“Cookie-cutter” advice practices breach key obligations under the Corporations Act and the Code of Ethics, and are regularly penalised by ASIC, AFCA, and the FSCP.

Introduction

“Cookie-cutter” advice refers to generic, templated financial advice that is not tailored to an individual client’s circumstances. Because they are not personalised to a client’s ‘objectives, financial situation and needs’ (as required under S961B of the Corporations Act), such ‘one-size-fits-all’ recommendations often fail to meet the Best Interests Duty (BID) under law.

At a time when efficiency is an increasingly important focus for advisers, using templated processes and documents can be seen as a powerful enabler of time savings, and to the extent that such savings allow advisers to maintain downward pressure on their costs, advice clients can ultimately benefit from such a systemised approach. However, when streamlining and repetition comes at the expense truly tailored recommendations, the risk of inappropriate advice (which is non-compliant, contravenes Standard 5 of the Code of Ethics, and is potentially harmful) becomes real.

As recent enforcement actions by ASIC highlight, “cookie-cutter” advice remains an industry problem across various advice areas – from superannuation and investments to insurance – despite heightened regulatory scrutiny.

In this article, we will examine the nature of generic or “cookie cutter” advice, why it risks being non-compliant, and the consequences for advisers and clients. We will also provide actionable strategies to ensure advice is personalised, appropriate, and in the client’s best interests.

Cookie cutter advice in the news

Cookie cutter advice is not a new problem and has indeed been on the radar of regulators and AFCA for quite some time. As AFCA Lead Ombudsman Shail Singh told an audience in 2023:

 “We’ve seen batches of disputes where you see the same SOA for every single client. It’s hard to understand how that advice is tailored to that particular person.”^[1]

More recently, several high-profile generic advice cases have received widespread news coverage.

Generic advice case 1 – SMSF property ‘one-size-fits-all’ strategy

In April 2025, the Federal Court penalised an advice business $11 million after finding the firm’s advisers gave “cookie-cutter” advice to roll clients’ super into SMSFs and buy property through a related company^[2]

The Court found advice given by the firm was virtually identical for many clients and failed to consider each client’s individual circumstances or objectives. Not only did this breach BID, but it was also found to have been motivated by conflicted remuneration, with the firm paying over $130,000 in bonuses to three advisers in relation to client property purchases^[3].

The Court found the firm’s misconduct was deliberate and sustained over years – resulting in poor outcomes for consumers. Compounding the problem, the firm had earlier failed to comply with an AFCA compensation order – triggering the new Compensation Scheme of Last Resort (CSLR) to pay out claims and leading to ASIC automatically cancelling their license in late 2024.

The significant financial penalty handed to the firm in this case is a timely reminder of how seriously regulators view one size fits all advice. To the extent that the SMSF – property nexus has already been seen to be problematic in an advice context, this case likely played a part in ASIC’s decision to further intensify their scrutiny of the sector, with them naming inappropriate super rollovers into conflicted SMSF property models as an enforcement priority going forward^[4].

Generic advice case 2 – Insurance advice lacking personalisation

Making the news in March 2025 was ASIC’s investigation – and subsequent banning – of a Queensland adviser.

ASIC’s review of his advice found he recommended life insurance cover that included mortgages his clients did not even have^[5]. According to ASIC, the adviser in question was relying on a generic formula (e.g. “cover all clients for a mortgage”) without tailoring to actual client debt levels. ASIC found he (the adviser) consistently failed to act in clients’ best interests or provide appropriate advice. His tendency to have clients sign documents (like insurance applications and ongoing service agreements) before giving them the Statement of Advice was, according to ASIC, further evidence of a generic, ‘rubber-stamp process’. In 2025, ASIC banned him from the industry for five years.

In this case, using a standard insurance recommendation for all clients breached his BID obligations by providing advice that did not take into a client’s specific circumstances and needs, and was therefore not appropriate. Regulators considered this so serious that the adviser was deemed “not fit and proper” to advise.

Generic advice case 3 – Superannuation contribution errors

Generic advice in the superannuation sector was in the news again in 2025 when a series of Financial Services and Credit Panel (FSCP) actions from late 2024 were made public.

ASIC’s involvement in this case started with them identifying multiple instances – or a theme – from breach reports submitted by licensees in 2024. These reports, centering on poor advice in relation to superannuation contributions, highlighted a pattern of clients exceeding their superannuation contribution caps – or untaxed plan caps – resulting in them incurring additional tax^[6].

Believing these breaches were potentially flagging a systemic problem where advisers were not doing the necessary personalised calculations – but instead using a generic ‘one-size-fits-all approach – ASIC convened several FSCP hearings in the second half of 2024. The FSCP found those advisers likely failed the Best Interest Duty and Code of Ethics by not being diligent about client specifics.

For example, in one determination the FSCP detailed that an adviser told a client to make a $110,000 non-concessional super contribution for 2021–22 and $301,000 for 2022–23 – ignoring that the client only had $124 of cap space left due to a prior bring-forward arrangement^[7]. Following this generic advice, the client inadvertently exceeded her cap by over $109,000 and faced a 47% tax on the excess, plus had to withdraw over $312k from her super the next year.

As reported in 2025, the outcomes of those hearings so far include:

• two advisers receiving reprimands,
• one adviser being ordered to have an independent expert audit his next 10 advice files, and
• another being directed to undertake additional training.

These cases show that even without malicious intent, a ‘templated’ (cookie cutter) approach to technical areas like superannuation (e.g. assuming every client can contribute a set maximum amount) can badly backfire. Advisers must identify each client’s personal circumstances – like their remaining contribution caps – to ensure that strategy is genuinely and specifically in that client’s best interests.

Generic advice case 4: Unbalanced “one-size” portfolios and in-house products

A raft of AFCA complaints in recent years has highlighted situations where firms put clients into nearly identical portfolios or in-house products, disregarding their suitability.

Undoubtedly the most high-profile example of this in recent years is the actions of a now collapsed advisory firm. This case – so egregious in nature and enormous in scale – has had a direct financial impact on every individual financial adviser, requiring them to pay a much higher CSLR Levy, than would otherwise have been the case.

The firm was found to have advised many clients to heavily invest in its in-house US property fund, regardless of their individual risk profiles. In over 50 AFCA determinations on associated cases – the vast majority of which were resolved in the clients’ favour – the common themes identified were (1) that the advice failed to comply with the Best Interests Duty, (2) was inappropriate to the clients, and (3) did not prioritise the clients’ interests ahead of their own.

For example, as noted by the FAAA in their Senate Committee submission^[8], the firm employed “an investment committee that made investment decisions on behalf of individual clients, effectively pushing clients to invest in in-house products, independent of their goals, objectives and personal circumstances.”

Many of those clients ended up over-concentrated in one illiquid asset (the US property fund) and suffered significant losses.

Recent modelling by the FAAA has estimated the future costs of compensation to over 800 affected clients could top $103 million, based on an average payout of $122,000 per client^[9].

Regulatory responses: enforcement, discipline and complaints

ASIC has made clear that cookie-cutter advice, especially when combined with conflicts of interest or poor outcomes, will attract strong enforcement action. The first case detailed above resulted in one of the largest penalties against an advice firm to date – over $11 million for “inappropriate ‘cookie cutter’ advice” and conflicted bonus payments.

The FSCP is now tackling many of the cases of substandard advice brought to light through the new breach reporting regime. Sanctions the FSCP can utilise include formal reprimands, mandatory professional development, or requiring an audit of an adviser’s work. While an adverse FSCP outcome might seem lighter touch than a ban, it is still extremely serious, being essentially a public warning, putting advisers (and their licensees) on notice to lift their game or face harsher consequences.

From an AFCA perspective, their reports and determinations demonstrate that clients have been largely successful in claims where an adviser’s recommendation was found to have not been appropriately tailored. Breaches of the Best Interest Duty and “cookie-cutter” approaches often lead AFCA to find the advice was unsuitable, requiring the adviser or their firm to compensate the client. Advisers and licensees thus end up ultimately footing the bill for losses that cookie-cutter advice causes – whether those losses be poor investment performance, unwarranted fees, or tax penalties incurred by the client.

Additionally, if a firm fails to pay an amount AFCA has awarded to a client as a result of a determination in their favour, the CSLR will pay the client and the firm’s AFSL will be automatically cancelled (as happened in the Case Study 1).

In other words, advisers who deliver generic, non-compliant advice not only risk legal action – and reputational damage – they can also lose their ability to practice if their advice leads to unpaid client redress.

Practical tips to ensure personalised, compliant advice

Although generic advice can often be inadvertent, rather than malicious, the legal and reputational consequences can still be severe, making it crucial for advisers to protect themselves and better serve clients by implementing strong safeguards against crossing the line. Below are some practical steps and best practices that can help ensure advice is tailored, high-quality, and in line with regulatory expectations:

1. Know Your Client (KYC) and document that knowledge

Go beyond the basic fact-find. Make reasonable inquiries into each client’s complete personal circumstances (income, debts, goals, risk tolerance, family situation, etc.) and document these. A thorough understanding of the client is the foundation for tailored advice. ASIC explicitly reminds advisers that they must identify relevant personal circumstances – for example, a client’s superannuation contribution history and caps – before making recommendations, so that the advice is in the client’s best interest. Ensure your knowledge of the client is up to date – over the course of a year a client may change jobs, address, or relationship status, all of which can render previous advice inappropriate.

2. Your investment philosophy does not excuse a ‘one-size-fits-all’ strategy

Be wary of any pre-determined course of action that you find yourself recommending to everyone. Not every client should start an SMSF, not everyone should buy an investment property, and not everyone should have the exact same portfolio or insurance coverage. If your investment philosophy is 100% passive – grounded in your passionate beliefs about indexing – that doesn’t mean such an approach is suitable for all individuals (in which case it is better to not take a client on, rather than force them into your blanket approach). If you catch yourself giving the same advice to most clients, pause and ask yourself whether it’s because it truly fits each one individually, or is actually because of your own bias or convenience. Informed consent – in itself – will not protect against regulatory action if advice is found to be generic. A good habit is to explicitly write in the advice document: “Why this advice is suitable for [Client Name]” and answer that by referencing their personal goals and circumstances. This not only helps the client understand the advice, but it also forces you to confirm the advice makes sense for them specifically.

3. When using templates, customise and review

While using templated SOA sections or standardised modelling can improve efficiency, never rely on a template without heavy customisation. Every boilerplate statement in an SOA should be checked against the client’s details for relevance and accuracy. Remove or edit any generic text that isn’t applicable to the client at hand. It’s especially crucial to get basic client details right – something as simple as having the wrong name or wrong personal info in an SOA (don’t laugh – it happens) is a glaring sign of cookie-cutter advice and will undermine client trust immediately. Implement a peer review or compliance check for each advice document: another set of eyes (a colleague or supervisor) should look for any signs that the advice isn’t adequately personalised (e.g. goals section doesn’t reflect the client’s real goals, risk profile on file doesn’t match the recommended asset allocation, etc.). Some firms conduct pre-vet audits of a sample of advice files – a good practice to catch generic advice issues before they reach the client. In short, treat templates as a starting point, not a finished product, and painstakingly tailor the final output to the individual client.

