much effort directed towards improving the questionnaires and tools themselves, especially their capacity to measure psychological components of risk.

These efforts have seen the proliferation of two main risk profiling methodologies – psychometric testing and revealed preferences.

Psychometric testing

Psychometric tests – sometimes referred to as a propensity measure – are designed to assess a person’s attitudes in a way that uncovers an underlying trait. They are widely used to assess intelligence, personality, and other psychological constructs. An advantage associated with psychometric measurements is that a well-designed test can account for a test taker’s deeply held feelings of regret, fear, greed, and happiness associated with financial decision-making. The widely used Finametrica software uses a psychometric approach.

Revealed preferences

Dating back to 1938, revealed preference theory asserts that the best way to measure consumer preferences is to observe their actual purchasing behaviours. Or put another way, behaviours which reveal attitudes are a more reliable indicator than stated preferences.

Rather than asking investors to state their attitudes by answering questions, revealed preference tools rely on them completing a series of intuitive decision activities through which they can demonstrate and reveal to their adviser how they make investment trade-offs at varying levels of risk and reward.

Capital Preferences is an example of revealed preference tools in the market.

Sometimes it is the process that fails, rather than the questionnaire

By now the penny has probably dropped that a risk profiling questionnaire or tool should be just one part of a more holistic process of determining a client’s attitudes towards, and ability to take, investment risks.

On a similar note, it’s not always the questionnaire that’s the issue, it’s the way we use the outputs.

The mere fact a client has a high appetite for risk doesn’t mean they should be advised to invest aggressively if that isn’t necessary to meet their financial objectives. Put another way, we shouldn’t be aiming to find out how much pain they can tolerate and then give them a portfolio that ensures they will experience that pain. Rather, we should be looking to meet their needs with as little pain as possible.

This was laid clear in clear in FOS case 433596, relating to advice about an SMSF. In this case, FOS found against the adviser, on the basis that he should have realised the SMSF’s objectives could have been achieved by taking on less risk than the applicants’ tolerance for risk indicated.

In their determination, available on the AFCA website^111], FOS noted:

“The selection of an appropriate investment strategy while having regard to the applicant’s tolerance to risk requires financial advisers to:

• determine whether there is a feasible investment strategy that will achieve the applicant’s goals
• determine whether the risk inherent in that strategy (the risk required) is consistent with the applicant’s risk tolerance, and
• if there is a mismatch between the risk required and the applicant’s risk tolerance, to bring the mismatch to the applicant’s attention and conduct a transparent trade-off process”.

What is interesting and relatively unusual about this scenario is that the mismatch is one in which the tolerance for risk is greater than the need for risk, whereas in the majority of mismatches the reverse is likely true.

The challenges of advising couples

Adding to the challenges when trying to accurately assess risk profile is the differences in risk preference often encountered when advising couples.

According to research by risk profiling specialists Capital Preferences, 60% of couples have a meaningful difference in their risk preference. Yet despite this, one in five advisers working with couples were only risk profiling one member of the couple, while 53% were profiling them jointly^[12].

Failing to consider the risk preferences of both members of a couple can be problematic in a number of ways, including the increased likelihood of a complaint, a higher possibility of losing the client who feels disenfranchised, and even laying the groundwork for relationship tension.

But arriving at an aggregate risk profile that suits both couples can be challenging.

Paul Resnik, then of Finametrica, suggested that where a mismatch in risk tolerance exists, it could be resolved in several ways.

“If one person takes primary responsibility for making financial decisions, and often it is the man, the couple could agree to proceed according to that person’s risk tolerance. Or they could choose the lesser risk tolerance of the two, or they could average. However, in any situation that involves the couple taking more risk than the less risk tolerant of the two would prefer, it is important to make sure both members are aware of this and have signed off on their understanding.”^[13]

Another solution advocated by some advisers, the viability of which depends on the circumstances, is to construct dual portfolios, each aligned to the risk preferences of the individual.

Whichever way you go, comprehensive file notes around the path taken are a must!

Practical ways to go beyond the questionnaire

Recommendation 10 from ASIC’s Report 362^[14] was:

“Advisers should ensure that risk profiling tools are just one of the methods used to understand their clients’ risk profile, and that any limitations of such tools are considered when recommending a client strategy.”

Which begs the question, what are some of the practical ways to go beyond the questionnaires to accurately assess a client’s risk profile?

As always, understanding total context and actual behaviours seems to be key. Joachim Klement, in his CFA paper¹⁵ mentioned above, suggested advisers could take one or more of the following steps:

1. Financial anamnesis

Doctors know that certain diseases have a significant genetic component, which is why they place so much importance on the family history when assessing the risks to their patient. Advisers can conduct a financial anamnesis to identify a systematic bias for or against finan­cial risk taking by asking about the investment behaviour of relatives.

In his paper, Klement references research showing that share market participa­tion and other parental attitudes about the riskiness of equities correlate with attitudes of their children. Asking about the financial habits of relatives can therefore shed light on the risk profile of an individual.

2. Investment diaries

Nothing conveys true underlying preferences more than the actual behaviour of an investor. What an investor chooses to invest in and how they decide to buy, or sell is more informative of risk attitudes than a questionnaire can be. Advisers should therefore investigate the past investment history of an indi­vidual. The ideal instrument to do this is an investment diary in which an inves­tor records, in real time, transactions made and the reasons for the transactions. Over time, this diary creates a picture of the individual risk-taking traits of the investor. In the absence of a diary, a collection of past transactions gleaned from bank statements other documents can be informative. If the investor is willing to disclose past transactions and decisions, their adviser can start to develop a rich investor risk profile.

3. Investment history by market environment

Finally, advisers can shed light on the risk profile of investors by putting their investment history into the context of the markets. As discussed, the markets in an investor’s formative years can leave a lasting imprint on the investor’s risk profile. Investors who experienced the sharemarket crash in 1987, the tech bubble in the early 2,000s, or the GFC, may have a different attitude toward stocks than someone who made their first investments during the bull market of the 1990s or in late 2010s. The current environment with high rates and high inflation will be new to many investors. In short, the financial history of an investor might show areas where the investor might be overly sensitive to some risks or blind to some risks.

In conclusion

Accurately profiling the risk preferences of investor clients is a crucial consumer protection mechanism. Ensuring an alignment between financial objectives, investment strategy, and client risk tolerances is not only fulfilling the obligation to act in the client’s best interests, but also more likely to drive improved outcomes, a better client experience, and less complaints.

An extensive body of research shows the inherent flaws in some risk profiling questionnaires, and for this reason, industry best practice – and ASIC’s recommendation – is to use contemporary questionnaires and tools in conjunction with other mechanisms, in order to assess a client’s true risk preferences more accurately and totally.

———–

References:
[1] https://download.asic.gov.au/media/oiphgtad/rg175-published-15-june-2021-22030720.pdf
[2] https://www.griffith.edu.au/__data/assets/pdf_file/0027/205749/investment-risk-profiling-hunt.pdf
[3] https://www.moneymanagement.com.au/news/financial-planning/less-one-three-chance-defending-know-your-client-complaint
[4] Ibid.
[5] Ibid.
[6] https://download.asic.gov.au/media/1344368/rep362-published-31-July-2013.pdf
[7] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088998
[8]https://www.cfainstitute.org/-/media/documents/article/rf-brief/rfbr-v1-n1-1-pdf.ashx
[9] https://www.researchgate.net/publication/228479814_Beyond_risk_tolerance_regret_overconfidence_personality_and_other_investor_characteristics
[10] https://www.kitces.com/blog/risk-tolerance-questionnaire-and-risk-profiling-problems-for-financial-advisors-planplus-study/
[11] https://www.afca.org.au/what-to-expect/search-published-decisions
[11]https://www.moneymanagement.com.au/news/financial-planning/risk-failing-consider-couples-risk-tolerance
[12] https://www.professionalplanner.com.au/2014/05/get-couples-risk-tolerance-right-or-prepare-for-a-fight/
[13] https://download.asic.gov.au/media/1344368/rep362-published-31-July-2013.pdf
[14] https://www.cfainstitute.org/-/media/documents/article/rf-brief/rfbr-v1-n1-1-pdf.ashx

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Fundamental to any consumer protection framework for advice clients are the consumer protection functions served by ACFA and the FSCP.

Protecting consumers through accountability mechanisms

Fundamental to any consumer protection framework for advice clients are mechanisms that (a) allow consumer redress for poor outcomes stemming from advice failures, and (b) hold advisers to account.

While Australia has had these elements in place for some time, the landscape was historically characterised by duplication and complexity, with multiple specialised bodies existing, many with overlapping jurisdictions. This led to confusion for clients and advisers alike. In recent years however, this landscape was dramatically simplified, with the creation of a single complaints body, (the Australian Financial Complaints Authority), and a single disciplinary body for advisers (the Financial Services Credit Panel).

In this article, we will get the under the bonnet of these bodies, to give readers a practical understanding of the roles of these bodies, their processes, and the circumstances in which they are likely to interact with them.

AFCA – when three become one

AFCA was established in November 2018, replacing three existing External Dispute Resolution (EDR) bodies – the Superannuation Complaints Tribunal, the Financial Ombudsman Service (FOS), and the Credit and Investments Ombudsman (CIO)^[1]. It operates as an independent not for profit body, funded by the financial service providers who comprise its membership. ASIC has oversight of AFCA.

Membership of AFCA is compulsory for Australian banks, insurers, credit providers, financial, debt collection agencies, superannuation members and many other businesses that provide financial products and services. Membership is also compulsory for financial advisers, at the licensee, rather than individual level.

The role of AFCA

AFCA describes its purpose as providing “fair, independent and effective solutions for individuals and small businesses who have a complaint about a financial product or service.”^[2]

The type of complaints considered by AFCA are broadly in line with the services provided by its membership, including:

• inappropriate financial advice​, including that relating to investments, superannuation, and life insurance
• denied insurance claims (both general and life)
• trustee decisions about distribution of superannuation benefits
• issues relating to loans, credit cards and short-term finance, and
• errors in banking transactions and credit listings.

Matters not considered include those relating to private health insurance and those relating to organisations who are not AFCA members.

Importantly – and sometimes controversially ­– AFCA may use its discretion to exclude complaints relating to wholesale/sophisticated advice clients. We will delve into this more, later in the article.

AFCA’s jurisdiction may also be limited by the size of the loss being claimed by a complainant, with them unable to consider cases where the amount claimed exceeds $1,085,000 for insurance, advice, and superannuation cases (higher limits apply to certain credit related claims)^[3].