4. Take risk profiling seriously and be aware of changing circumstances

It sounds so obvious as to be unnecessary, but advice being mismatched to individual clients is still a significant issue. For the majority of advisers who do the right thing, there is still a danger of mismatches occurring where there is a disconnect between what the client’s circumstances are understood to be, and what they actually are. Such discrepancies can occur where an adviser isn’t made aware by the client of major changes in their life. Another, potentially more serious, scenario is where a risk profiling process – or the way that process is applied by an individual adviser – is insufficiently robust, resulting in clients taking on inappropriate amounts of risk (whether that be too little or too much). Always ensure there is a clear and defensible match between a client’s profile and the recommendations made.

5. Stay up to date with rules, regulations, and product features

Some instances of generic advice failings come from advisers not staying fully up-to-date or diligent on technical matters – for example, superannuation contribution limits, Centrelink rules, or product terms. To give appropriate advice, advisers need current knowledge. Regularly refresh your training (CPD) on areas you advise in. Leverage your BDM relationships and the technical support and resources offered by many fund managers and insurers. If you’re unsure about something (e.g., how the three-year bring-forward cap works in a specific scenario), consult a specialist or do further research. If you are a self-licensed adviser, tap into your peer network or use an advice community to crowdsource an answer to your question.

6. Implement robust compliance and file-keeping systems

Smaller practitioners, in particular, should ensure they have compliance systems somewhat akin to larger licensees. This includes documenting the rationale for advice, keeping file notes of conversations (to capture personal nuances), and having a process to check the quality of advice documents. Consider using checklists that force you to address client-specific factors (e.g., “Have I considered the client’s existing insurances? their tax bracket? etc.”). If you use standardised text, maintain a version control or note when you last updated those sections for regulatory changes. Given that ASIC has introduced more intensive breach reporting obligations (licensees must report even minor advice compliance breaches now), having an internal compliance review can catch issues early and allow you to remediate them. Also, if a mistake is discovered, act quickly to remediate the client – this can mitigate regulatory penalties. A culture of compliance and continuous improvement in advice processes is the best antidote to unintentional cookie-cutter outcomes.

7. Focus on client understanding and deeper engagement

Personalised advice isn’t just about numbers and financial strategy – it’s also about ensuring the client genuinely understands and agrees that the plan suits them. Take the time to explain why the advice makes sense for them personally, invite questions, and gauge their comfort. Sometimes a client will only be forthcoming about their circumstances and plans for the future during a deeper conversation. By fostering open dialogue and taking the time to genuinely connect with a client – rather than treating them as a transaction – you will build trust and be more equipped to truly tailor your advice.

By implementing these safeguards, advisers can ensure they deliver high-quality, bespoke advice that stands up to regulatory scrutiny and fulfills the spirit of the Best Interest Duty. The extra effort to personalise each recommendation is ultimately an investment in the adviser’s own practice – it leads to better client outcomes, fewer compliance headaches, and a stronger reputation in the long run.

Conclusion

“Cookie cutter” or generic financial advice – intentional or otherwise – remains problematic, and recent action by regulators, courts, and AFCA has demonstrated their willingness to identify and punish advisers for advice that appears copied and pasted or in some way fails to account for a client’s individual situation. At a time when templated documents and processes are seen as a key enabler of practice efficiencies, advisers must remain vigilant.

The lessons from recent cases –including multi-million-dollar penalties, licence cancellations, and disciplinary orders – are clear warnings that every client must be treated as unique and placed at the centre of the advice process.

The cost of failing to do so is measured not just in fines or bans, but in real consumer harm – something that genuinely client-centric advisers seek to avoid at all costs. By recommitting to personalised, diligent advice and using robust compliance practices, advisers can both meet their legal obligations and deliver better outcomes for clients. In the end, tailoring advice is not just about avoiding penalties; it is the cornerstone of building trust, achieving client goals, and upholding the integrity of the financial advice profession.

———–

References:
[1] https://www.professionalplanner.com.au/2023/06/simpler-dealing-with-banks-than-smaller-licensees/#:~:text=in%20planning%20in%202008%2C%20I,%E2%80%9D
[2] https://www.ifa.com.au/news/35635-cookie-cutter-advice-lands-financial-firm-11m-penalty#:~:text=According%20to%20an%20ASIC%20statement%2C,entity%2C%20Equiti%20Property%20Pty%20Ltd
[3] https://www.asic.gov.au/about-asic/news-centre/find-a-media-release/2025-releases/25-063mr-financial-services-provider-penalised-11-million-over-cookie-cutter-advice-and-conflicted-bonus-payments/#:~:text=DOD%20Bookkeeping%20Pty%20Ltd%20,provided%20inappropriate%20%E2%80%9Ccookie%20cutter%E2%80%9D%20advice
[4] https://www.professionalplanner.com.au/2025/04/court-hands-down-11m-penalty-for-conflicted-smsf-property-advice/#:~:text=The%20ruling%20comes%20as%20ASIC,of%20the%20regulator%E2%80%99s%20enforcement%20priorities
[5] https://riskinfo.com.au/news/2025/03/28/adviser-banned-for-five-years-2/#:~:text=ASIC%20has%20banned%20financial%20adviser,clients%20had%20not%20yet%20obtained
[6] https://www.asic.gov.au/about-asic/news-centre/news-items/asic-targets-financial-advisers-providing-poor-superannuation-advice-through-the-financial-services-and-credit-panel/#:~:text=ASIC%20convened%20multiple%20sitting%20panels,in%20clients%20paying%20more%20tax
[7] https://www.ifa.com.au/news/35656-fscp-reprimands-another-adviser-over-super-contribution-errors#:~:text=In%20its%20determination%2C%20the%20panel,total%29%20for%20FY22%E2%80%9323
[8] https://faaa.au/wp-content/uploads/2024/12/12.FAAA_.pdf
[9] https://www.moneymanagement.com.au/news/financial-planning/faaa-expects-dixon-push-cslr-levy-past-100m-fy26-27#:~:text=The%20remainder%20they%20will%20be,which%20represents%20$12%2C500%20per%20adviser

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Effective risk profiling is a foundational element of compliant advice.

Introduction

The shockwaves that followed the announcement of ‘Liberation Day’ tariffs by Donald Trump brought an abrupt and unsettling end to a three-year bull market. Major global indices plummeted by 10% or more from recent highs – with the NASDAQ tumbling by over 20% – leaving many investors rattled.

Amid sensationalist coverage warning of market carnage, panic and uncertainty took hold, especially among retirees watching their portfolio balances rapidly shrink. These events have brought risk profiling sharply back into the spotlight, revealing in many cases a clear disconnect between clients’ real tolerance for risk and the equity exposure they were advised to take on.

Risk profiling is not just a best practice, it’s a legal and ethical obligation. Embedded in legislation, referenced in ASIC Regulatory Guides, and reinforced by the Code of Ethics, it is central to the “know your client” principle and the delivery of compliant, appropriate advice. Yet, despite its critical importance, risk profiling remains one of the most common areas of adviser failure — and a frequent source of AFCA rulings in favour of clients. For advisers, poor profiling exposes them to financial loss, disciplinary action, and reputational harm.

In this article, we explore adviser obligations around risk profiling, the reasons it often goes wrong, the consequences when it does, and how advisers can strengthen their approach to better protect their clients — and themselves.

Risk profiling – what the law says

At the heart of compliant financial advice lies the Best Interest Duty, set out in section 961B of the Corporations Act, and requiring advisers to act in the best interests of their clients when providing personal advice. ASIC’s Regulatory Guide 175 (RG 175) offers more detailed guidance on how advisers can meet this obligation, specifically highlighting the importance of understanding a client’s risk tolerance.

In paragraph 173 of RG 175, ASIC states:

“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]

Further, in paragraph 227 of the same Guide, ASIC reinforces the relevance of risk profiling when investment products are involved, stating that ‘relevant circumstances’ include:

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

Matching a client’s risk profile to an appropriate solution is not only required by law — it’s also embedded in the Code of Ethics, particularly Standard 9, which governs how products and advice are delivered.

Standard 9 stipulates that advisers must:

“Offer all advice and products in good faith and with competence, ensuring they are neither misleading nor deceptive.”^[2]

The reference to competence is important here. Effectively this standard requires advisers to genuinely understand the products they recommend – merely relying on the fact that that product is on their Approved Product List (APL) is not enough.

Misclassification of products can also occur when the detailed investment parameters of a product are not fully understood. For example, an ostensibly defensive ‘income generating product’ may have underlying guidelines that allow it to behave aggressively in certain circumstances, which could render it inappropriate for some clients.

Of course compliant advice doesn’t end with matching a product to the client’s profile. A third – and critical – step is ensuring the client understands the risks of any recommendation. This is reinforced by the Code’s requirement that:

“You must be satisfied that the client understands your advice, and the benefits, costs, and risks of the financial products that you recommend — and you must have reasonable grounds to be satisfied.”^[3]

In summary, compliance with obligations around client risk profiles can be seen as a three-step process:

1. Accurately understand and document the client’s risk profile
2. Match that profile with a product or strategy that is genuinely aligned
3. Ensure the client fully understands the risks of the recommended solution.

Each step is fundamental — and increasingly, each is being scrutinised by regulators and complaint bodies alike.

And yet…

With AFCA’s own data suggesting around two thirds of their determinations relating to ‘Know Your Client’ failures are found in favour of the complainant^[4], there is a clear incentive for advisers to prioritise this aspect of their advice process.

And yet as straightforward as the obligations around risk profiling are, it is still a process that features extensively in AFCA complaints.

In a 2021 study of over 1,000 advice complaints, risk management consultancy Fourth Line estimated around 18% related to ‘Know Your Client’ failings – with poor risk profiling practices a major contributor^[5].

(As alarmingly high as this figure may seem, it is still a remarkable improvement on the 2015 data referenced in a research paper by Dr Kathryn Hunt^[6], which suggested up to 70% of advice complaints escalated to The Financial Ombudsman Service – AFCA’s predecessor – were because of ‘inadequate or incorrect risk profiling of clients’.)

So why does it still go wrong?

While ASIC and the Code of Ethics are clear around the importance of risk profiling, neither stipulates a specific process for advisers to follow. As a result, across the market, there is a wide variance in the processes used by licensees and individual advisers in assessing a client’s attitude towards, and tolerance for, financial risk.

These processes can be problematic for a number of reasons:

• They are treated more as a tick a box client exercise (a ‘safe harbour’) involving little rigour or explanation to clients, or
• The tools and processes themselves can have flaws, including overly simplistic scoring, poorly framed questions, or biases that pigeonhole clients inaccurately.

One of the most common tools used by advisers in assessing risk profile is the Risk Tolerance Questionnaire (RTQ), and there is an extensive body of research identifying their common deficiencies. One high profile study was conducted by US researchers Carrie Pan and Meir Statman^[7], who 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 on 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 bring 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.

Advising couples can also be challenging

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 found to only be risk profiling one member of the couple, potentially exposing the other to inappropriately high (or low) levels of risk. Just over half of advisers (53%) surveyed were found to profile couples jointly.^[8]

ASIC have been on this case for a long time

As far back as 2013, ASIC, in Report 362^[9], investigated 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.”

You can’t rely on TMDs either

Introduced as part of the Design and Distribution Obligation legislation, the Target Market Determination (TMD) was designed to be an important tool for achieving alignment between a product solution and a client’s risk profile.

But advisers relying heavily on TMDs as a proxy for their own research should be aware of the growing number of product providers subject to ASIC action in response to ‘inappropriate risk profiles’.

As detailed in ASIC Report 762^[10], poor risk profiling was a factor in 21 of the first 26 Stop Order actions taken against issuers of investment products under the DDO laws.

Specific inadequacies found by ASIC included relying on measures of risk that were too narrow, understating the true level of risk in the product, and taking too narrow a view of performance.

When it goes wrong
As touched on above, the misalignment between recommended product solutions and client risk profile is a common trigger for advice disputes, many of which are escalated to AFCA.

AFCA’s approach to resolving such disputes is to first assess the appropriateness of the advice, which involves a thorough investigation of the processes used to assess risk, align to a product, and then the communication behind that recommendation. (It goes without saying that comprehensive record keeping of these processes are as critical as the processes themselves.)

Mini case studies – AFCA determinations involving risk profiling

There are many ways problematic risk profiling has resulted in AFCA determinations against advisers.

In one case, a complainant successfully argued that the questionnaire used by the adviser was too complicated, and they were unable to understand some of the questions. 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”.^[11]

In another case (AFCA Determination 606592), a complainant successfully argued that the results of his risk profiling – which identified him as a conservative investor – was ignored by the adviser who invested his assets in a 60/40 mix rather than a 70/30 mix.

In a third case where AFCA ruled in favour of the complainant (Determination 734237), the adviser was found to have profiled the client’s attitude towards risk, but not their financial capacity for risk, (their financial ability to absorb losses), therefore effectively only doing half the job required under law.

In the event they find in favour of the client, AFCA will then determine the amount of loss, using what has been described as a counterfactual, or ‘but-for’ approach. Under this approach, AFCA will seek to quantify what investment outcome the client would have achieved if they had received appropriate advice (including products aligned to risk profiles).

Whilst this methodology is not intended to cover scenarios where one appropriately aligned product outperforms an alternative – for example a Vanguard indexed ETF outperformed a Blackrock indexed ETF – that hasn’t stopped some observers complaining that it theoretically creates a zero-risk environment for clients.

Infocus Wealth Management’s Darren Steinhardt raised the issue on an industry webinar in November 2024, railing against the ability for a client that “might have actually made some money” to receive compensation because different advice could have received more. “To me that sounds like a zero-cost option”, he said^[12].

Bracing for a client backlash

Having started this article by referencing the tariff induced market volatility, it seems appropriate to close the loop by looking at what advisers themselves think.

A global survey by Oxford Risk found more than three quarters of wealth managers and advisers expect increased regulation on risk profiling.

Their survey results^[13], published in 2023, suggest that Australian advisers anticipate both a surge in compensation claims from clients due to failure to comprehend risk profiling processes, and expect tougher regulation to follow as a result.

Speaking in 2023 (after the horrors of 2020 and 2022) a spokesperson for Oxford Risk pointed out that many clients will “inevitably be disappointed with their returns”.

She went on to say, “It is worrying however that so many wealth managers fear they will face compensation claims over their advice and particularly worrying that it will focus on a poor understanding of client risk profiles,” she added^[14].

Furthermore, the study by Oxford revealed that a substantial 68 per cent of wealth managers were occasionally caught off guard by their clients’ investment decisions, with the most frequent mistakes being evaluating returns over a short period (36 per cent).

Other common mistakes included impulsive decisions to the detriment of short-term plans (35 per cent) and buying high and selling low (34 per cent).

Sound familiar?

Protecting clients and yourself

Effective risk profiling is both an important consumer protection mechanism and a compliance cornerstone. In the event of any client complaints, the rigour of your profiling process and your documented reasoning can be a vital defence.

A basic checklist to support this could include:

• Is the client’s risk profile up to date and clearly documented?
• Is there evidence of discussion and understanding?
• Is the recommended strategy clearly aligned with the profile?
• Was the client’s profile revisited after major changes?

Advisers could also consider going beyond the basic questionnaire approach and adopt a more rigorous and contemporary process capable of allowing for emotional and behavioural biases. Such approaches include psychometric profiling and ‘revealed preference’ methodologies, both of which are now widely available.

For those looking to go even further, methods with widespread academic support include

• Understanding the investment behaviour of relatives, especially parents (a technique called financial anamnesis)
• The recording – by the client – of investment transactions in an investment diary, and
• Understand the client’s investment history in the context of the prevailing market environment. How did they behave in 2020, in 2022, in April 2025?

Conclusion

Risk profiling is more than a regulatory checkbox — it is a cornerstone of ethical, compliant, and effective financial advice. Against a backdrop of heightened market volatility and growing client expectations, the flaws in many traditional approaches are becoming harder to ignore. ASIC, AFCA, and the broader regulatory framework are increasingly focused on ensuring that advisers not only assess client risk accurately, but also align their advice appropriately and communicate the rationale clearly. Despite this, poor risk profiling remains a persistent cause of client disputes and compensation claims.

The takeaway is clear: advisers must move beyond simplistic, one-size-fits-all tools and embrace more rigorous, transparent, and client-specific processes. This includes profiling both members of a couple, understanding risk attitudes across financial goals, and staying alert to the evolving emotional and behavioural drivers behind client decisions.

Getting risk profiling right protects more than your clients’ portfolios — it protects your business, your reputation, and your peace of mind. In an environment where regulators are sharpening their scrutiny and clients are becoming more litigious, now is the time to ensure your risk profiling process is up to standard — before you find yourself on the defensive.

———–

References:
[1] https://download.asic.gov.au/media/pqpe0hwc/rg175-published-21-november-2024-20241219.pdf
[2] https://www.legislation.gov.au/F2019L00117/latest/text
[3] https://www.assuredsupport.com.au/articles/standard-5-best-interests-and-appropriateness/
[4] https://www.moneymanagement.com.au/news/financial-planning/less-one-three-chance-defending-know-your-client-complaint
[5] Ibid
[6] https://www.griffith.edu.au/__data/assets/pdf_file/0027/205749/investment-risk-profiling-hunt.pdf
[7] https://www.researchgate.net/publication/228479814_Beyond_risk_tolerance_regret_overconfidence_personality_and_other_investor_characteristics
[8] https://www.moneymanagement.com.au/news/financial-planning/risk-failing-consider-couples-risk-tolerance
[9] https://download.asic.gov.au/media/1344368/rep362-published-31-July-2013.pdf
[10] https://download.asic.gov.au/media/llbdpf5b/rep762-published-03-may-2023.pdf
[11] https://www.moneymanagement.com.au/news/financial-planning/less-one-three-chance-defending-know-your-client-complaint
[12] https://www.ifa.com.au/news/35562-afca-defends-counterfactual-approach-to-advice-complaints
[13] https://www.ifa.com.au/news/32538-advisers-brace-for-client-backlash-on-risk-profiling
[14] Ibid

The post Is your approach to client risk profiling putting you at risk? appeared first on AdviserVoice.

Identify, avoid, and manage both obvious and hidden conflicts, including those involving remuneration structures, related parties, product selection, and wholesale client classification.

Introduction

In late 2024, ASIC announced^[1] it would be consulting with licensees and other stakeholders as part of its review and update of several Regulatory Guides, including RG 181- Licensing: Managing conflicts of interest.

In a statement, ASIC said:

“In 2025, ASIC will consult with stakeholders to update some key RGs, taking into account law reform, insights from case law about the provisions and other relevant issues.”^[2]

Managing conflicts of interest appropriately remains one of the most enduring – and challenging – aspects of delivering compliant financial advice. ASIC’s review comes at a time when the Australian Financial Complaints Authority (AFCA) has called out conflicts of interest of one of two issues it has flagged for increased scrutiny^[3]. The review therefore presents a timely opportunity for advisers and licensees to revisit their current frameworks, embed stronger conflict governance practices, and align with emerging regulatory expectations.

Conflicts of interest – what’s the big deal?

Imagine it’s the holiday season – Christmas or Easter – and you are in the middle of a long drive to your destination. Your fuel warning light comes on and so you go to your navigation app for ‘nearest fuel’.

Let’s say the provider of that app had recently done a deal with a major oil company, and part of that deal was to prioritise its own petrol stations. Unbeknown to you, the app automatically identifies the nearest of its own outlets and starts navigating you towards it. You get to the petrol station, fill up, and get back on your way.

So what’s the problem?

While you ultimately got the product you needed (petrol), it’s possible that:

• That petrol station wasn’t literally the closest, meaning you used extra fuel.
• It wasn’t necessarily the one that required the least deviation from your direction of travel, possibly costing you time.
• It wasn’t necessarily the one with the cheapest petrol or the best facilities.

You may have got an outcome you were happy with, but it was an outcome that prioritised the interests of the navigation app and the oil company over your own.

Financial advice is no different.

Putting your clients in a quality product from a respected provider isn’t itself enough if there are forces – financial or otherwise –  that incentivise you to recommend that product over another. While on a prima facie basis a client may have received a good outcome, there is an underlying conflict of interest, which if unmanaged or undisclosed – or which the adviser isn’t even conscious of – can represent a significant risk to consumer outcomes and adviser integrity.

The enduring compliance challenge

Conflicts of interest have long been inherent in many financial advice business models. Prior to the Future of Financial Advice (FOFA) reforms of 2013, commissions, shelf space fees, volume-based bonuses, referral fees and generous ‘soft dollar’ benefits were common across the industry, used (legally) by providers to subtly or overtly influence adviser behaviour.

On July 1^st, 2013, many of these payments were outlawed^[4], with Division 4 of Part 7.7A of the Corporations Act 2001 prohibiting:

• commission-based payments tied to product sales
• volume-based bonuses from product providers
• certain soft dollar benefits.

Notable exemptions to these requirements include those for general and/or intra-fund advice, the provision of education, and life insurance commissions within the Life Insurance Framework (LIF) caps.

But whilst many of the most egregious examples of conflict were outlawed, the evolving advice landscape – of which platforms and managed accounts are now dominant features – means that potential conflicts of interest remain ever-present. Examples of scenarios with the potential for conflicts of interest to arise include:

• Life Insurance Commissions (Under LIF) – can still be seen to incentivise product sales over advice quality, especially in the context of policy switching or adding benefits.
• Asset based fees can be conflicted if they encourage advisers to recommend funds retention rather than paying down debt or withdrawals for lifestyle or non-investment purposes.
• Educational conferences can still meet soft dollar limits but subtly encourage product support.
• Licensee or platform arrangements that indirectly reward volume and which can influence APLs.
• Payments for intra-fund advice which always favours staying with that fund.
• Payments/bonuses based on retention metrics.