To ensure AFCA doesn’t implode under the weight of the millions of complaints made each year across the sector, AFCA makes it clear that the first line of defence is a provider’s own Internal Dispute Resolution (IDR) process. Generally speaking, therefore, AFCA is only considering those complaints where internal processes have failed to deliver a satisfactory outcome.

AFCA processes

AFCA will first aim to resolve any complaint it receives by informal methods, seeking to reach a settlement between the complainant and the financial firm through negotiation or conciliation.

If this doesn’t work, they may use more formal methods, involving a preliminary assessment about the merits of the complaint. Ultimately, AFCA may make a decision (called a determination). A determination will set out the circumstances of the complaint, AFCA’s assessment of the facts, and the steps the provider must take to resolve the complaint. This may include financial compensation.

In some circumstances, AFCA will skip the ‘arbitration’ stage and go straight to a determination. Examples of these circumstances include:

• complaints that need to be finalised urgently. For example, because the complainant is experiencing financial hardship
• where the complainant has suffered a natural disaster such as flood or bushfire
• a low-value claim where the complainant suffers from a serious medical condition or is a victim of family violence, and
• a high-value claim, where a prolonged period may see the claim amount exceed our monetary limits.

Financial firms must comply with AFCA determinations against them, and there is no grounds for appeal with AFCA itself, only through the courts. This applies to complainants also.

In one recent case, a dealer group who refused to abide by an AFCA determination against them, relation to inappropriate SMSF advice, was ordered by a court to pay around $270,000 to their client^[4].

Furthermore, the Federal court recently reaffirmed the legal obligation financial firms have to co-operate with AFCA throughout the entire complaints process.

In a case brought by ASIC on behalf of AFCA, Justice Downes ruled against the defendants (a credit provider), on the basis that failure to co-operate with AFCA constituted a breach of the relevant consumer protection legislation (in this case the National Consumer Protection Credit Act). The two individual defendants in the case were fined^[5].

Where a financial firm – including a financial advice licensee – fails to comply with a determination, AFCA is required to report this non-compliance to ASIC.

Where a financial advice licensee fails to comply with at least two AFCA determinations, this can trigger the convening of a Financial Services & Credit Panel, which may impose a range of penalties on the licensee/adviser (more on this below).

A mountain of complaints against advisers? Not so much

For the 2021/22 financial year, AFCA resolved 71,152 complaints^[6], bringing the total number of complaints dealt with by AFCA to more than 270,000 since opening their doors in late 2018.

For perspective, only around 4,900 of 70,000 plus complaints required a determination, with the vast majority being settled before this was necessary^[7].

And despite perceptions to the contrary, the proportion of complaints relating to financial advice remained relatively small.

Under AFCA’s current classification system, financial advice is included in a broad ‘investments and advice category’. Under this umbrella, actual advice related claims only total around 45 – 50 per month, or just under 600 per year^[8].

Five free complaints per year

Under its user pays model, AFCA levies a cost on its members. This user charge, levied at the end of each financial year, is proportionately allocated based on the number, closure point and complexity of the complaints each member closed in the relevant financial year, compared with same data for all members in the same period.

Fees for the 2023/24 financial year range from around $950 per fast-track complaint (without needing a decision) through to $8,090 for non-fast-track cases resulting in a decision^[9].

Crucially for smaller licensees, the model was amended shortly after its launch, so that members receiving 5 complaints or less per year would not need to pay.

The announcement of this ‘first five free’ policy in 2022 was warmly welcomed by many advice stakeholders, with then AFA CEO Phil Anderson noting that it would give licensees more confidence to defend complaints which, under the previous model, they may have chosen to settle because it was cheaper^[10].

Timeliness of AFCA processes under review

AFCA data on complaints closed shows just under 90% of investment and advice complaints are resolved prior to AFCA needing to make a determination. The average time AFCA takes to review complaints varies from around 78 days for General Insurance, to 106 days for advice related complaints and over 120 days for life insurance and superannuation complaints^[11].

Following an independent review by Treasury, AFCA commenced a consultation process in early 2023, as it seeks to improve the efficiency and timeliness of complaints handling.

AFCA themselves have previously expressed a desire to halve the time it takes to resolve complaints^[12].

AFCA and wholesale advice

As previously mentioned, one particular area where AFCA has attracted criticism relates to its use of discretion in deciding to consider or exclude certain complaints, including those relating to wholesale/sophisticated clients.

Commenting on the issue, AFCA Lead Ombudsman Shail Singh stressed that if someone is properly classified as wholesale, and are properly informed of the consequences it is highly unlikely they would pursue those complaints^[13].

However, where a client has been misclassified as a sophisticated client, AFCA is likely to consider their complaints, provided they fall within the jurisdictional dollar limits.

Advisers operating in this space must ensure there is sufficient evidence of client informed consent and an understanding of the protections forfeited when going down the wholesale path.

Viewing the latest AFCA determinations

The details of AFCA determinations can make for interesting reading, and can be instructive for advisers seeking to sense check their own processes and avoid the mistakes of others. AFCA publishes the details of determinations regularly on its website, where they also provide a detailed search function.

Holding advisers accountable – single disciplinary body

As previously mentioned, a consistent refusal to abide by an AFCA ruling is just one of several triggers for a convening of the FSCP, the relatively new single disciplinary body covering financial advisers.

A direct response to the 2018 Hayne Royal Commission, the ‘new’ FSCP took effect following the introduction of the Better Advice Act at the start of 2022. Under the Act, financial advisers ceased to be regulated by the Tax Practitioners Board (TPB), and the Financial Adviser Standards and Ethics Authority (FASEA) closed, with responsibility for the FASEA Code of Ethics moved to Treasury.

Although already in existence (the relevant ASIC regulatory guide – RG 263 – dating back to 2017), the FSCP saw its powers and size greatly increased at the start of 2022, most visibly through the size of its member pool which increased from 16 to 31. These members include a range of experts across relevant disciplines, with initial appointees including former adviser and AFA CEO, Brad Fox, and high-profile advisers Julie Berry and Will Hamilton^[14].

What circumstances trigger FSCP involvement?

Broadly, there are six circumstances that would be considered matters for the FSCP^[15].

1. Where the adviser is in a position that compromises their ability to practice as a financial adviser. For example, they could be insolvent, under administration, convicted of fraud, or not be a fit and proper person.
2. Where the adviser may have contravened financial services law, such as those relating to conflicted remuneration or annual consent requirements or any FASEA standards.
3. Where an adviser has been involved with someone else’s breach of financial services law.
4. Where an adviser provides advice while unregistered.
5. Where an adviser fails to follow a previous sanction from the FSCP.
6. Where an adviser has at least twice been linked to a failure or refusal to give effect to an AFCA determination.

Additionally, ASIC has publicly stated it may also convene a sitting panel at their discretion at any time, even if the convening circumstances are not present¹⁶. This may be because ASIC themselves are unsure if the requirement for convening circumstances has been met and so will ask its panel of experts to consider the matter.

Procedures for ‘less serious matters’

In the event that misconduct falls short of triggering a sitting of the panel, ASIC has a range of mechanisms it can call on to discipline advisers.

These mechanisms, published by ASIC, include a warning, designed to let the adviser know they should stop continuing the conduct cited, and a reprimand, which admonishes the adviser in relation to that conduct.

ASIC will send a letter electronically to the financial adviser outlining the decision, while a copy will be given to the current AFSL of the adviser whether or not the incident in question happened during the period they were licensed with that AFSL.

Warnings and reprimands will not be recorded on the ASIC’s Financial Advisers Register and the name of the financial advisers will not be published.

What penalties can the FSCP hand down?

The FSCP has a range of ways it can penalise adviser misconduct.

It can take administrative action against an adviser by issuing warnings or reprimands, it can direct an adviser to take specific training, it can order the suspension or cancellation of an adviser’s registration, issue infringement notices, and recommend to ASIC that it seek to apply to the court for a civil penalty.

FSCP Processes

Before taking action against an adviser, the FSCP will be required to give that adviser a notice detailing the relevant circumstances, action it proposes, and the adviser’s right to request a hearing or make a submission to the FSCP.

According to RG 263, and consistent with its underlying consumer protection intent, decisions of a sitting panel are likely to be publicised by ASIC and, in certain specified circumstances, are required to be displayed on ASIC’s Financial Advisers Register (FAR).

These circumstances include where the adviser has had their registration suspended or cancelled, where the adviser accepts an enforceable undertaking, and – in some cases – where an adviser has been directed to undertake training or receive counselling or supervision.

When ASIC publishes a matter – on its publicly accessible Outcomes Register – which it is not required to enter onto the FAR, it will do using a randomly assigned pseudonym, so the adviser cannot be identified. This includes cases where no adverse findings are made against an adviser.

The first two cases, published on the Outcomes Register in June 2023, demonstrate this approach perfectly:

Case Study 1

In the FSCPs inaugural finding, ‘Mr S’ impersonated a client during two phone conversations with a bank, to facilitate a transaction for the client’s benefit. The panel found that, while the adviser had breached the Code of Ethics, and engaged in misleading and deceptive conduct, they did not themselves obtain any benefit as a result of the behaviour.

The FSCP ordered the adviser’s licensee to perform three successive compliance audits in relation to retail personal advice clients, with a minimum of 12 months between each audit.

Because the circumstances were not deemed sufficient to include on the FAR, the adviser wasn’t named^[17].

Case Study 2

Mr M cold called a client and recommend they move to a new superannuation fund. The FSCP found that Mr M had failed to consider the client’s life insurance cover under their existing fund, had provided retirement projections with no basis in fact, and had recommended a high growth portfolio, at odds with the client’s growth risk profile. Also problematic was the fact that the SOA was presented to the client only a day after the fact find was completed, and on the SAME DAY the client completed the risk profiling process.

Mr M was deemed to have failed to act in the client’s best interests and provided advice that was not appropriate. He was also found to have made false and misleading statements and breached the Code of Ethics, including the duties of trustworthiness, competence, honesty, fairness, and diligence.

The panel required Mr. M have their next 10 SOAs for retail clients be pre-vetted by an independent person with expertise in financial services laws compliance, along with an audit of their last 10 retail SOAs^[18].

Appealing an FSCP decision

An adviser can apply to ASIC for a variation or revocation of a direction or order from the FSCP.

In these circumstances, ASIC can either decide to convene the FSCP to consider the matter, or refuse the application.

In the event ASIC decides not to convene the panel, or a sitting panel decides not to vary or revoke its original decision, the adviser can apply to the Administrative Appeals Tribunal to review the decision.