These and many other payments have the potential to shape adviser behaviour if not transparently managed.

Not all conflicts are obvious

Not all conflicts of interest relate directly to financial payments. One obvious example is the certification of sophisticated investors. ASIC has raised concerns about the current process for classifying investors as “sophisticated,” highlighting potential conflicts of interest when licensees make these determinations^[5].The regulator noted that the existing tests under sections 708(10) and 761GA of the Corporations Act rely heavily on subjective assessments by AFSLs, which may benefit from categorising clients as wholesale investors, thereby exempting them from certain consumer protections.

Another contemporary example relates to making changes to investments on behalf of clients, in response to market conditions. If some clients had the changes to their portfolio made ahead of other clients, that could potentially see them benefit from more favourable unit pricing. RG 181 specifically requires licensees to treat clients equitably, or rather ‘not advance one client’s interests unfairly ahead of other clients’ interests’^[6]. This requirement has undoubtedly contributed to the soaring popularity of Managed Accounts – where all client changes are made at the same time – with advisers.

Vertical integration – the biggest conflict of all?

Vertical integration – where the one business provides products and advice – was often regarded as being limited to large institutions, and as such was expected to disappear as an issue as these institutions began to exit advice.

But as two recent high-profile cases show, vertical integration is alive and well, and extremely problematic for consumers and the advice profession as a whole.

Case Study 1: First Guardian^[7]

In early 2025, ASIC applied to the Federal Court for the appointment of liquidators to Falcon Capital, the responsible entity for the First Guardian Master Fund, and for orders directing the liquidators to wind up the First Guardian fund. ASIC’s action came after a range of issues with the First Guardian fund had come to light, including:

• Substantial payments (over $23 million) being made from First Guardian’s assets to entities purportedly providing marketing, contrary to representations made to investors.
• The fund had invested in entities in which a director of the responsible entity had an association with or financial interest – conflicts which were not recognised or managed.

Case Study 2: Dixon Advisory

Dixon Advisory was a financial advice firm that also operated its own investment products — particularly the US Masters Residential Property Fund (URF) and related vehicles. Advisers at Dixon frequently:

• Recommended clients invest in in-house funds.
• Provided advice to SMSF trustees to direct assets into these funds.
• Failed to clearly disclose the firm’s financial interest in those products.

This created a conflict between the adviser’s obligation to act in the client’s best interests and the firm’s interest in directing funds to its own investments.

According to ASIC^[8] Dixon clients, at different times, accounted for 80 per cent of the investment in the property fund, which came to grief due to falling US property values (especially in New Jersey and New York), currency risk, and poor liquidity and governance. A senate committee heard^[9] how AFCA’s first determination related to the case involved a client who was “invested between 54 per cent and 75 per cent in related party product across a seven-year period”.

Ultimately, investors in the URF lost hundreds of millions of dollars, an outcome advisers today are indirectly picking up the tab for, in the form of an increased CLSR levy.

What RG 181 currently says about managing conflicts of interest

G 181 sets out the obligations and expectations for AFSL licensees in managing conflicts of interest^[10]. Originally issued in August 2004, the guide seeks to promote fairness, professionalism, and informed decision-making across the financial advice industry.

The central requirement is for licensees to maintain adequate arrangements to manage conflicts of interest that may arise in the course of providing financial services. This includes conflicts between clients and licensees (or their representatives), and among different clients.

ASIC defines a conflict of interest as a situation where the interests of a licensee or its representative diverge from those of the client. These may be actual, apparent, or potential^[11].

RG 181 emphasises three key mechanisms for managing conflicts:

1. Controlling conflicts – by identifying, assessing, and implementing responses (e.g. reallocating clients to different advisers, imposing internal restrictions, or disciplinary measures).
2. Avoiding conflicts – particularly where the conflict cannot be adequately controlled or disclosed without compromising service quality.
3. Disclosing conflicts – providing timely, prominent, specific, and meaningful disclosures to allow clients to make informed decisions.

The guide also sets out expectations around governance and implementation, including that:

• Conflicts management policies must be tailored to the nature and complexity of the business.
• Senior management must endorse and oversee the implementation.
• Monitoring and compliance must be active and documented.
• Remuneration structures must not create unmanageable or undisclosed conflicts.

ASIC expects licensees to retain records for at least seven years documenting conflicts, actions taken, and disclosures made. They are also urged to keep sample scripts and written disclosures to demonstrate compliance.

Finally, RG 181 makes it clear that the conflicts management obligation is not limited to retail clients. It applies equally to wholesale clients and across all financial services — whether advice, dealing, or operating a managed investment scheme.

Disclosure is not enough

ASIC makes clear in RG 181 that mere disclosure of a conflict will not be considered sufficient in most cases, a point recently reinforced by AFCA Senior Ombudsman Alex Sidoti^[12].

Speaking at a conference in late 2024, Sidoti told the audience:

“We’ve been looking specifically at the Conflicts Priority Rule, which is that rule that advisers have to give advice that prioritises the interests of the client over those of the financial firm or a related party of the financial firm.
A financial firm has to prioritise the best interests of the client over the interests of the financial firm or a related entity of the financial firm. So if a financial firm is recommending a product to its clients that it gets any benefit from, or that a related party of it gets a benefit from, it needs to really show that it’s prioritising the client’s best interest.
Mere disclosure is not enough.”

Smaller licensees are more likely to underestimate conflicts

Emphasising the extent to which smaller licensees maybe more at risk of non-compliance, a 2023 survey^[13] by financial services law firm Holley Nethercote found a direct relationship between the size of a licensee and their likelihood to admitting to having conflicts of interest.

Their ‘Compliance Trends Survey’ found the smaller the licensee, the less likely it was to perceive having conflicts of interest, with 77 per cent of licensees with under five representatives saying they had none.

What the RG181 review might address

ASIC has confirmed that the consultation process on RG181 will begin in Q3 2025, with revised guidance expected in early 2026^[14]. The review will likely focus on ensuring the guide reflects modern practices and legal expectations, which may include:

• clearer obligations around identifying and documenting conflicts
• improved standards for disclosure and informed consent
• stronger governance frameworks for managing structural and commercial incentives, and
• guidance on how licensees should monitor and supervise advisers

Importantly, the review will likely address the ‘inherent conflict’ in self-assessing wholesale (sophisticated) clients.

Preparing for possible changes

In anticipation of potential changes – and as a timely check on existing processes – advisers should audit their practices now for the following types of common conflicts:

1. Product recommendations: does your advice disproportionately favour products that generate revenue for your licensee or firm? Are you using in-house platforms or products without offering clear comparative analysis?
2. Remuneration and bonuses: do any of your remuneration structures (including KPI-linked bonuses) incentivise certain product choices or discourage holistic advice?
3. Referral arrangements: are your referrals to related businesses (mortgage brokers, accountants, insurance brokers) adequately disclosed and free from coercion?
4. Wholesale client classification: are you correctly applying the sophisticated investor test? Is your process robust, and are clients being properly informed of the rights they waive?

Building a conflict governance framework

To align with the anticipated regulatory updates, licensees and advisers can take several proactive steps:

• Implement a detailed Conflicts Register that is actively maintained and includes decisions and rationale
• Conduct staff training on identifying both structural and behavioural conflicts
• Embed compliance into workflows with prompts for disclosure, conflict recording, and third-party product comparisons
• Review fee and incentive structures to ensure they do not unduly influence advice outcomes.

In summary

Managing conflicts effectively isn’t just a compliance requirement – it’s a consumer protection imperative. Poor conflict management can erode consumer trust, create client harm, and result in disciplinary action against licensees and individual advisers. In a sector where trust is fundamental, transparency around conflicts is a critical factor in maintaining long-term relationships and delivering genuine value. Even more challenging for advisers is that not all conflicts are obvious or apparent.

The upcoming review of RG181 offers advisers a chance to test and possibly reset their approach to managing conflicts. By proactively identifying, managing and disclosing conflicts, advisers not only remain compliant, but also enhance client outcomes and position their businesses – and the advice profession as a whole – for long-term trust and success.

———–

References:
[1] https://www.moneymanagement.com.au/news/financial-planning/licensees-conflict-interest-under-asic-gaze
[2] Ibid.
[3] https://www.moneymanagement.com.au/news/financial-planning/mere-disclosure-not-enough-avoiding-conflicts-interest-breaches
[4] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2013-releases/13-038mr-asic-releases-guidance-on-conflicted-remuneration-ban/
[5] https://www.ifa.com.au/news/34987-inherent-conflict-in-afsls-assessing-sophisticated-investors-asic#:~:text=investing%20in%20financial%20products
[6] https://download.asic.gov.au/media/1241003/rg181.pdf
[7] https://www.moneymanagement.com.au/news/financial-planning/asic-applies-liquidate-first-guardian-responsible-entity
[8] https://www.ifa.com.au/news/34591-dixon-clients-comprised-up-to-80-of-investment-in-urf
[9] Ibid.
[10] https://download.asic.gov.au/media/1241003/rg181.pdf
[11] https://www.hnlaw.com.au/its-time-to-dust-off-your-conflicts-of-interest-policy/
[12] https://www.moneymanagement.com.au/news/financial-planning/mere-disclosure-not-enough-avoiding-conflicts-interest-breaches
[13] https://www.professionalplanner.com.au/2023/07/wheres-the-conflict-smaller-afsls-believe-there-is-none/
[14]https://asic.gov.au/regulatory-resources/find-a-document/regulatory-document-updates/regulatory-developments-timetable/

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AFCA plays a vital role in consumer protection across the financial services sector by providing an accessible, independent, and binding dispute resolution process.

As essential component of a robust framework for protecting financial consumers is the presence of mechanisms that hold individuals and organisations to account for causing consumer harm and allow consumers financial redress in the event they suffer such harm.

In financial advice, there is a triumvirate of bodies who fulfil these functions, the Australian Financial Complaints Authority (AFCA), the Compensation Scheme of Last Resort (CSLR), and the Financial Services & Credit Panel (FSCP).

For the vast majority of compliant, financially health advice practices, AFCA is the body most likely to be interacted with, and this article will look under the hood, in order to provide advisers a practical working knowledge of AFCA, including its remit, processes, costs, and criticisms.

AFCA – the single dispute resolution body

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’s primary purpose is to ensure fair and efficient resolution of financial disputes without the need for court proceedings. It fulfils this purpose by:

• investigating complaints about financial advice, banking, insurance, and credit
• assessing complaints based on relevant laws, regulations, industry codes, and fairness principles
• requiring firms to compensate consumers if a complaint is upheld.

AFCA also works to identify and report systemic issues, and works closely with stakeholders including regulators, product providers, and licensees to enhance compliance and professional standards.

AFCA plays an important role in identifying unpaid compensation and referring cases to the CSLR.

AFCA’s remit

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
• 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 consider complaints relating to wholesale/sophisticated advice clients.

Financial limits can limit AFCA’s involvement

AFCA’s jurisdiction may also be limited by the size of the loss being claimed by a complainant. As of January 1^st, 2024, the maximum claim value AFCA will consider is $1,263,000, for insurance and advice cases^[2]. There is no limit for superannuation cases.

The maximum compensation AFCA can award per claims is $631,500.

AFCA processes

For complaints falling within its jurisdiction, 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^[3] include:

• when urgent finalisation is needed, for example if a complainant is experiencing severe financial hardship
• when complainants are impacted by a natural disaster, such as a bushfire or flood
• high value claims where prolonged proceedings could result in claim amounts exceeding AFCA’s financial limits
• low value claims involving serious personal circumstances, for example if the complainant is a victim of domestic abuse, or is suffering a serious medical condition.

Determinations are binding

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

Furthermore, a federal court case finalised in January 2023 reaffirmed the legal obligation financial firms have which is that they must co-operate with AFCA throughout the entire complaints process^[4].

The costs of AFCA to practices and licensees

AFCA’s services are funded by financial firms through membership fees and user charges, ensuring accessibility for consumers without direct costs.

Financial firms bear the costs associated with complaints lodged against them. In addition to a modest registration fee (currently $388.69)^[5], AFCA charges on a per complaint basis, giving firms an incentive to resolve complaints through internal dispute resolution processes before they reach AFCA.

As of March 2025, the current fee schedule applies:

To support smaller firms and encourage early dispute resolution, AFCA provides the first five complaints closed within a financial year free of charge^[7]. This approach is also celebrated for giving advisers more confidence to defend, rather than blindly settle, complaints.

Complaints trends

During the 2024 Financial Year, AFCA received 3,559 complaints in the investments and advice sector, a drop of 26 per cent compared to the previous year.

Excluding complaints related to Dixon Advisory, advice complaints reached an all-time low of 2,709 complaints, according to AFCA (the previous low being 3,207 during the 21/22 financial year.

As the table 2 shows, inappropriate advice remains the dominant type of investments and advice complaint received.

From a product perspective, the highest number of complaints related to equities.

Of all complaints resolved before the determination stage, 72% were resolved in favour of the complainant. Of all complaints that went to determination stage, 30% were found in favour of the complainant^[10].

How does AFCA calculate loss in financial advice complaints?

When AFCA upholds a complaint against an advice firm who has breached one or more duties to the consumer, they may rule that financial compensation is payable. The purpose of compensation is to place the consumer in the position they would have been in had there been no breach of duty.

The approach to calculating this compensation is informally referred to as the ‘but for’ approach. That is, AFCA will determine the financial position the complainant would have been in, ‘but for’ the breach of duty by the adviser.

In simple terms, the compensation amount – the amount of loss the consumer has suffered – is difference between the client’s actual financial position, and their ‘but for’ position.

As shown in table 3 above, the most common type of investment and advice complaint during FY 24 related to equities and equity-based products. In this type of scenario, AFCA will often be required to rule on the appropriateness of a portfolio for a particular client – in terms of its risk profile.

For example, where a consumer has received inappropriate advice which caused them to invest in an unsuitable portfolio of investments, it would be assumed that the consumer would instead have invested in a suitable portfolio of investments if they had been advised properly.

To work out the direct financial loss a consumer has suffered as a result of investing in unsuitable investments, AFCA will consider what would have been a suitable alternative, looking for an alternative portfolio of investments with the correct mix of defensive and growth assets. To do this, AFCA may need to use either a suitable benchmark asset allocation used by the financial firm or a comparable benchmark asset allocation.

In cases where it is harder to determine what the consumer’s position would have been if the breach of duty had not occurred. AFCA will consider a range of factors, including:

• how the consumer’s money was invested immediately before it was invested in the disputed investments
• whether the consumer was satisfied with their investments immediately before they made the disputed investments
• whether the consumer actively sought the financial adviser’s advice or had responded to an invitation to obtain advice
• if the consumer had actively sought the advice, the reason why they had done so
• whether the consumer had told the adviser that they had any investment preferences.

Full details of the AFCA approach to advice complaints can be found in their guide: ‘The AFCA Approach to calculating loss in financial advice complaints’.^[11]This guide includes the following case study from AFCA’s predecessor, FOS.

Case Study – compensation for inappropriate asset mix

Mr & Mrs Smith, both in their early 60s, inherited $1,000,000 and sought financial advice in 2006. Acting on the advice of the firm, they each invested $500,000 in allocated pensions, seemingly unaware of the fact that the asset allocation was 90% growth and 10% defensive (they believed the mix to be 40% growth and 60% defensive).

When the GFC occurred, the clients panicked and withdrew their funds, incurring capital losses of $160,000 and $185,000. They complained to the Financial Ombudsman Service (FOS), on the basis that the asset mix they were actually invested in (90/10) was dramatically different to what they believed they were invested in (40/60).

After considering all the facts, FOS determined that, had the clients received appropriate advice, and been invested in a portfolio with a 40/60 mix, Mr Smith would have been $35,500 better off, and Mrs Smith $45,000 better off. As a result, FOS ordered the advice firm to pay these amounts to Mr and Mrs Smith as compensation.

Criticism of the ‘but for’ approach

The ‘but for’ methodology used by AFCA has drawn significant criticism from industry bodies and financial advisers. This approach determines compensation by assessing what financial position a client would have been in ‘but for’ the advice they received. Critics argue that it is too theoretical, inconsistent, and unfairly punitive to advisers.

One major concern is that AFCA’s application of the methodology lacks clear guidelines and overestimates financial losses by considering alternative scenarios that may not have realistically occurred. Advisers argue that clients should be responsible for some level of investment risk, rather than being compensated for hypothetical lost opportunities.

The Financial Advice Association of Australia (FAAA) has been particularly vocal, arguing that AFCA’s assessments often ignore market realities and economic fluctuations, leading to inflated compensation claims.

Their harshest criticism was reserved for the way the ‘but for’ test was interacting with the CSLR – a system under which advisers are forced to fund unpaid determinations.

“So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.” Sarah Abood, FAAA CEO^[12].

The SIAA similarly drew issue with application of the ‘but for’ method in the well-publicised Dixon advisory case, arguing that AFCA had erred by applying the methodology to the entire portfolios of affected clients, rather than just to the specific failed product at the centre of the controversy (a real estate trust, URF).

“We would expect a ‘but for’ calculation on the URF only would result in a significantly lower loss calculation compared to a whole of portfolio approach,” their submission to Treasury said^[13].

“AFCA has not provided an explanation as to why each investment in the portfolio should not have been held by the complainant and was not in line with their objectives based on the information readily available at the time, except to say they were related party products.

Both the financial services minister, Stephen Jones, and the shadow minister Luke Howarth, also agree that the CSLR should not be about guaranteeing investment returns but instead should aim to give genuine victims a form of redress.

Citing data which suggests 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, the shadow minister called on the government to “intervene to limit or filter out these claims”^[14].

The ‘but for’ approach has also been criticised for essentially making advisers shoulder the burden for product failures, a criticism staunchly rebutted by AFCA, who argue that ultimately advisers are “gatekeepers” that need to ensure client portfolios are appropriately diversified.

As senior AFCA Ombudsman Alexandra Sidotti told an AFCA members forum in February 2025:

“When there’s a product failure, though, and that’s maybe 5 per cent of a person’s portfolio, that’s not going to have a catastrophic impact on someone’s superannuation funds. The issue that we’re really seeing here is a complete lack of diversification, and that’s an advice issue.”^[15]

Similarly, Lead Ombudsman Shail Singh said advisers wouldn’t bear the burden for the failure of products that were recommended in line with sound advice principles:

“If people put someone into a mortgage fund for 5 per cent, it was suitable to their portfolio, and there was no information to show that that fund was not going to perform – the adviser’s not responsible for that sort of conduct.”^[16]

While AFCA defends their approach as consumer-centric, critics argue it creates uncertainty, erodes adviser confidence, and could drive up professional indemnity insurance costs, ultimately increasing barriers to advice. Calls for greater transparency and reform in AFCA’s methodology continue to grow.

AFCA and wholesale advice

While wholesale advice is technically outside AFCA’s remit, they can use their discretion to consider wholesale complaints, if they believe the client has been misclassified as a sophisticated client, and provided the complaint falls within the jurisdictional dollar limits.

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^[17].

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

Conclusion

AFCA plays a vital role in consumer protection across the financial services sector – including financial advice – ensuring that disputes are resolved fairly and efficiently. By providing an accessible, independent, and binding dispute resolution process, AFCA enables consumers to seek redress without resorting to costly legal action. Its ability to investigate complaints, assess breaches of duty, and award compensation underscores its importance in maintaining trust in financial services.

Despite its strengths, AFCA’s ‘but for’ compensation approach has drawn criticism from financial advisers and industry bodies. Concerns include the theoretical nature of loss calculations, perceived inconsistencies in methodology, and potential financial strain on advisers due to obligations under the Compensation Scheme of Last Resort (CSLR). These debates highlight the ongoing tension between consumer protection and ensuring fairness to advice professionals.

As financial advice continues to evolve, AFCA’s role will remain critical in balancing consumer rights with industry sustainability. Calls for greater transparency and reform in AFCA’s methodology may lead to refinements in its approach. Ultimately, the effectiveness of AFCA will depend on its ability to maintain fairness, clarity, and confidence in its dispute resolution framework while addressing industry concerns.

———–

References:
[1] https://www.allens.com.au/insights-news/insights/2018/07/unravelled-australian-financial-complaints-authority-a/
[2] https://www.afca.org.au/news/latest-news/afcas-compensation-caps-and-monetary-limits-adjusted
[3] https://www.afca.org.au/what-to-expect/the-process-we-follow
[4] https://www.afca.org.au/news/media-releases/federal-court-reaffirms-financial-firms-must-co-operate-with-afca
[5] https://www.afca.org.au/members/news/changes-to-afcas-fees-and-charges-in-fy25
[6] https://www.afca.org.au/members/funding-model/fee-structure
[7] https://www.afca.org.au/members/news/changes-to-afcas-fees-and-charges-in-fy25
[8] https://www.afca.org.au/annual-review-investments-and-advice-complaints
[9] Ibid.
[10] https://www.afca.org.au/annual-review-year-at-a-glance
[11] https://www.afca.org.au/media/402/download
[12] https://www.ifa.com.au/news/35424-siaa-puts-the-magnifying-glass-on-afca-methodology
[13] Ibid.
[14] https://www.ifa.com.au/news/35328-jones-and-howarth-agree-but-for-test-has-no-place-in-cslr-scheme
[15] https://www.ifa.com.au/news/35469-complete-lack-of-diversification-afca-says-advisers-not-being-blamed-for-product-failures
[16] Ibid.
[17] https://www.professionalplanner.com.au/2023/06/afca-defends-use-of-discretion-to-hear-complaints-from-wholesale-investors/

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Advisers need to have a clear understanding of their record-keeping obligations under ASIC regulations and the Financial Adviser Code of Ethics.