When an adviser makes an application to the AAT, they can request stay orders on the publication by ASIC of the original FSCP decision, a situation described by some advisers as an unacceptable loophole^[19].

Summary

Financial advice clients enjoy the protection of a robust framework of financial consumer protections, under which they know they are able to seek remedies for any financial harm they have suffered as a result of their adviser breaching financial services law and/or ethical standards, and which incentivises professional and compliant adviser behaviours by holding them to account when those behaviours fall short.

From an adviser perspective, they should feel confident that this framework prioritises procedural fairness for all parties, while playing an important role in lifting the reputation of the financial advice profession.

———–

References:
[1] https://www.allens.com.au/insights-news/insights/2018/07/unravelled-australian-financial-complaints-authority-a/
[2] https://www.afca.org.au/about-afca/engagement-charter/purpose#:~:text=AFCA’s%20role,a%20financial%20product%20or%20service.
[3] https://www.afca.org.au/news/latest-news/afca-complaint-monetary-limits-updated
[4] https://www.moneymanagement.com.au/news/financial-planning/nextgen-ordered-court-pay-270k-inappropriate-advice
[5] https://www.afca.org.au/news/media-releases/federal-court-reaffirms-financial-firms-must-co-operate-with-afca
[6] https://www.afca.org.au/media/1469/download
[7] Ibid.
[8] https://www.moneymanagement.com.au/news/financial-planning/advice-complaints-decline-getting-more-complex-afca
[9] https://www.afca.org.au/members/funding-model/fee-structure
[10] https://riskinfo.com.au/news/2022/06/07/new-afca-fee-model-licensees-more-inclined-to-defend-complaints/
[11]https://www.afca.org.au/media/1469/download
[12] https://www.professionalplanner.com.au/2022/03/afca-eyes-halving-the-time-of-complaint-disputes/
[13] https://www.professionalplanner.com.au/2023/06/afca-defends-use-of-discretion-to-hear-complaints-from-wholesale-investors/
[14] https://www.professionalplanner.com.au/2022/02/beefed-up-fscp-doubles-in-size-as-disciplinary-body-takes-shape/
[15] https://download.asic.gov.au/media/bhvde4zi/rg263-published-3-august-2022.pdf
[16] https://www.professionalplanner.com.au/2022/02/asic-lays-out-draft-adviser-discipline-plan/
[17] https://www.financialstandard.com.au/news/large-afsls-lead-advice-complaints-afca-179800123
[18] https://www.financialstandard.com.au/news/fscp-hands-down-second-order-audits-adviser-179800207
[19]https://www.professionalplanner.com.au/2023/05/anomaly-enabling-banned-advisers-to-avoid-public-shaming/

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DDO is back in the spotlight with ASIC stepping up its enforcement of DDO compliance.

From a consumer protection perspective, the Design and Distribution Obligations (DDO) regime, which came into effect in October 2021, represents one of the most significant regulatory reforms of recent years.

In the wake of ASIC’s recent review into the first year of the regime’s implementation – resulting in a ‘do better’ directive from the regulator – and with DDO-related recommendations an important plank of Michelle Levy’s QAR report, it is timely to revisit the DDO through an adviser lens.

DDO recap

Assumed by many to be a direct outcome of the Hayne Royal Commission, the origins of DDO can actually be traced as far back as the 2014 Financial Systems Inquiry (FSI).

Among the recommendations of the FSI Final Report was Recommendation 21:

“Government should amend the law to introduce a principles-based product design and distribution obligation. The obligation would require product issuers and distributors to consider a range of factors when designing products and distribution strategies.”^[1]

Although disclosure is generally regarded as one of the key pillars of financial consumer protection, there has for some time been a recognition that an over-reliance on disclosure can actually harm, rather than protect, consumers. This recognition was one of the catalysts for the game-changing DDO regime, which requires firms to take a consumer-centric approach to designing and distributing financial products.

DDO adopts an outcomes-based approach, bringing together product governance with distribution processes, to ensure financial products are fit for purpose and that they reach their intended target audience. Putting positive consumer outcomes at its heart, DDO in simple terms can be thought of as a constant, organic feedback loop, where:

• a product issuer articulates the target market the product is suitable for (via a Target Market Determination, or TMD)
• distributors (including AFSLs and their authorised representatives) provide data to issuers that help them assess whether the product design – or the definition of the target market – needs to change, and
• issuers then provide data to ASIC, for them to assess the appropriateness of products and product categories.

Adviser impacts

Although largely an intervention aimed at product manufacturers/issuers, DDO carried some serious, and potentially onerous, obligations for financial advisers. These centred around:

• the use of TMDs
• dealings outside notional target markets
• reporting of these dealings
• reporting of product related complaints, and
• reporting of other distribution data as required by the product issuer.

Reinforcing the intent of DDO to drive a better match between consumers and products is a ‘reasonable steps’ obligation, under which distributors must take reasonable steps to ensure distribution of that product is in accordance with the TMD.

While personal advice is exempt from this requirement (Best Interests Duty in essence being a proxy for this step), this exemption does not apply in general advice or execution only scenarios. The administrative burden on advisers implicit in these reporting requirements – and the associated impact on the cost to serve – was understandably condemned by many stakeholders. As a result, Michelle Levy made specific recommendations about DDO in her final QAR report. We will cover those recommendations – and the Government response – in more detail later in this article.

ASIC flags the next phase of DDO

Ahead of their 2023 report into DDO^[2], explored below, ASIC were already flagging that their focus on DDO was shifting from the introductory phase (focused largely on TMDs) to the compliance phase.

In November 2022, ASIC Deputy Chair Karen Chester told Company Director magazine:

 “Our regulatory focus has now shifted to compliance. Reducing the risk of harm to consumers — by bringing a DDO compliance lens across our work — is now a whole-of-ASIC priority.”^[3]

Chester went on to make two more points of particular relevance to advisers. The first concerned ASIC’s intention to focus more on the way issuers were monitoring distributors to ensure they were remaining within defined target markets. Her second point was around a heightened focus on data gathered from distributors:

“It is critical that companies get their TMDs and product governance settings right and have robust and meaningful data to test and monitor these settings. Firms must collect and understand data about the outcomes of their product distribution and who their products are getting to.”

2023 ASIC review of DDO implementation

In May 2023, ASIC released Report 762 – Design and distribution obligations: Investment products^[4].

Focusing their initial attention on investment products, where the potential for consumer harm was relatively higher than some other product categories, ASIC observed there was “considerable room for improvement” in issuers’ compliance with the DDO regime.

As a result of the review, ASIC noted it had issued 26 interim stop orders against 18 issuers for breaches of TMD requirements. (A stop order essentially means a product cannot be offered for sale while the order is in place).

Particular areas of concern noted in the report included:

• the use of inappropriate risk profiles in the target market (for example, stating that a high-risk product was suitable for clients with a medium risk profile) – a factor in 21 stop orders
• inappropriate investment timeframes or withdrawal needs – a factor in 18 stop orders
• defining a target market too broadly (15 stop orders)
• inappropriate or no distribution conditions and inappropriate use of a TMD template (13 stop orders), and
• inappropriate levels of portfolio allocation (10 stop orders).

ASIC summarised their findings and actions through three main ‘areas for improvement’:

1. Avoid over-reliance on TMD templates: Some issuers relied on a TMD template to drive the process of determining an appropriate target market for a scheme. A template may be useful as a starting point, if used properly. However, in all cases, issuers still need to critically assess a product.
2. Design products with consumers in mind: ASIC identified products with niche or unusual features where issuers had not given enough attention to designing the product with consumers in mind.
3. Assess product features on ‘absolute’ basis: Some issuers developed their TMD by assessing a scheme’s features relative to peers or a benchmark. ASIC makes it clear the TMD for each scheme should be assessed on its own merits, rather than in comparison with other products or against a benchmark.

FSC revises templates in response

The FSC was specifically called out in ASIC’s report for shortcomings in the TMD templates it had created for the use of its members.

For example, their template for investment products included options for certain types of consumers to be ‘potentially’ included in the target market. ASIC noted:

“‘Potentially’ including consumers in the target market can lead to uncertainty about who is in or outside it and is likely to result in a TMD failing to meet the appropriateness requirements. For example, an issuer that is unlikely to have any funds to pay distributions in the short term should not have consumers seeking income as ‘potentially’ in the target market.”

In response, the FSC announced in June 2023 that it had revised its templates^[5].

DDO and QAR

The operation of the DDO regime and its impact on advisers was an area of considerable focus for Michelle Levy in her QAR Final Report^[6].

From the very first consultations with stakeholders, advisers had made clear the extent to which it had created a burden which they were passing onto consumers:

“Financial advisers have told us that the design and distribution obligation reporting requirements are onerous and add an additional compliance burden and expense to the conduct of their practices.”

Levy had previously noted in her Proposals Paper^[7], issued earlier in the review process, that two reporting requirements in particular were problematic:

• the requirement for distributors to notify the issuer of matters specified in the TMD, which effectively allows issuers to impose legal obligations on financial advisers (and other distributors) ‘at will’, and
• reporting of significant dealings outside the target market, which she felt provided little value to issuers or consumers, given the DDO regime specifically acknowledges and permits a financial adviser to recommend a financial product to a client who is outside the target market for the product.

In the QAR Final Report, Levy went on to make two specific recommendations relating to DDO, shown below.

Recommendation 12.1 – DDO (Distribution Requirements)

Amend the DDO distribution obligations in the Corporations Act to limit the exception to the requirement to take reasonable steps to ensure the distribution of a financial product is consistent with its target market to personal advice provided by relevant providers.

Where personal advice is provided by someone who is not a relevant provider, the AFS licensee should, like any other distributor, be required to comply with the distribution obligations and take reasonable steps to ensure the financial product is only recommended in accordance with the target market determination.

The objective of this recommendation is to ensure that, where personal advice is provided by a person who is not a financial adviser, financial products are distributed to consumers within the target market for the product.

Recommendation 12.2 – DDO (Reporting Requirements)

Amend the DDO reporting requirements in the Corporations Act to remove the requirement for relevant providers to:

• report significant dealings outside the target market to the product issuer
• comply with the additional reporting obligations specified by the product issuer in the target market determination, and
• report to the product issuer where there have been no complaints during the specified reporting period. 

These exceptions will not apply to someone who is not a relevant provider.

All providers of personal advice (including relevant providers) will need to report the number of complaints received during a reporting period (if there have been any), as well as a description of the nature of these complaints to the product issuer.

The objective of this recommendation is to ensure that the reporting obligations under the DDO regime are appropriate for relevant providers and do not impose an unwarranted compliance burden.

The government responds with ‘Delivering Better Financial Outcomes’ package

In May 2023, the Federal Government issued its formal response to QAR, in the shape of its ‘Delivering Better Financial Outcomes’ reform package^[8].

While the Government accepted 14 of Levy’s 22 Recommendations in full, or in principle, Recommendations 12.1 and 12.2 were referred for further consultation, along with:

• Introduction of a ‘good advice’ duty to replace the existing best interests duty (Recommendation 4).
• Broadening the definition of personal advice (Recommendation 1).
• Removal of the general advice warning (Recommendation 2).
• Allowing non-relevant providers to provide personal advice (Recommendation 3).

The consultation process, which will operate alongside the review of the FASEA Code of Ethics, is expected to conclude by the end of 2023^[9].

Where does that leave financial advisers?

The deferral of Recommendations 12.1 and 12.2 means the DDO regime will continue to operate in its current form until at least the end of 2023.

The challenge for advisers in this regard is that with ASIC stepping up its enforcement of DDO compliance, product issuers will feel themselves under increased scrutiny and increased pressure to ensure watertight adherence to the obligations. Some of this pressure is likely to be referred onto distributors, including advisers.

Importantly, many experts expect ASIC’s approach to enforcing compliance with the DDO will evolve in the next 12-18 months¹⁰, focussing less on TMDs and more on the adequacy of governance processes around the product design and review process. In terms of products, ASIC has said it will prioritise those where it sees the most chance of consumer harm, including Managed Funds.

To the extent that distributor reporting is an important input into product design processes, advisers should expect issuers to be increasing, and more strictly monitoring, their reporting requirements.  Issues product manufacturers are likely considering at present include:

• How they are collecting and understanding product distribution outcomes.
• What data and metrics are being used, and the timeliness of measurement.
• How they are collecting, assessing, and responding to data relating to consumer outcomes.

It is possible that some issuers may extend their requirements beyond the mandatory complaints and significant dealings data, to other data they deem relevant to their product governance processes.

For advisers offering General Advice and execution only services, extra scrutiny should also be expected in respect of the Reasonable Steps obligations, with ASIC using Report 726 to flag its concerns with the overreliance on Investor Questionnaires.

The widespread inadequacies with TMDs identified by ASIC should also put advisers on alert as to their own reliance on these documents. Although legislation does not mandate that TMDs are given to clients¹¹ (only that they must be available on request), it is likely some advisers may be seeing these as an additional way of supporting their recommendation of a particular product. The increasing issuance of stop orders, and the concerns flagged by ASIC with templates previously issued by a major industry association, suggests advisers should tread with caution.

In conclusion

When it first came into effect in October 2021, the DDO regime represented one of the most significant financial consumer protection reforms in many years. The intent of the DDO regime is to reduce consumer harm by ensuring a better match between financial products and consumers, and whilst largely seen as matter for product manufacturers, product distributors are also central players in this matching process.

The onerous reporting burden on financial advisers associated with DDO – and their consequent impact on the cost of financial advice ­– have been widely condemned, a point recognised by Michelle Levy in the QAR Final Report. The widespread optimism that her recommendations to reduce the DDO burden on advisers – without compromising consumer protections – would be accepted, were dashed when the Government released its formal response.

Whilst Levy’s recommendations have not been rejected outright, but rather are subject to further consultation, the resulting state of limbo actually creates more challenges for advisers, as it comes against a backdrop of ASIC stepping up its enforcement of DDO.

For the time being, this is likely to see product issuers under increased pressure and scrutiny, some of which may well be referred onto advisers in the form of more onerous and more strictly monitored reporting requirements.

———–

References:
[1] https://treasury.gov.au/publication/c2014-fsi-final-report
[2] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[3] https://asic.gov.au/about-asic/news-centre/articles/product-design-and-distribution-the-consumer-is-key
[4] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[5] https://www.moneymanagement.com.au/news/funds-management/fsc-builds-updated-ddo-template-fund-managers
[6] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[7] https://treasury.gov.au/sites/default/files/2022-08/c2022-307409-proposalsp.pdf
[8] https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/delivering-better-financial-outcomes-roadmap-financial
[9] Ibid.
[10] https://hsfnotes.com/fsraustralia/2023/05/29/asic-lifts-its-game-on-ddo/
[11] https://www.dwyerharris.com/blog/tmd-available

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Advisers are at the forefront of consumer protection, through both the provision of advice, and the creation of financial education content.

Finfluencer: A finfluencer is a content creator who breaks down complex financial concepts into easy-to-understand explanations^[1].

Casually drop the word ‘finfluencer’ into a conversation and you will evoke a range of responses. Depending on the audience, those responses could range from “Yes I follow a few of those” (millennials), to “They are a blight on the financial landscape and should be run out of town” (a gathering of financial advisers).

But whilst finfluencers have recently been newsworthy for mostly the wrong reasons (providing unlicensed ‘advice’, stock manipulation), merely dismissing them as a fringe dwelling nuisance ignores the powerful trends that have seen their birth in the first place. These trends are ones that will shape the financial landscape for years to come, having major ramifications for the way advisers – proper, registered, qualified advisers ­– will need to advise clients of the future.

Many advisers and licensees are already recognising that the way younger consumers expect to access advice is changing and that to remain relevant and accessible, they must embrace the delivery of advice – and financial education – in new ways.

Along with advice, financial literacy is one of the fundamental pillars of financial consumer protection, and many advisers share a strong commitment to educating their clients. Some are already creating educational content, promoting it through their social channels and hosting it on their website. In this context, advisers themselves are already acting as finfluencers, and the ASIC guidance around discussing financial products and services online is as relevant to the contemporary advice practice as it is to the young Tik Tok star.

In this article we will discuss the underlying mega trends that are seeing the worlds of advisers and finfluencers merge, and cover off in detail the guidance from ASIC – born out of consumer protection concerns –  that advisers need to be aware of as they look to provide online education to clients and prospects.

Younger consumers, including self-directed investors, want more advice, not less

The surge in young retail investors since 2020 has been widely discussed in the media. And regardless of whether recent market volatility has diminished their enthusiasm for investing, the fact remains that this group represents a strong cohort of consumers needing, and happy to seek, advice. 

The long-held article of faith across the financial advice profession that self-directed investors – the ‘DIYers’ – are not a viable target market for advice seems particularly untrue in relation to these younger investors.

In actual fact, as the research below from the US and Australia shows, the preference to ‘go it alone is’ actually much higher with older investors, especially those who are retired (and therefore have more time on their hands to manage and research, and likely have more experience).

75% of US Millennials surveyed by the National Association of Personal Financial Advisors^[3] said they want to work with an advisor to help them mitigate risk and plan for retirement (compared to 50% in 2016).

In Australia, research by the ASX found that nearly a third (31%) of ‘new generation’ investors are already using a financial adviser^[4], while CoreData found that whilst overall, around one in four (25.7%) Australians sought financial advice during 2020, the highest demand was highest from Gen Y (32.2%)^[5].

But they want to access information, education, and advice differently

The increasing preference for digital channels is starkest among younger investors.

UK research^[6] published in 2021 looked at the preferred sources of research for newer investors (3 years or less) compared to more established investors, and found the newer (and younger) investors were considerably more likely (63% v 32%) to rely on ‘contemporary’ sources (including YouTube and social media). This is highlighted in Figure 2 below.

Australian research reveals similar findings:

• An ASX retail investor study^[7] found that 41% of ‘new generation’ investors preferred to access investor education via YouTube.
• Of Australian investors using an online investing app, more than a third (35%) turn to online communities and forums to research and learn about investments, with the same proportion (35%) also relying on social media/finfluencer content^[8].

Finfluencers are filling a gap

To the extent that finfluencers are providing information and financial education, through digital channels, at little or no cost (some run a subscription model), their popularity is understandable. Indeed, ASIC’s own research^[9] in 2021 found that 33% of 18–21-year-olds follow at least one financial influencer on social media. The survey found a further 64% of young people reported changing at least one of their financial behaviours as a result of following a financial influencer.

Advisers are starting to learn from – and even partner with – influencers

Understanding the factors behind the popularity of finfluencers, and applying them to advice delivery, may prove critical if we are to address the chronic advice gap in Australia. Many advisers and licensees are already recognising this, and are looking to incorporate finfluencer elements into their businesses, either by partnering with finfluencers, or by acting as finfluencers themselves.

Melbourne based practice Guideway, for example, has partnered with finfluencers Natasha Etschmann, who’s podcast ‘The Get Rich Slow Club’ has more than 40,000 subscribers. According to Guideway CEO Alex Aracas, said the partnership dovetails with its ambition to make quality advice more accessible and affordable:

“As the demand for advice and education increases, we believe it will be unlikely that practices will have this time or imperative to invest to build a compliant self-sustaining education or general advice service. At the same time, we can see from the engagement levels with finfluencers that this emerging channel is highly valued by consumers.”^[10]

The number of financial advisers who have themselves turned finfluencers via their own podcasts include Victoria Devine (‘She’s on the Money’), Adele Martin (The Savings Squad), and Glen James (My Millennial Money). We are also seeing more advisers offer online education around everything from budgeting and saving to superannuation and investing. Many of these are on a subscription basis and are intended to create a cohort who are more ‘advice ready’.

No matter which path advisers take into the finfluencer world, ASIC’s guidelines (shared below) are as relevant to them as they are to unlicensed social media celebrity finfluencers.

ASIC crackdown on finfluencers

Alarmed by the exploding popularity of finfluencers, many of whom were effectively providing advice without being licensed to do so, ASIC announced^[11] a major crackdown on finfluencers in early 2022. ASIC’s message in essence was to either get licensed and play by the rules, or face increased scrutiny and prosecution.

Of particular concern were those finfluencers who were promoting specific investment products, many of them high risk. More often than not, the finfluencer would have a financial incentive to spruik those solutions.

As two recent court cases prove, ASIC are determined to make good on their threat.

Following a late 2022 finding that finfluencer Tyson Scholz (aka the ASX Wolf) had provided financial product advice regarding ASX share trading without a licence, the Federal Court recently issued an injunction permanently banning him from carrying on a financial services business^[12].

And in May 2023, Gabriel Govinda was sentenced to two and half years in prison for a ‘pump and dump’ market manipulation scheme promoted through his online identity ‘Fibonarchery’^[12].

ASIC Guidelines on acting as, or in partnership with, a finfluencer

At the same time that they announced their crackdown, ASIC published an information sheet about discussing financial products and services online^[14].