Introduction

The financial services regulatory framework is a key pillar of financial consumer protection. Regulatory compliance is therefore not merely about avoiding penalties, but is a critical step in building consumer trust and confidence in the financial advice process, and in the financial advice profession as a whole.

Within that framework, one of the most important elements is record-keeping. Proper record-keeping not only satisfies adviser compliance obligations, but it also safeguards advisers (and clients) in the event of disputes and audits. Failing to maintain proper records can lead to serious penalties, reputational damage, and license suspension.

With inadequate record-keeping at the centre of many client complaints and FSCP determinations, and a new ASIC instrument affecting this area issued in September 2024, this article is a timely exploration of best practices in contemporary record-keeping, and is designed to help advisers protect themselves and their clients.

Why record-keeping matters

Under ASIC regulations and the Corporations Act 2001, advisers are obligated to retain detailed records of client interactions, advice provided, and the reasoning behind their recommendations. Proper record-keeping helps:

• Compliance with regulatory and professional association guidelines: ensuring adherence to Best Interest Duty and other legal obligations
• Consumer protection: demonstrating transparency and providing proof of informed consent, it also facilitates the tracking of progress against plans and helps clients understand the fees charged and the services received
• Risk management: an evidence base that helps protect advisers in the event of legal disputes, complaints, and investigations, especially by recording the outcomes of risk profiling, verification of instructions, and any subsequent variation to those obstructions
• Audit readiness: enabling smoother, more efficient compliance audits by the maintenance of accessible, well organised records
• Improved business value: A practice with quality record-keeping is likely to attract a higher value in the event of sale, through being a lower compliance risk.

What records are advisers obliged to keep?

Adviser record-keeping obligations are mainly enshrined in two instruments – ASIC Corporations Instrument 2024/508, and the Financial Adviser Code of Ethics.

ASIC requirements – what records?

ASIC Instrument 508^[1] became effective in September 2024, essentially making permanent a Class Order dating back to 2014 (CO 923). It provides guidance about the aspects of the advice process for which records must be kept, as well as the timeframe for records to be retained.

In summary, licensees must ensure records of the following matters are kept in relation to the provision of personal advice:

• the information relied on and the action taken by the provider that indicates the provider has, in accordance with subsection 961B(1), acted in the best interests (the best interests duty) of the client in relation to the advice
• if subsection 961B(2) is being relied on to prove that the best interests duty has been satisfied—the information relied on and the action taken by the provider that satisfies the steps in that subsection
• the advice given, including the reasons why, under section 961G, it would be reasonable to conclude that the advice is appropriate to the client, had the provider satisfied the best interests duty, and
• where the provider knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of a person mentioned in any of the paragraphs in subsection 961J(1)—the information relied on and the action taken by the provider to indicate that the provider has given priority to the client’s interests when giving the advice.

ASIC requirements – how long?

One of the controversial aspects of the ASIC Instrument relates to the amount of time records must be kept.

ASIC requires AFS Licensees who provide personal advice to retail clients to keep records for a period of at least seven (7) years after the day advice was provided to the client to comply with best interests duty and related obligations^[2]. They must be accessible to the licensee during that period, and this obligation applies even where the AFSL ceases to be licensed.

Where the provider of the personal advice is an authorised representative and the authorised representative is responsible for keeping records, the authorised representative must provide the records to the AFS Licensee upon request, where the request is made for the purposes of comply with the recording keeping obligations within 7 years after the day on which the personal advice was provided to the client.

A practical outcome of this requirement is the handover – to the AFSL – of all client files and records when an Authorised Representative leaves a licensee.

Why the controversy?

Prior to issuing Instrument 508 in September 2024, ASIC conducted a public consultation. As part of the consultation, the Financial Advice Association (FAAA) argued that – by continuing the original 2014 class order – Instrument 508 is effectively out of date and ramping up the cost of advice.

According to the FAAA, ASIC’s requirements generate a high level of compliance activity and effort, and have increased the cost of providing advice.

“The FAAA have for a long time advocated for greater regulatory capacity for financial advisers to rely upon their professional judgement, rather than the type of prescriptive record-keeping obligations that are set out in this class order,” their submission^[3] said.

The FAAA also flagged concerns around the application of the regulations even after a licensee has gone into administration, or when an authorised representative dies.

“The continuation of these record-keeping obligations beyond the closure of these businesses or the death of an individual, in the absence of an obvious alternative solution, is quite problematic.”^[4]

The code of ethics and record-keeping

A core objective of the 2019 Financial Planners and Advisers Code of Ethics is to lay down standards in the area of client care, and the keeping of accurate and comprehensive records is clearly key to caring for clients and protecting their interests.

Standard 8 of the Code^[5] governs financial adviser record-keeping, and this standard specifically requires advisers to:

• Keep records of all the advice and services they provide, and
• Ensure records of clients, including former clients, are kept in a form that is complete and accurate.

That means, rather than recording a bare minimum of personal information for each client, advisers must keep and file every piece of correspondence between themselves and their clients. This means physical documents, and also communication including emails, phone calls, voice/video recordings, electronic messages, and any conversations with clients during meetings.

Keeping clear, accurate and complete records also evidences adviser compliance with other Code of Ethics requirements around informed consent and best interests including Standard 2 (acting with integrity and in the best interest of your client) and Standard 5 (your client has understood the advice and recommendations you’ve given them).

In the course of ‘knowing your client’, and in order to give the best quality advice, advisers must gather a lot of information, encompassing:

• current client circumstances
• broader, long-term needs and likely circumstances
• family members’ broader, long-term needs and likely circumstances;
• risk tolerances;
• money attitudes; and
• financial and lifestyle goals.

Keeping records safely and securely

Record-keeping obligations don’t just relate to what records are kept, they also relate to how they are kept, specifically the requirements to keep any client information in those records private and confidential. This obligation is enshrined in both law and applicable professional conduct frameworks.

The overarching legal requirements can be found in the 13 Australian Privacy Principles which underpin the 1988 Privacy Act^[6]. These principles govern standards, rights and obligations around:

• the collection, use and disclosure of personal information
• an organisation or agency’s governance and accountability
• integrity and correction of personal information
• the rights of individuals to access their personal information.

A breach of an Australian Privacy Principle is regarded as ‘interference with the privacy of an individual’ and can lead to regulatory action and penalties (including a maximum fine currently of up to $50 million^[7]).

Whilst small businesses (those with annual turnover less than $3 million) are largely exempt from the requirements of the Act, financial advisers do not enjoy this exemption, as they are generally classified as ‘reporting entities’ under Section 6 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Professional association guidelines

The FAAA Best Practice Standards^[8] also reference the importance of record-keeping, specifically in relation to:

• recording the scope of services to provided (s1.8)
• gathering and recording client factual and qualitative information (s2.5)
• recording client asset holdings in a Client Asset Register (s5.6), and
• the maintenance of separate and independent files in relation to each client (s7.18).

Record-keeping in the spotlight

In addition to the publicity surrounding the release of Instrument 508 in late 2024, two other factors have been keeping the topic of record-keeping top of mind for many in the industry:

1. recent determinations by the Financial Complaints body (AFCA), and by the Financial Services & Credit Panel (FSCP) – the advice disciplinary body, and
2. the likely replacement of the Statement of Advice through the yet to be legislated Tranche 2 of the Delivering Better Financial Outcomes (DBFO) reforms.

Poor record-keeping is poor advice

Poor record-keeping continues to be a significant driver of client disputes and disciplinary actions taken against advisers. Two examples from 2024 illustrate this.

Case study 1: SOA fails to adequately record client objective

AFCA determination 969037, published in June 2024^[9], concerns the case of a client who received advice in relation to their SMSF. Specifically, the clients had an existing SMSF and sought advice about the suitability of their SMSF and its investments.

Normally advisers find themselves in the cross hairs for inappropriately placing clients into SMSFs, however in this case, the reverse was true, and the adviser recommended the client stay in their SMSF, on the basis that exiting the SMSF structure and the selling the property the fund owned would cause considerable losses.

AFCA, however, found that among the reasons the client sought the advice was the belief that their growth objectives and growth-oriented risk profile would not be met by the property owned by the fund. The advice to retain the property within the SMSF was therefore deemed inappropriate.

AFCA found no evidence the adviser had reviewed the cash flow of the fund, conducted a fresh risk profile, or considered alternative strategies. Nor did the SOA accurately record the client’s objectives.

The AFCA determination upheld the client complaint, and required the adviser to pay over $90,000 plus interest (in lieu of lost growth). Along with likely process deficiencies, inadequate or non-existent record-keeping was a key failing that contributed to this outcome.

Case study 2: FSCP clamps down on poor record-keeping

Describing record-keeping as the “mortar between the bricks” of the advice process, the FSCP suspended an adviser for three months for failures in this area^[10].

According to the FSCP, the adviser failed to comply with his obligations when providing advice to three clients, using records of advice (ROA) that relied on statements of advice (SOA) that had been given to the clients up to seven years ago.

Finding that two of the clients had experienced significantly changed circumstances since the original SOA was issued, the FSCP found that the adviser could therefore not rely on the exemption from issuing an SOA.

The panel noted there was insufficient evidence on the client files that reasonable enquiries had been made about the clients’ relevant circumstances.

“Ultimately, record-keeping on all three client files was poor. Details of advice processes, if undertaken, could not be substantiated.”^[11] 

Will the end of SOAs change much?

While, at the time of publishing, Tranche 2 of the DBFO legislation had not been put to Parliament, there is a commitment from both major parties to implement the legislation, regardless of the result of the 2025 federal election^[12].

Arguably two of the most significant reforms flagged as part of Tranche 2 are the scrapping of the Safe Harbour provisions around Best Interest Duty, and the scrapping of SOAs in favour of a more streamlined document (the format of which is currently unknown).

Both reforms are clearly very significant from a record-keeping perspective, with the scrapping of SOAs likely to force many advisers to focus on their broader record-keeping.

Countering concerns that the scrapping of SOAs would somehow leave advisers with less protection in the event of client disputes, experts argue that in fact SOAs were never regarded as the primary evidentiary source when investigating complaints, rather it was the quality of records kept about client/adviser interactions and conversations that were the most important.

As one expert said, “I’ve never seen a situation where a phrase missing or present in a document is what a matter hinged on.”^[13]

AFCA Commissioner Shail Singh observed that the dispute process will always come down to evidence that proved the adviser gave proper advice that is free of any conflicted interests. “If something goes wrong, how do you demonstrate that you’ve satisfied your professional obligations?”^[14]

Singh also made it clear that it was the file notes, and not the SOA, that provided the best evidence:

“I really should be clear on that – the longer [SOAs] often don’t help and sometimes you have to look at the other documentation to understand whether informed consent was given to a particular strategy.”^[15]

The AI revolution, making record-keeping easier

The idea that record-keeping is about paper based records of face-to-face conversations is no longer representative of the modern advice practice. Increasingly, adviser client interactions are virtual, taking place via video meetings, phone calls, SMS and social media messages, emails, and online data capture through website and dedicated portals.