Information Sheet INFO 269 ‘Discussing financial products and services online’ outlines how the law applies to social media influencers, and the licensees who use them^[15].

Commenting on the launch of INFO 269, ASIC Commissioner Cathie Armour said:

“The way investors access information is changing. It is crucial that influencers who discuss financial products and services online comply with the financial services laws. If they don’t, they risk substantial penalties and put investors at risk.”^[16]

The information sheet is highly relevant to advisers looking to offer some degree of online education, and/or partner with an external finfluencer.

What does INFO 269 set out to do?

According to ASIC¹⁶, INFO 269:

• highlights activities where influencers may contravene the law if they are unaware of the legal requirements, using a series of practical examples on:
  • financial product advice
  • dealing by arranging
  • misleading or deceptive conduct
• explains issues for influencers to consider including:
  • whether an AFS licence is needed
  • being familiar with relevant regulatory guidance
  • doing their due diligence on people who are paying them (including non-monetary benefits)
• reminds AFS licensees who use influencers to:
  • do their due diligence
  • have appropriate risk management systems and monitoring processes
  • have sufficient compliance resourcing to monitor the influencers they use
  • consider their design and distribution obligations.

How ASIC describes the law about what constitutes financial advice

Even though the term finfluencer has its origins in the social media term ‘influencer’, the concept of ‘Influence’ is coincidentally central to the definition of financial advice (as distinct from information and education).

In INFO 269, ASIC describes the relevant law thus:

“Financial product advice is a recommendation or statement of opinion which is intended to influence, or which could reasonably be regarded as being intended to influence, a person making a decision in relation to financial products”.
“You can share factual information that describes the features or terms and conditions of a financial product (or a class of financial products) without giving financial product advice. However, if you present factual information in a way that conveys a recommendation that someone should (or should not) invest in that product or class of products, you could breach the law by providing unlicensed financial product advice.”^[17]

Providing extra clarity for finfluencers, ASIC goes on to say:

“If you’re an influencer who receives benefits or payment for your comments in relation to financial products, you’re more likely to be providing financial product advice because it indicates an intention to influence the audience.”

INFO 269 contains a number of examples of scenarios that would be regarded as advice (including recommendations on stocks to hold, and statements about likely future performance of investment products), and those that would not (including providing tips on how to cut expenses and a comparison of the general characteristics of different investment products).

Guidance for licensed advisers providing online education

While experienced licensed advisers would be in little doubt as to their compliance obligations, and the distinctions between information, general advice and personal advice, the nuances around online education, especially that delivered through videos and podcasts, require extra vigilance. Inadvertently showing branded materials in videos, referencing sponsors, or calling on personal examples can see the advice line crossed, bringing forth a raft of compliance complications.

Mistakes are also harder to erase when they have been posted online (taking down some content can be very difficult).

INFO 269 also draws attention to relevant Regulatory Guides, and in the context of providing online information and education, even experienced advisers could benefit from revisiting RG 234 (Advertising financial products and services), and RG 244 (Giving information, general advice, and scaled advice).

RG 234 includes a range of useful guidance relevant to audio and video materials, including around the treatment of disclaimers:

“They should also have sufficient prominence to effectively convey key information to a reasonable member of the audience on first viewing of the advertisement. Information is less likely to be noticed and understood if it is in fine print, contained within a dense block of text, only shown on television or a computer screen for a brief period, or placed where there is distracting content shown simultaneously.”^[18]

Guidance when partnering with external influencers

AFS licensees who use external influencers may be liable for misconduct by those influencers, and to this end ASIC recommends licensees:

• do their due diligence. If the influencer is acting on behalf of a firm, and is therefore their ‘representative’ for the purposes of the financial services laws, this triggers other obligations (including ensuring they are adequately trained and complying with the financial services laws)
• put in place appropriate risk management systems and monitoring processes to make sure those influencers are not providing unlicensed financial services
• have sufficient compliance resourcing to monitor the influencers, and
• consider if they have engaged an influencer to promote a financial product that is subject to the design and distribution obligations and – if so – whether reasonable steps have been taken to ensure the influencer only promotes the product to consumers in the target market.

Of course, taking these steps can somewhat undermine the authenticity of finfluencer content, a point recognised by Vince Scully, CEO of Life Sherpa. Commenting on his firm’s partnerships with various finfluencers, including Queenie Tan, Scully observed that context collaboration was key:

“The question is, how do I satisfy my monitoring and supervision obligations as an AFSL holder and still meet the spontaneity and authenticity that you need in social media? We can either amplify our content or the finfluencer’s content. We collaborate in a sense that one plus one becomes three. Recently, in our studio, we had Queenie, Victoria [Devine], and I record a combined episode for ‘She’s on the Money’. Collaboration around events and content brings a greater variety; the more voices you have, the better”.^[19] 

Conclusion

Once thought of as a nuisance and a threat to financial advice, the rise of finfluencers may actually be a boon for the future of advice, creating a cohort of advice ready consumers, and enabling advisers to make their offering more affordable and accessible to this cohort. Additionally, by opening up the eyes of advisers to the potential of digital technologies for delivering education, information, and advice, finfluencers have encouraged innovation in advice business models.

In introducing tougher regulation for finfluencers, ASIC has responded to legitimate consumer protection concerns relating to unqualified, unlicensed ‘celebrities’ providing what amounts to financial advice.

But this crackdown isn’t about unlicensed social media stars. Those advisers providing educational content on tools through their social channels and website are, in effect, already acting as finfluencers, and in this context, ASIC’s guidance in this area is equally relevant to licensed advisers.

With the sector now more tightly scrutinised and regulated by ASIC, the worlds of finfluencers and traditional advisers are coming ever closer together. By operating within the guidelines provided by ASIC, ultimately we should see advisers and finfluencers work together for the benefit of consumers, making information, education, and financial advice more accessible to everyone.

———–

References:
[1]https://www.clevergirlfinance.com/what-does-a-fin-fluencer-do/
[2] https://www.dowjones.com/professional/resources/blog/majority-of-millennial-investors-value-an-advisor
[3] <https://www.cnbc.com/2021/12/08/how-financial-advisors-can-attract-millennial-clients.html
[4] <https://www2.asx.com.au/content/dam/asx/blog/ASX-Australian-Investor-Study-2020.pdf
[5] https://www.moneymanagement.com.au/features/expert-analysis/invisible-demand-financial-advice
[6] https://www.fca.org.uk/publication/research/understanding-self-directed-investors.pdf
[7] https://www2.asx.com.au/content/dam/asx/blog/ASX-Australian-Investor-Study-2020.pdf
[8] https://au.yougov.com/news/2022/07/12/australia-finfluencer-financial-influencer-impact/
[9] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-054mr-asic-issues-information-for-social-media-influencers-and-licensees/
[10] https://www.financialstandard.com.au/news/finfluencers-bridge-financial-advice-gap-179799669
[11] https://www.smh.com.au/business/banking-and-finance/asic-finfluencer-crackdown-curbs-social-media-finance-posts-20220408-p5ac2n.html
[12] https://www.moneymanagement.com.au/news/financial-planning/why-licensee-ceo-wont-discount-role-finfluencers
[13] Ibid.
[14] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-054mr-asic-issues-information-for-social-media-influencers-and-licensees/
[15] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/discussing-financial-products-and-services-online/
[16] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-054mr-asic-issues-information-for-social-media-influencers-and-licensees/
[17] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/discussing-financial-products-and-services-online/
[18] https://download.asic.gov.au/media/rkzj5nxb/rg234-published-15-november-2012-20211008.pdf
[19] https://www.financialstandard.com.au/news/finfluencers-bridge-financial-advice-gap-179799669

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The rapid uptake of video meeting apps since early 2020 has led to many advisers realising they can leverage this technology to deliver both efficiencies and an improved client experience in the context of the SOA.

Introduction

Disclosure, along with financial advice, financial literacy, and regulation, is one of the four key pillars of financial consumer protection. And in the context of financial advice, there is no more important disclosure vehicle than the much discussed, often derided, Statement of Advice (SOA).

One of the criticisms levelled at the SOA is that they are time consuming – and therefore costly – to produce, leading to higher fees and putting advice further out of reach for many consumers.

But perhaps the bigger failing of the SOA – or at least, the way many are choosing to implement ASICs guidance – is that they are failing to perform their intended role, which is enabling the client to fully understand the advice they have been given, the reasons for that advice, and its potential outcomes.

Although the scrapping of the SOA was one of many recommendations made by the Quality of Advice Review (QAR), comments by Assistant Treasurer Stephen Jones suggest this is unlikely^[1]. (Many observers have also suggested some licensees would be keen to keep SOAs even if they were no longer mandated).

While at the time of writing the Government’s response to Levy’s QAR recommendations remain unknown, the likelihood remains strong that Statements of Advice – in some shape or form – will remain a key component in the advice disclosure regime.

To forward looking advisers, the question of whether SOAs are in or are out is less relevant than the question of how to best communicate advice to clients and how best to achieve the genuinely informed consent that lies at the heart of truly effective, valued advice.

Many such advisers have already decided that video-based disclosure and communication is the way to go, and the Video SOA has quickly become a major talking point within advice circles.

In this article, we will look at video SOAs from a theoretical, regulatory, and practical perspective, bringing together research and resources that can help advisers decide if this is a path they want – and have the capability – to take.

The problem with written SOAs as a communication tool

The shortcomings of over-reliance on disclosure as a consumer protection have long been recognised by policy makers. As far back as 2014, the final report of the Financial Systems Inquiry stated:

“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.^”[2]

Arguably there is no clearer example of disclosure working against consumer interests than the SOA

Despite being the primary document that formally addresses a client’s most important dreams, goals, and concerns, and which includes recommendations and action plans for achieving those goals, the truth is SOAs are rarely read – let alone understood – by clients. Indeed, a recent industry panel discussion concluded that 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”.^[3]

In simple terms, many SOAs have prioritised legalese, and confuse length and jargon with transparency.  They are too complex for clients to engage with. As a result, they are ineffective in creating truly informed consent. And, contrary to what some compliance teams may believe, they are leaving advisers exposed, rather than protected.

Many advisers were on to this long ago, choosing to make the SOA an appendix – rather than the centrepiece – of their advice communication. Advice strategy documents, which were shorter, used much simpler language and relied on more graphics, became quite popular.

The Video SOA is so hot right now

The latest advancement in this space has been the video SOA. Leveraging the increasing digitalisation of our lives, advocates of the video-based advice communication believe it is the way of the future, and can drive both efficiency and an improved consumer experience.

As hot topics go, the video SOA is sizzling.

The FPA (prior to its merger with the AFA) undertook an extensive advocacy campaign, releasing a comprehensive tool kit and holding a number of ‘how to’ webinars. ASIC weighed in and gave them a tick (sort of). And the acquisition of Enlightened Financial Solutions by Viridian Financial Group was reported to have been driven “as part of an expansion into the emerging video Statements of Advice segment^[4].

What does ASIC say about video SOAs?

From ASIC’s perspective, video SOAs are an acceptable replacement for written versions provided they meet the meet the same compliance requirements as written ones, and provided clients can receive one in written format if they prefer.

Speaking at the 2022 FPA National Congress, ASIC executive leader Leah Sciacca, explained that the Corporation’s Act is “technology neutral” and did therefore not mandate format^[5].

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.”

A reminder of what those compliance requirements are

There is currently no ASIC Regulatory Guide specific to video SOAs. Rather, the requirements are those already applying to SOAs and digital advice generally, as articulated in RG 244 (Giving information, general advice, and scaled advice), RG 221 (Facilitating digital financial services disclosures), and RG 175 (Licensing: Financial product advisers—Conduct and disclosure).

The foundational guidance around the information that MUST be contained in an SOA is RG 175. 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”. 175.185

What is NOT mandated by ASIC

Equally importantly, the format and length of the SOA, and the inclusion of charts, graphs, projections etc is NOT mandated by ASIC^[6]. Nor is the need to for a client to sign the SOA as an ‘authority to proceed’.

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.

Special relief for digital disclosures

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.

This Good Practice Guidance requires:

1. Disclosure documents should be easy to retrieve, view and understand.
2. Disclosures should not distract or divert clients from relevant information.
3. Clients should be able to identify the disclosure.
4. Providers should use their reasonable efforts to ensure that the client or their agent receives a copy of the disclosure.
5. Clients should be able to keep a copy so that they can access the disclosure in the future.
6. Clients should be able to prove which version of the disclosure they relied on.
7. Clients should be able to opt out of digital disclosure.
8. Disclosure documents should be delivered in a way that does not unreasonably expose clients to security risks (e.g., phishing or identity theft).

None of which precludes video SOAs.

The scientific support for video SOAs

There is an extensive body of research that shows education is more effective when delivered through sight and sound, rather than through static text.

The human brain processes pictures and sounds far quicker than words, and retains that information longer too.

One study found that when you pair images with information, “people retain 65% of that information three days later as opposed to just 10% with text alone.” Another study by Insivia found that “viewers retain 95% of a message when they watch it in a video, versus 10% via text.”^[7]

So why did it take so long to get here?

Whilst some advisers have been using video SOAs for as long as 5 years^[8], take up is nowhere near mainstream. Which begs the question as to why the penny is just starting to drop on video SOAs. There are several possible explanations:

1. The improved quality of mobile devices and laptops has made it easier than ever to produce video with good resolution and sound without needing expensive equipment
2. The withdrawal of the large institutions from advice has heralded a more commercial and consumer centric perspective among licensees (some, at least!)
3. The widespread embracing of video-based communication by clients, and the growing usability of video meeting apps, which COVID-19 accelerated.

FPA’s practical toolkit for Video SOAs

In July 2022, to capitalise on growing adviser interest, The FPA released its ‘State of Advice Project (SOAP) Box Set, a a series of 14 videos designed to equip advisers with the required tools to provide an SOA via video format^[9].

The SOAP Box Set – available exclusively to FPA members via their portal – covers a range of topics, demonstrating the ease with which advisers can create a video of their advice meeting which can be provided as an SOA, as well as real-life examples of video SOAs covering various scenarios such as pre-retirement planning and life risk advice.

The project followed an extensive consultation process between the FPA and members, consumers, regulators, lawyers, compliance experts, and technology providers. The shared goal of that project being a paperless SOA that reduced compliance costs and increased efficiency, while also delivering advice that clients can better understand.

According to the FPA’s then Head of Policy, Ben Marshan, two of the key principles behind the project were that advisers should be able to adopt SOAs using existing technology, and that the use Video SOAs was not reliant on legislative change^[10]. In other words, there were no cost or regulatory barriers.

‘It’s not about taking an 80-page written SOA then standing in front of a camera and delivering it. In simple terms it’s about recording the client meeting in which you deliver the advice.

Case Study – how one adviser converted his practice to video SOAs in 4 weeks^[11]

Financial Adviser and CEO of self-licensed Verse Wealth, Corey Wastle, knew inherently that paper based SOAs impeded, rather than added to, the client experience. He first heard about Video SOAs when listening to an FPA podcast one weekend. He was so inspired that he immediately spent a couple of hours whiteboarding the possibilities. After speaking to his team, and seeking the advice of their external compliance consultant, he knew that he wanted to take his practice down that path, and mapped out a change process with a challenging 4-week deadline to make it happen. With the help of his team, it happened.

In a nutshell, the video SOA is a recording of the meeting in which the advice is delivered. This makes it more watertight from a compliance perspective because there is irrefutable evidence of what the adviser – and the client – said. The recording works in conjunction with a written document – the Summary of Advice – which is focused on the actual strategy recommendations, leaving the mandatory disclosures to be handled during the meeting.

Whether that meeting is done over Zoom, or in person, Zoom is used as the recording platform. Wastle has configured his team’s laptops to make recording automatic. For in person meetings, the adviser briefly turns the webcam around and shows the people in the room, and gives a brief verbal introduction. A large part of that meeting effectively shows the screens that the adviser is typically sharing with the client. The mandatory disclosures required by ASIC could be done at the start or end of the meeting, and could be done via a shared screen or simply verbalised.

At the end of the meeting, the recording is saved to the CRM. The adviser also undertakes a quick ‘Professional Judgement’ survey to capture whether they detected any red flags or issues for follow up, and these also get saved to the CRM.

To make the meetings smoother, a Summary of Advice Document – a more client friendly document which is generally no more than 20 pages – is sent to the client in advance along with other information. The client is sent a link to a DropBox folder created for them, which is where the file of the meeting recording (Video SOA) will also be stored.

The efficiency and client experience improvements have been significant.

The meetings themselves have been cut from 90 minutes to 60. The Summary of Advice Documents has shrunk from around 15000 words to 3500 words and takes 2.5 hours to produce rather than the 8.5 hours it took to produce an 80-page compliance focused document. As a result, the paraplanning support needs have also shrunk from 1 to 3.

The recording of the meeting replaces the need to do file notes, which saves the adviser time and cognitive energy.

A common question from advisers is about the need for a written Authority to Proceed.

Wastle points out that there is no legal requirement for this to be in writing. For most clients, their verbal authority – the informed consent – is recorded on video when the adviser asks them. For those clients who prefer to think it over, they are sent a one-page Authority form via Docusign, with an automated reminder every three days. The average time taken provide these written authorities has also dropped dramatically, helping maintain momentum and improving the client experience.

In conclusion

The communications effectiveness of video is beyond dispute, and with the rapid uptake of video meeting apps since early 2020, the time seems ideal for advisers to leverage this technology to deliver both efficiencies and an improved client experience. Those advisers who take the time to understand ASIC’s guidance around the content and format for SOAs – and who approach the entire advice communication process with a client centric lens – will understand that a process incorporating video SOAs can not only be more effective at achieving truly informed consent from the client, but it can also be more robust from a legal and compliance perspective. All that is needed is to discard the legacy thinking and be open to what is actually possible.

Importantly, with the Government suggesting that some sort of SOA – perhaps with a different name and in a shorter form – is still likely to be required as part of their response to the QAR recommendations, any steps towards building a video SOA capability are likely to remain just as relevant and beneficial in the future as they are now.

———–

References:
[1] https://www.professionalplanner.com.au/2023/03/jones-eyes-soa-reform-a-bloody-no-brainer/
[2] https://treasury.gov.au/publication/c2014-fsi-final-report
[3]  https://www.moneymanagement.com.au/comment/30080
[4] https://www.financialstandard.com.au/news/viridian-picks-up-advice-firm-179799273
[5] https://insideadviser.com.au/asic-neutral-on-soa-format-video-statements-good-to-go/
[6] https://www.assuredsupport.com.au/articles/2023/3/6/the-problem-with-models
[7] https://idearocketanimation.com/4293-video-worth-1-million-words/#:~:text=According%20to%20McQuivey’s%20Forrester%20study,at%20least%201.8%20million%20words.%E2%80%9D
[8] https://www.professionalplanner.com.au/2023/03/detraction-from-a-great-client-experience-moving-on-from-paper-soas/
[9] https://www.smsfadviser.com/news/21337-fpa-releases-new-toolkit-for-video-soas
[10] https://www.linkedin.com/video/event/urn:li:ugcPost:6988657603769696257/
[11] https://www.linkedin.com/video/event/urn:li:ugcPost:7007896123696697344/

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How to design and run effective remediation processes through the lens of regulatory compliance and consumer protection.

Remediation is big news

In March 2023, ASIC published what it said would be its last update on the large-scale remediation of financial advice clients by major financial institutions^[1].

These remediation programs, which largely relate to issues of ‘fees for no service’, and non-compliant advice, were first undertaken several years ago, on behalf of advice licensees who were then owned by the big four banks plus Macquarie and AMP. These licensees included some of the biggest and best-known groups, such as Millennium 3, RI Advice, Securitor, Count Financial, and Godfrey Pembroke.

The institutions have paid or offered a total of $4.7 billion in compensation, as of 31 December 2022, to customers who suffered advice-related loss or detriment^[2].

This includes $1.1 billion paid or offered by the institutions between 1 July and 31 December 2022.

But while most of these large institutions have now divested themselves of their advice arms, and settled with clients, remediation still looms large as a part of the advice landscape. No matter how robust a licensee’s advice and compliance systems are, it is almost inevitable that at some stage, almost every advice firm will need to remediate at least one client. Having a framework in place for equitable and timely is thus a must for all licensees, not just from a compliance perspective, but from a reputational perspective also.

Putting the topic of remediation even more front and centre at the moment is the release – in late 2022 – of new ASIC guidelines on remediation, RG 277 Consumer Remediation^[3].

This article will provide advisers with a comprehensive overview of advice remediation, exploring the background and current context, examining the updated ASIC Guidelines, and then providing a practical field guide on how to design and run effective remediation processes.

What is remediation?

For consumers to interact with financial services providers with trust and confidence, licensees that engage in misconduct or other failures when providing financial services or credit activities, and cause consumer loss as a result, must initiate remediation.

In simple terms, remediation is compensating clients who have suffered detriment because of that misconduct or failure.