ASIC has long stated it is technology agnostic, and in this regard, file notes do not have to be paper based, or even written documents. They can just as easily be scanned records or electronic recordings.

One of the hottest topics in advice right now is of course Artificial Intelligence (AI) and its potential to revolutionise many aspects of advice, including operational efficiencies.

Seemingly every day a new AI powered tool for advisers is launched to market, helping in areas such as making transcripts of video calls, and creating file notes in the blink of an eye. It’s more advanced uses include checking client comprehension of topics discussed during a meeting (which can help support proof of informed consent).

A system that listens in on client meetings, captures every detail, and auto-generates a perfect, organised summary file note is probably a dream scenario for advisers who want to focus on building relationships rather than being bogged down by administrative tasks.

But this scenario, is much as it is real, also comes with its own considerations, including the occasionally suspect accuracy of the outputs, and data security issues.

In step with the rapid adoption of AI by the advice profession, ASIC has flagged^[16] its concerns around ‘governance gaps’ in the use of AI, and its subsequent intention to heighten its scrutiny of AI usage by licensees and individual advisers.

Conclusion

Record-keeping is the backbone of regulatory compliance in financial advice, serving as both a safeguard for advisers and a critical element in consumer protection. The introduction of ASIC Instrument 2024/508, in late 2024, has reinforced the long-standing obligations for advisers to maintain detailed, accurate, and accessible records. Despite industry concerns over the cost and administrative burden, robust record-keeping practices remain non-negotiable, ensuring advisers can demonstrate adherence to Best Interest Duty, ethical standards, and privacy laws.

Recent determinations from AFCA and FSCP highlight how poor record-keeping can expose advisers to financial penalties, disputes, and even license suspension. As the industry moves toward Tranche 2 of the DBFO reforms, which will see the end of Statements of Advice (SOAs), advisers must refine their broader record-keeping practices to ensure compliance and mitigate risk.

While emerging technologies such as AI-driven documentation tools can improve the quality and efficiency of record-keeping, they also present governance challenges. With ASIC signalling increased scrutiny over AI use, advisers must balance innovation with compliance, ensuring data integrity and security.

Ultimately, advisers who proactively enhance their record-keeping processes will not only safeguard their businesses but also strengthen trust with their clients and regulators alike.

———–

References:
[1] https://www.legislation.gov.au/F2024L01201/latest/text
[2] https://sophiegrace.com.au/asic-record-keeping-obligations-on-afsls/?srsltid=AfmBOoqJP72RMTlXEGkXXrEw5-4vm4_YNmw5Q_WbBmmwZRlqPH2h2dSF
[3] https://www.professionalplanner.com.au/2024/09/faaa-argues-record-keeping-requirements-too-onerous/
[4] Ibid.
[5] https://myintegrity.com.au/wp-content/uploads/2024/07/FG002_Financial-Advisr-CoE-Guide_10-2020.pdf
[6] https://www.oaic.gov.au/privacy/australian-privacy-principles/australian-privacy-principles-quick-reference
[7] https://www.corrs.com.au/insights/higher-penalties-and-other-privacy-act-amendments-commence
[8] https://faaa.au/wp-content/uploads/2023/04/FAAA-Practice-Standards.pdf
[9] https://my.afca.org.au/searchpublisheddecisions/kb-article/?id=cbef98d1-df5d-ef11-bfe4-6045bde57fbd
[10] https://www.moneymanagement.com.au/news/financial-planning/fscp-clamps-down-poor-recordkeeping
[11] Ibid.
[12] https://www.moneymanagement.com.au/news/financial-planning/howarth-commits-implementing-dbfo-reforms-current-form
[13] https://www.professionalplanner.com.au/2023/02/go-away-soa-record-keeping-and-file-notes-already-the-superior-proof-of-advice/
[14] Ibid.
[15] Ibid.
[16] https://www.professionalplanner.com.au/2024/08/asic-places-offshoring-and-ai-in-advice-under-magnifying-glass/

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Alternative assets are one of the fastest growing, yet least understood, investment sectors, and as such represent a significant consumer protection challenge.

Introduction

Interest in alternative assets – including private markets and infrastructure – has surged in recent years, a strong growth trajectory that is expected to continue well into the future. Certainly advisers, driven by client demand, are looking to increase their allocation to alternative assets over the coming 12 months.

According to Praemium and CoreData research^[1], nearly 70 per cent of high-net-worth-focused advisers have cited alternatives as a necessity for meeting client demands in the future. Interest is particularly strong in private market investments, with a Hamilton and Lane survey of financial advisers finding 56 per cent plan to increase overall allocations in 2025, with nearly one-third of survey respondents planning to allocate 20 per cent or more to the asset class over the coming year^[2].

While alternative assets offer the opportunity for higher returns potential – as well as powerful diversification benefits – the nascent category also comes with many risks, prompting ASIC to step up its scrutiny of the sector during 2025^[3].

This article will explore the consumer protection challenges inherent in the alternative assets sector, challenges that stem from both the characteristics of alternative investment offerings, and systemic factors including regulatory grey zones and the weaker consumer protection regime applying to wholesale investors.

What are alternative investments?

While an online search will yield countless technical definitions of alternative assets, for the purposes of this article we will keep it simple – alternatives are those assets which fall outside the realm of equities, bonds, and cash (referred to as traditional assets).

While some people use the term private markets and alternative assets interchangeably, private markets are in fact just one subset of a much broader category, which includes:

• Private Equity: Private equity involves investing in privately held companies, typically through buyouts, venture capital, or growth investments, with the goal of enhancing value before exiting via a sale or public offering​
• Private Credit: Private credit refers to non-bank lending to companies, often in the form of direct loans or structured debt, providing an alternative to traditional financing sources​
• Hedge Funds: Hedge funds are pooled investment funds that employ diverse and often sophisticated strategies – including leverage, derivatives, and short-selling – to generate returns independent of market direction​
• Real estate: Real estate investments include the acquisition, development, and management of physical properties such as residential, commercial, and industrial assets, offering potential income through rents, and long-term capital appreciation
• Infrastructure: Infrastructure investments involve capital allocation to essential physical assets such as transportation systems, utilities, and energy projects, typically offering stable, long-term, inflation-linked cash flows​
• Commodities: Commodities are raw materials or primary agricultural products, such as oil, gold, and wheat, that are traded on global markets and often serve as hedges against inflation and economic uncertainty​
• Crypto: Cryptocurrencies are digital or virtual assets that leverage blockchain technology for decentralized transactions, often characterised by high volatility and speculative investment potential​
• Art and Collectibles: Art and collectibles refer to tangible assets such as paintings, sculptures, rare coins, and vintage items that are valued for their rarity, cultural significance, and potential for long-term appreciation​.

Consumer risks unique to alternatives

In addition to the risks inherent in all investment types, the unique characteristics of the assets comprising the alternatives sector carry additional risks that represent additional challenges for financial consumer protection.

Illiquidity

Many alternative assets, such as private equity, real estate, and infrastructure, are highly illiquid. This can be reflected in long lock in periods, or long, expensive sale processes. Selling assets quickly can often only be done at a significant discount. A recent report^[4] by Natixis found illiquidity was one of the most misunderstood aspects of private market investments, with 72% of surveyed advisers saying that ‘clients do not understand the holding period that comes with private investment’. Aligning investor time frame and risk appetite is therefore critical when considering alternatives.

Higher risk of loss

Many alternative asset types – particularly private markets, hedge funds, and crypto – appeal to investors through their potential for higher returns. The possibility for outsized returns is certainly there; private equity is about getting in on the ground floor of new companies, or reaping the dividends of company turnarounds; hedge funds look to amplify returns through the use of leverage and complex investment structures and instruments; Private credit looks to mimic the consistent income patterns of fixed interest, but with a rate of return to reflect the associated risk premia.

But higher return potential also comes with a heightened risk of loss, with some alternatives being highly speculative in nature.

Opacity and complexity

Many private market operators and hedge funds are unlisted entities, meaning they are not subject to the same stringent audit and reporting and disclosure requirements as listed entities. Similarly, the heterogenous nature of many alternatives makes it hard to point to publicly available benchmarks and indices. This lack of transparency can make it harder to gain a deep understanding of the credentials, track record, ongoing business performance, and financial health of operators in this space.

Some alternatives are also highly complex – involving complicated structures, contract terms, and financial instruments, thus requiring a high level of technical knowledge to understand. The mechanics of cryptocurrencies are so complex and new that they are poorly understood by most people, making it a highly speculative investment for most people.

The increased difficulty in understanding, assessing, and monitoring the performance of many alternative assets undoubtedly represents a significant consumer protection challenge.

Valuation challenges

Because of their illiquidity and opacity, valuing alternatives can also be challenging. Unlike stocks and bonds, with transparent market prices and frequent transactions, valuing an airport, a factory, a new business, or even a piece of art, can be difficult, requiring complex valuation methods and highly specialised expertise. Helping clients making informed decisions about acquiring, holding, and disposing of such assets can thus be a more complicated process.

Evolving regulatory regime

The regulatory regime for hedge funds and cryptocurrencies are continuously evolving, creating a regulatory grey zone in which there is more likelihood of outliers, who operating on the fringes of legality, may display less care for consumers.

While ASIC has established a regulatory framework for cryptocurrencies that emphasises consumer protection, anti-money laundering (AML), and counter-terrorism financing (CTF), this framework is currently more effective when dealing with those entities that operate as crypto exchanges, or who incorporate crypto exposures into financial products. Regulation around the digital currencies themselves is less well formed, with Parliament yet to pass any crypto-specific fit-for-purpose legislation. Indeed there are concerns that Australia is falling behind the rest of the world in regulating crypto, with the current approach being characterised as ‘regulation by enforcement’^[5].

Consumer protections when accessing wholesale investments

While there is a growing number of alternative investments offered through retail vehicles such as managed funds and ETFs, many alternative investment opportunities can only be accessed on a wholesale basis, meaning the protections available to retail consumers (including disclosures, advice protections, and recourse mechanisms) do not apply.

The list of consumer protections an investor forfeits when they take the wholesale, rather than retail, path is extensive:

• the design and distribution obligations (DDO) regime, which requires financial product issuers to identify a target market for their financial products and take reasonable steps to ensure that distribution of those financial products to retail clients is consistent with that target market
• various obligations that AFS licensees must comply with including the requirement that licensees have an appropriate internal dispute resolution system to deal with complaints from retail clients, and membership with the Australian Financial Complaints Authority (AFCA)
• entitlements to receive financial product and service information disclosure such as a Product Disclosure Statement (PDS) or a Financial Services Guide; and
• a range of protections under Ch 5C of the Corporations Act that apply to registered schemes (where registration is generally required when retail clients are scheme members), including the duty for the responsible entity of a registered scheme to act in the best interests of scheme members.

Wholesale clients also forfeit a number of significant additional protections afforded retail advice clients under the Corporations Act, including requirements for advisers to:

• act in the best interests of their client (s961B)
• ensure their advice is appropriate (s961G)
• give priority to their client’s interests where there is a conflict of interest (s961J), and
• in many cases, and potential QAR/DBFO changes notwithstanding, give a retail client a statement of advice (s946A).