There are many challenges when remediating clients, including:

• the volume, or lack of, records
• the significant dollar value of client portfolios under advice
• the potentially significant quantum of detriment experienced by clients
• potentially large time gaps between when advice was provided and when remediation occurs.

The two main types of remediation are monetary compensation and rectification.

Monetary compensation

Providing monetary compensation to clients is the most obvious remedy, and can also be the easiest and quickest to implement. It can also be the most visible from a media perspective (which can be good and bad).

One of the challenges with monetary compensation is calculating the appropriate amount. It is not always easy to quantify the financial loss suffered by the client as a result of poor advice, because the range of issues that can require remedy is so large, from inadequate disclosure of fees to inappropriate risk profiling and associated investment losses. Whether interest should be paid is also a key question.

Rectification

Rectification is in essence, correcting an error and can take a number of different forms. It could for example involve providing the client with updated advice. If a client initially received inappropriate advice but has become comfortable relying on that advice over time, the client may choose to retain the original advice received, and rectification could simply involve a confirmation they want to retain the (originally) inappropriate advice.

Many cases will involve both types of remediation.

Deciding if/when a client needs to be remediated

The decision to remediate a client, and the initiation of processes to do so, can be an outcome of several processes:

• the licensee’s own compliance and monitoring processes identify some sort of breach or misconduct, resulting in the licensee proactively commencing remediation of affected clients
• a client complaint is managed within the licensee’s internal dispute resolution (IDR) process, resulting in an admission of fault and remediation, or
• if a client complaint is not satisfactorily resolved through the firm’s IDR process, the client may take that complaint to AFCA, who may determine that remediation is required.

ASIC guidance on remediation

Since 2016, adviser obligations around client remediation were codified in ASIC Regulatory Guide RG 256.

However, in 2020, after observing licensees using remediation practices “not aligned with their stated values about the treatment of consumers”, ASIC released Consultation Paper 350 ahead of a comprehensive review of their guidelines.

At the time of releasing CP 350, ASIC noted that:

“Some licensees view remediations as a distraction from their core business, while others take a legalistic approach that neglects consumer interests or fails to prioritise or resource remediations”.^[4]

The headline change proposed in CP 350 was an amendment to the relevant period for remediation from the current seven years to “the date a licensee reasonably suspects the failure first caused loss to a consumer”, effectively requiring licensees to go back further than seven years when reviewing remediation issues.

After reviewing responses to CP 350 and working with stakeholders across the sector, an updated guidance, RG 277, was released in September 2022.

At the time of releasing the 94-page Guide, along with a supporting document ‘Making it right: How to run a consumer-centred remediation’, ASIC said the guidance put the onus on the industry to pursue equitable and timely remediations^[5].

“To date, ASIC has needed to oversee large-scale remediations to ensure affected consumers were treated fairly and received the compensation they were entitled to,” Chester said^[6].

RG 277 in detail

RG 277 provides comprehensive guidance on client remediation, covering topics such as:

• when remediation must be initiated
• scoping the misconduct or failure
• determining an appropriate outcome
• communicating with customers
• payments and settlement deeds (including how to prioritise, and how to deal with small ‘residual’ payment amounts
• resourcing and governance of remediation processes, and
• engaging with external organisations such as AFCA, APRA, and the ATO.

Importantly, Under RG 277, remediation procedures must be initiated as soon as a licensee becomes aware of an instance of misconduct or failure, rather than await a customer complaint. And that misconduct or failure can include the ‘decisions, omissions, or behaviours of a licensee, as well as those of a current or former authorised representative, any third-party service providers and consultants engaged by the licensee, and any related entities.

Licensee processes for remediation must be ‘efficient, honest and fair’, and consider the following nine principles:

The seven-year record-keeping rule and complying with RG 277

As first flagged in CP 350, the seven-year rule applying under the now superseded RG 256 was scrapped, meaning any misconduct occurring outside this timeframe are now in scope, and licensees are therefore obliged to look back much further than seven years if circumstances demand it. (Note: RG 256 still applies for remediation already underway at the time RG 277 was released).

This of course has a practical implication in that record-keeping obligations are still based on seven years, and it is possible that licensees may have – in good faith – destroyed records relating to the case at hand.

RG 277 addresses this issue with a criticism thinly disguised as an observation:

“If licenses have adequate systems and processes in place to identify misconduct promptly, then the remediation review period should rarely exceed any record-retention requirements”.

In the event the remediation period IS outside the seven years, licensees need to consider whether it is possible and reasonable to apply assumptions that are beneficial to consumers to fill in the necessary gaps.

These beneficial refund assumptions should “err on the side of overcompensation rather than under-compensation”.

The provided example of such an assumption relates to the refund of historical life insurance premiums. In the absence of the destroyed client records, and rather than waiting for the life insurer to provide several years of detailed premium data, the licensee simply rationalised that the most recent premium would likely have been the highest (because of age-related increases) and used that as the basis for the other years (filling in the gaps).

(ASIC also provides an example of when such an assumption was not beneficial to clients.)

A practical framework for remediation

Like all effective processes, the approach to remediation should be systemised to ensure efficiency and consistency. This in turn can ensure remediation processes are compliant and customer-centric.

A practical framework for building such a systematic approach – which is aligned with the nine principles articulated in RG 277 – might include the following:

1. Understand what happened (and prevent it from happening again)
   Work out the root cause of the problem, underlying drivers, and how to stop it from happening again. Look at which products, services, systems, processes, and people are involved and affected – identify any common, underlying threads. If there are systemic issues, make appropriate changes in your business to ensure they don’t recur.
2. Understand which clients are affected
   Once you have identified the issue, assess which clients may have been affected, and the extent of their potential loss. Cast the net widely.
3. Customer journey mapping
   To ensure your remediation is client-centred, use data and insights to truly understand your clients, the journey they take with your organisation, and how this issue may have impacted them. Segmenting clients may be necessary, and can help with triaging. Remediation doesn’t take place in a vacuum – their lives may have changed since you last had contact with them so bear this in mind.
4. Decide remediation outcomes
   Determine whether consumers have suffered loss and what remedies (monetary and/or non-monetary) are appropriate. Consider your knowledge gaps and appropriate assumptions to fill those gaps. Calculation methodologies can be found in RG 277. A good rule of thumb is whether you would be happy if the remedies were made public and became known to your other clients.
5. Communications planning and execution
   An overarching communication plan should set out the recipients, timings and frequency of communication, the messages, communication channels, and metrics used to judge the effectiveness of that communication. Drafting communication may require expert help, to write the communications and ensure it is both clear, client-focused, and legally compliant. Clear calls to action and your own contact details are also essential.
6. Testing and learning
   Testing the effectiveness of your remediation. This may mean trialling the approach with a subset of the larger client group. What you learn can be applied to finetuning and improving your remediation approach.
7. Monitoring and documenting outcomes
   Monitor progress and outcomes. Decide key metrics to use (for example, response rates to communication, how many clients agree with the proposed remediation, and the appropriateness of assumptions used). Track and record the metrics. Document the outcomes and key learnings.

Specific issues to consider – contacting clients and dealing with unclaimed monies

Two specific issues to consider, because of their importance, and frequency of occurrence, are contacting clients and dealing with unclaimed remediation payments.

Contacting clients

To make reasonable endeavours to contact consumers, licensees should use more than one channel of communication to contact consumers, focusing first on the key preferred channel for the customer. A mix of email, telephone calls, app notifications or SMS may be suitable. While licensees are not required to receive a response from consumers after making reasonable attempts to contact them, their remediation plan must demonstrate that they have made those attempts.

Unclaimed monies

Licensees are not able to keep unclaimed remediation payments, even after making reasonable albeit unsuccessful attempts to contact the client. Instead, licensees must either lodge the money with an unclaimed money regime or donate the money to a charity or not-for-profit that is registered with the Australian Charities and Not-for-profit Commission.

Licensees must assess whether relevant state, territory and/or Commonwealth unclaimed money regimes apply to their remediation payments as well as whether minimum thresholds apply.

Amounts of $5 or less to former clients, where no payment information exists on file, can automatically be treated as a residual payment, and automatically donated to a charity.

The remediation ripple effect

As mentioned at the start of this article, remediation is a vitally important issue, impacting the way consumers feel about the financial advice profession and the reputation of individual advisers and licensees.

The way remediation is dealt has other associated impacts, such as the involvement of AFCA, the way licensees funds the Compensation Scheme of Last Resort, and even Professional Indemnity insurance premiums. Done properly, it is a resource-intensive process, and as such needs to be factored into decisions across the value chain, including choice of licensee structure, adoption of appropriate technology, process design and staffing.

Conclusion

No matter how robust a licensee’s advice and compliance systems are, it is almost inevitable that at some stage, almost every advice firm will need to remediate at least one client.

ASIC has recently updated its strict guidance around client remediation. The cost of not remediating clients in a fair and timely manner can be sky high, ranging from criminal penalties to the licensee, brand damage for the adviser and their practice, all the way to a loss of consumer trust in the entire financial advice profession.

A robust and sustainable approach to remediation is one that is aligned with the nine underlying principles articulated in RG 277 and is systemised to ensure efficiency and consistency. This in turn will help ensure remediation processes are both compliant and client-centric.

———–

References:
[1] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-057mr-final-asic-update-compensation-for-financial-advice-related-misconduct-as-at-31-december-2022/[
[2] Ibid.
[3] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-277-consumer-remediation/
[4] https://www.professionalplanner.com.au/2020/12/advice-remediation-rules-up-for-review/
[5] https://www.professionalplanner.com.au/2022/09/asic-aims-for-hands-off-approach-to-remediation/
[6] Ibid.

The post New ASIC Remediation Guidelines – a practical adviser framework appeared first on AdviserVoice.

To the extent that limited advice can overcome consumer barriers to advice would be a game changer.

QAR – are we closer to solving the limited advice conundrum?

One of the most longstanding and contentious issues within financial advice is that of limited (or scaled, or episodic) advice. For some time now there has been a philosophical gap between ASIC, who have publicly encouraged the provision of more limited advice, and licensees who feel that regulatory ambiguity represents too much of a risk to take. The main losers from this disconnect, are consumers, who have a proven preference for limited advice, a preference driven mainly, but not solely, by cost factors.

The widespread reluctance to provide limited advice represents a major barrier to making financial advice more accessible to Australians, a fact recognised and called out in the recently released Quality of Advice Review (QAR) Final report. While some of the proposed changes to advice regulation will undoubtedly increase the appetite to provide limited advice, the scope of the Review excluded the FASEA Code of Ethics, leaving a major barrier to limited advice unaddressed. In the absence of any certainty, the future of limited advice therefore remains somewhat cloudy.

In this article we will review issue of limited advice from several perspectives: the consumer demand, ASIC’s guidance, and the FASEA standard that has been interpreted as a regulatory roadblock to making limited advice more widely available.

Michelle Levy on limited advice

A search of the Final QAR report^[1] will reveal 17 mentions of the term ‘limited advice’. While this may not seem much in a 267-page document, the context in which that term appears leaves no doubt that Michelle Levy recognises that solving the limited advice conundrum is absolutely central to improving the accessibility of financial advice in Australia.

“High quality advice is not always, and perhaps not often, comprehensive advice – it is advice that responds to the needs of consumers. Many consumers need incidental, simple, and limited advice, sometimes frequently. It is in the interests of consumers to be able to get financial advice as and when they need it.”^[2]
Michelle Levy

Consistent with this importance, many of her proposals are designed to facilitate the improved accessibility and flexibility of advice.

Consumer demand for limited advice

As referenced by Levy, consumer demand for limited advice is significant, and likely to grow further due to two structural shifts in the investor landscape – the beginning of the intergenerational wealth transfer, and the surge in new share market investors, a trend which began during the pandemic, and which has been particularly strong amongst millennials.

The consumer preference for limited advice has been well documented for many years.

In 2010, ASIC Report 224 ‘Access to Financial Advice in Australia’^[3] uncovered several themes:

• In aggregate, more consumers prefer limited (‘piece by piece’) advice over comprehensive ongoing advice
• The preference for scaled advice was highest amongst Millennials (whose lower income levels would make the affordability of comprehensive advice more challenging)
• Under 65s had an overwhelming preference for one-off – rather than ongoing – engagements with an adviser (regardless of whether that engagement was for limited or comprehensive advice).

Fast forward several years, and these findings have been validated by more contemporary data.

• Research by the Conexus Institute found that 40 per cent of consumers wanted advice on a topic-by-topic basis, while 35 per cent wanted a comprehensive plan which was reviewed from time to time. A smaller proportion (22 per cent) wanted a comprehensive plan that they could follow for the next few years.^[4]
• Research by Investment Trends in 2021 found that 11 per cent of consumers wanted comprehensive advice, while 38 per cent wanted limited advice.^[5]
• Also in 2021, an Investment Trends survey of High-Net-Worth clients found that just over half (52%) were happy to use the services of a financial adviser, but only to validate their own thoughts (via limited advice)^[6].

Where do licensees and advisers sit on scaled advice?

A longstanding supply-side reluctance/inability to meet market demand for limited advice has been amplified in recent years.

There are three main drivers of this:

• advice has become more expensive to provide
• perceived lack of regulatory certainty around the legality of limited advice
• declining adviser numbers are reducing the competitive imperative to provide scaled advice (the remaining advisers can stay busy purely focusing on clients seeking comprehensive advice).

Economic barriers

In 2021, KPMG benchmarked⁷ the cost to produce comprehensive advice at $5334. With an average advice fee charged to the client of around $2,000 less than this, comprehensive advice is a loss maker.

The prevailing view amongst most licensees is that, in order to be compliant, the same amount of work needs to go into producing scaled advice as comprehensive. To the extent that scaled advice would likely involve less opportunities to recoup the loss made on the initial advice, the economic challenges of scaled advice become clear.

Perception that limited advice contravenes FASEA standards 2 and 6

The KPMG research mentioned above, revealed a firm belief among many licensees that scaled advice contravenes standards 2 and 6 of the FASEA Code of Ethics, which requires an adviser to collect extensive information on a client’s circumstances beyond needs, objectives and wants, in order to consider the broad consequences of any single piece of advice.

The research concluded that:

“Concerns with these standards results in risk adverse (sic) licensees imposing greater obligations on advisers to make greater inquiries and consider matters broader than the client’s intended advice needs and scope. Respect of client needs is paramount as they often wish to limit the disclosure of information at first advice and feel more comfortable disclosing more information once they get to know their adviser. It is the view of research participants that the Code does not permit scaled advice.”^[8]

This general lack of confidence in providing limited advice was displayed in the QAR Final Report, which highlighted ‘Certainty in Providing Limited Advice’ as a major way the regulatory burden on advisers could be reduced.

Why Limited Advice isn’t just about providing cheaper advice

Cost isn’t the only barrier to advice that can potentially be overcome by limited advice.

Across numerous studies undertaken locally, and around the world, over a number of years, consumer cite two other major reasons for not engaging an adviser:

• the lack of complexity of their situation, or size of their investment, doesn’t warrant advice
• they enjoy managing finances themselves.

This was quantified by ASIC in their 2019 study^[9] of attitudes towards financial advice:

Could it be then that there is a problem in the structure of advice that needs to be solved?

it is tempting to look at the barriers to people getting advice – cost, the desire for more control, not having complex enough affairs to justify it – in isolation of each other and set out to fix them accordingly.

But is the underlying issue actually one which combines all these elements?

Is the real problem the fact that financial advice is perceived as an all or nothing proposition? A proposition where the advice relationship is seen as one in which:

• Tthe advice must be comprehensive complex and ongoing
• the adviser has total control over initial and ongoing investment decisions
• a recurring fee of thousands of dollars is charged.

And is limited advice the offering that overcomes all these barriers at once? Michelle Levy certainly hopes so.

For its part, ASIC encourages limited advice

In 2020, ASIC Commissioner Danielle Press reiterated the corporate regulator’s belief that limited advice should play a crucial role in the industry, and questioned the extent to which licensees and their compliance divisions playing it too safe was actually to the longer-term detriment of advisers and their clients^[10].

Recognising and reacting to industry feedback on the lack of clarity around how to provide limited advice in a compliant way, ASIC issued Information Sheet 267: Tips for Giving Limited Advice in December 2021^[11].

INFO 267 provides tips and summarises the relevant guidance from RG 175 (Licensing), and RG 244 (Giving information, general advice and scaled advice). It includes information on what advice providers can do to meet their obligations under the law, including the best interest’s duty and related obligations as well as the FASEA Code of Ethics when giving limited advice.

Commenting on the launch of INFO 267, ASIC Commissioner Danielle Press said:

“ASIC recognises that many consumers prefer to seek limited and specific advice rather than comprehensive advice. We also understand that industry faces some barriers to providing limited advice, including a lack of clarity about the regulatory requirements.

We expect this guidance will provide regulatory certainty to industry and help reduce compliance costs. It will assist financial advisers in their efforts to make these forms of advice more available to consumers and assist them in delivering quality advice in a timely, affordable, and compliant manner.”^[12]

The detail of INFO 267: Tips for giving Limited Advice

INFO 267 has two sections. First, the overview of giving limited advice, covering

• What is limited advice?
• Best interests duty and related obligations when giving limited advice.
• The safe harbour.

Second, ASIC’s tips for limited advice, covering:

• using professional judgement when identifying subject matter and scope
• communicating the service you are providing and scoping implications
• taking active steps to identify and inquire about your client’s relevant circumstances and obtain complete information
• using processes and systems.

INFO 267 also includes a sample limited advice SOA.

Advisers considering providing Limited Advice are encouraged to remember the following:

• you can limit the scope of all types of advice, including advice about complex issues
• limited advice can include advice on a single topic or advice on multiple topics
• you can adjust the level of your inquiries to reflect the nature of the advice sought
• you should not reduce the scope of advice to exclude critical issues that are relevant to the subject matter
• you must explain what advice you are providing and what advice you are not providing
• limited advice is not lesser quality advice
• while processes can be used to help you provide limited advice, you need to use your expertise, skills, and professional judgement as an advice provider to deliver good-quality limited advice and comply with your obligations.

What does the future hold for Limited Advice?

In her final report, Michelle Levy makes a total of 21 recommendations designed to ultimately make advice more accessible. Largely these recommendations revolve around reducing the amount of complexity and the compliance burden, with the two ‘Headline Recommendations” being the scrapping of SOA, and a requirement to give ‘good advice’, which essentially would see the scrapping of the Safe Harbour provisions – one of the major barriers to limited advice.

The Report notes:

“The good advice duty will make it easier for financial advisers to exercise their expertise and professional judgement when providing advice to their clients. They will no longer feel obliged to follow the safe harbour steps regardless of the nature, scope, or content of the advice they are providing. They will be able to follow the process they consider will most effectively and efficiently allow them to comply with their obligation to provide good advice to their clients. This flexibility will also ensure that the good advice duty does not inhibit the provision of limited advice in the same manner as the current best interests duty”.

Recognising the issues with FASEA, Levy goes on to say:

“Advisers have told us the Code of Ethics, especially Standard 6, is also an impediment to the provision of limited advice for financial advisers. While the contents of the Code of Ethics are outside the scope of this Review, I do urge the Government to consider this issue as part of its review of the Code of Ethics.”^[13]

Financial Services Minister Stephen Jones has asked Treasury to consult on the Code in 2023, after the Government has considered its response to the Quality of Advice Review¹⁴.

Conclusion

Despite strong consumer demand and the exhortations and guidance of ASIC, many licensees are still choosing not to provide limited advice, for a combination of economic and risk management reasons. Many of the same licensees have said they would like to increase their provision of limited advice if these barriers could be overcome.

Should the QAR recommendations be accepted and implemented by the government, it is hoped this will go a long way to mitigating some of the financial and compliance challenges, with eyes now turned to the yet to be commenced FASEA Code review and the potential to remove perceived contradictions and inconsistencies.

To the extent that limited advice can overcome numerous consumer barriers to advice – not just cost – a more limited advice friendly regulatory regime would indeed be a game changer.

———–

References
[1] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[2] Ibid
[3] https://download.asic.gov.au/media/1343546/rep224.pdf
[4] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[5] https://www.moneyandlife.com.au/professionals/grow/improving-access-to-advice/
[6] https://www.moneymanagement.com.au/news/financial-planning/more-hnws-growing-unmet-advice-needs
[7] https://fsc.org.au/resources/2299-kpmg-the-cost-profile-of-australia-s-financial-advice-industry-final-research/file
[8] Ibid
[9] https://download.asic.gov.au/media/5243978/rep627-published-26-august-2019.pdf
[10] https://www.professionalplanner.com.au/2020/08/conservative-licensees-making-scaled-difficult-asic/
[11] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-325mr-asic-releases-guidance-and-examples-on-limited-advice/
[12] Ibid
[13] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[14] https://www.professionalplanner.com.au/2022/08/adviser-exam-to-be-included-in-education-consultation/

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