Nor do they benefit from provisions around conflicted and other banned remuneration, designed to align the interests of providers of advice on financial products more closely with the interests of their retail clients.

What protections are offered to wholesale investors?

Notwithstanding the above, the Stockbrokers and Investors Association (SIAA), in a 2023 submission to Treasury, were at pains to point out that wholesale advice is not a ‘regulatory free for all’.^[6]    

Indeed, wholesale investors do have protections under general law, market integrity rules, and the Corporations Act, including:

• those arising from section 912A of the Corporations Act that, amongst other things, require financial services licensees to provide financial services ‘efficiently, honestly and fairly,’ manage conflicts of interest, comply with financial services laws, ensure their representatives do so as well and are adequately trained and competent
• the consumer protection provisions of the Corporations Act including those dealing with misleading and deceptive conduct, unconscionable conduct, representations and warranties, and
• a fiduciary duty on the adviser to act in the client’s best interests.

A knowledge gap to be filled

Financial literacy is a key pillar of financial consumer protection. Clients rely on financial advisers for their guidance and to fill gaps in their knowledge of complex products and concepts, and this is particularly true when it comes to alternative assets. But as a developing sector, and one which is often away from the mainstream, many advisers lack exposure to, and working knowledge of, alternatives.

Of course, most advisers readily admit this, with a 2023 survey^[7] of US advisers finding that only one quarter rated their knowledge of alternatives as very good, while one in eight said they found alternatives too complex to understand. Unsurprisingly, 95% of survey respondents said they would welcome more educational content on alternatives.

In response, providers of alternatives products have been urged to step up their investment in adviser education, with a 2024 report by EY stating:

“If alternative fund managers are to successfully increase their engagement with individual investors, many will need to step up their education efforts significantly – not only among investors themselves, but also among the financial advisers that will incorporate alternatives into wealthy clients’ portfolios”.^[8]

In a separate report, Deloitte^[9] observed that ‘some advisers believe that investment managers do not provide them with sufficient materials to educate clients about alternative investments’.

The importance of communication

The client literacy gap, exacerbated by the complexity and opacity of many alternative investments, places extra pressure on advisers to communicate clearly and effectively when discussing alternatives.

Key skills and methods advisers must focus on include:

• Simplifying complex information, through the use of simple, relatable language, analogies, and tools such as graphs, charts and visual models
• Transparency about risks, including discussing specific risks such as longer lock-in periods
• Illustrate the upside and downside with real-life scenarios and case studies
• Regular education and updates, to help keep clients abreast of market developments
• Set clear and realistic expectations, especially around time horizons, returns, and liquidity.

Compliance essentials when recommending alternatives

In addition to the many compliance obligations advisers have in a retail advice context, the unique nature of alternative assets brings other compliance risks to the fore, including:

• Misclassification or Misrepresentation of Asset Types
  • Misrepresenting (inadvertently) the features, risks, and behavioural characteristics of alternatives is more likely due to the complexity and opacity of alternatives
  • Accurate and transparent client communication becomes vital. 
• Breaches of investor suitability requirements
  • The risks associated with assets such as cryptocurrencies and hedge funds can be much higher than those seen in investments more familiar to clients, exposing advisers to a higher risk of complaints in the event of losses
  • Thorough risk assessments, and tools like the TMD (for retail offerings such as crypto ETFs), as well as clear communication and comprehensive record keeping, are critical to ensure alignment with client risk tolerance and investment goals.
• Evolving regulatory guidelines
  • Regulation in areas such as crypto and hedge funds is evolving rapidly, placing advisers at increased risk of inadvertent non-compliance
  • It is crucial for advisers to stay informed through regular professional development, ASIC updates, and other industry resources.

In summary

The growing interest in alternative investments, particularly private markets, presents both opportunities and challenges for advisers and investors. While these asset classes offer diversification benefits and the potential for higher returns, they also introduce significant risks, including illiquidity, valuation complexities, and regulatory uncertainties. In a sector often lacking the transparency and oversight of traditional financial products, consumer protection requires extra vigilance on the part of advisers.

The regulatory landscape, particularly in sectors like hedge funds and cryptocurrencies, is still evolving, creating grey areas that require careful navigation. Many alternatives are only offered on a wholesale basis, a channel in which investors are afforded fewer consumer protections compared to retail investors, further highlighting the need for strong due diligence and informed decision-making.

A crucial aspect of mitigating these risks lies in financial literacy—both for advisers and their clients. Many advisers acknowledge their own knowledge gap in alternatives, necessitating greater investment in education and communication strategies. Advisers must prioritise clear, transparent communication to help clients understand the complexities of alternative assets, their risk profiles, and suitability within a broader portfolio.

Ultimately, a well-informed, compliance-driven approach is essential to responsibly integrating alternatives into client strategies. As the market matures, regulatory clarity and enhanced adviser education will be key to ensuring that investors can access these opportunities while maintaining adequate consumer protection.

———–

References:
[1] https://www.moneymanagement.com.au/news/financial-planning/investor-education-piece-alts-puzzle
[2] https://www.ifa.com.au/news/35281-advisers-set-to-increase-exposure-in-private-markets
[3] https://asic.gov.au/about-asic/news-centre/news-items/key-issues-outlook-2025/
[4] https://www.im.natixis.com/en-gb/insights/investor-sentiment/2024/financial-professionals-report#
[5] https://www.abc.net.au/news/2024-11-26/cryptocurrency-regulation-asic-bitcoin-price/104642846
[6] https://www.stockbrokers.org.au/wp-content/uploads/Final_submission_MIS_Review_29092023.pdf
[7] https://www.wealthprofessional.ca/investments/alternative-investments/alternatives-becoming-increasingly-core-in-portfolios-but-advisors-need-more-tools/378971
[8] https://www.moneymanagement.com.au/news/financial-planning/investor-education-piece-alts-puzzle
[9] https://www.moneymanagement.com.au/news/funds-management/funds-managers-urged-their-game-alternatives-education

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Regulatory framework for financial advice will continue at pace in 2025.

The evolution of the regulatory framework for financial advice will continue at pace in 2025, giving advisers and licensees little respite from changes which can impact them, their businesses, and their clients.

In addition to the well-publicised Delivering Better Financial Outcomes (DBFO) Tranche 1 reforms that come into effect in 2025, advisers must also be conscious of changes to the broader regulatory framework applying to advice businesses – including legislation relating to privacy and cyber security for example – as well as the areas the corporate regulator, ASIC, is likely to have a heightened focus on for the year ahead.

By understanding this regulatory ‘big picture’, advisers can not only ensure their compliance with confirmed changes, but they can also better position their businesses for the future, by factoring reform trajectories into critical business decisions in areas such as technology, processes, people, and even business models.

This article will therefore serve as a primer for advisers to understand what changes are locked in, what changes are coming, and what areas ASIC will be paying extra attention to in 2025.

Structure of this article

This article will be organised into three main sections, firstly looking at the DBFO legislation, and the related changes taking effect in 2025 (some of which were only detailed at the end of 2024). The second will examine two pieces of legislation that are not financial services specific, but which will still impact many licensees and advisers. And finally, we will recap those areas under to be put under the microscope by ASIC over 2025.

1. DBFO: Key dates in 2025

Key Date number 1: January 10, 2025

Two important DBFO changes become effective on this date. One, relating to trustee oversight of advice fees authorised by members, has being controversial, with some experts believing the legislation is poorly worded and could see some ultra-conservative (and/or non-adviser friendly) funds choose to scrutinise every single SOA before agreeing to a fee deduction.

While ASIC, and Minister Stephen Jones, have gone to great lengths to provide assurance that this is not the intent^[1], many advisers are holding their breath, awaiting the proof that will come in the form of actual trustee behaviour post January 10.

A recap of that change:

• Amendments to the SIS Act (s99FA) intended to clarify the legal basis for trustees to pay advice fees agreed to by a member. Trustee obligations include the following:
  • Ensure the advice given is personal
  • Ensure the cost of advice aligns with the term of the member’s written consent
  • Ensure the appropriate consent requirements are met, including ongoing fee arrangements.

The second change to take effect on 10^th January relates to Ongoing Fee Arrangements, effectively giving advisers much more flexibility around timing and format.

Key aspects of this reform include:

• Remove the requirements to provide clients with a Fee Disclosure Statement
• Require advisers to obtain client consent for ongoing fees via a standardised written consent form
• Replace “anniversary date” with “reference date” for determining the renewal period, with a new consent required between
  • Up to 60 days before, and
  • On or before 150 days after the reference date.

(This last change introducing far more flexibility than the current 120-day period commencing on the anniversary date of the arrangement).

Introducing the new reference date

The reference date concept – introduced as part of the change to ongoing fee arrangement consents – has caused confusion for some. ASIC have produced examples which help clarify the setting and changing of reference dates, which can be found in their Information Sheet 286, updated and reissued in November 2024^[3].

Key date number 2: July 9^th, 2025

On this date, new consent requirements become effective for life insurance commissions. In simple terms, life commissions which are (a) within the limits prescribed by the Life Insurance Framework requirements, and (b) accompanied by the appropriate client consent, will be exempt from the ban on conflicted remuneration.

The consent – a new document – must include the following information:

• Name of the insurer
• Commission rate
• If more than one monetary benefit will be given in connection with the issue or sale of the relevant product, the frequency of giving those monetary benefits and the period over which monetary benefits covered by the consent could be given, including any renewals;
• The nature of any services that the AFSL or authorised rep will provide the client in relation to the relevant product;
• A statement that “it is a requirement of the law that client consent must be obtained before payment of an insurance commission”; and
• The fact that the consent is irrevocable.

Importantly, these guidelines mean that – provided the rate of commission on renewal does not exceed that disclosed in the initial consent – no further consents are required, meaning the consent is a one-off, for the life of the policy.

ASIC updates regulatory guidance to support DBFO changes

In November 2024, ASIC issued 4 new information sheets^[4] – and updated several existing Regulatory Guides – in response to DBFO Tranche 1.

The new Information Sheets are:

• INFO 286 FAQs: Ongoing fee arrangements and consents
• INFO 287 FAQs: Non-ongoing fee requests or consents
• INFO 291 FAQs: FSGs and website disclosure information
• INFO 292 FAQs: Informed consents for insurance commissions.

Updates were also made to RG 246, and 175.

The Information Sheets in particular are very helpful, containing practical examples of the changes in action, and it is recommended readers familiarise themselves with these resources as soon as possible.

So what about DBFO Tranche 2?

Advisers busy in the lead up to the end of 2024 could be forgiven if they missed the announcement by Treasury about DBFO Tranche 2, made public on 4^th December^[5].

The more significant of the two tranches, in terms of its capacity to improve the accessibility of advice, Tranche 2 may well prove to be the most contentious, tackling issues such as Statements of Advice and Safe Harbour, while also introducing a new tier of advice.

Generally light on detail, Treasury’s announcement split the proposed changes into two categories:

• A ‘new class of financial adviser’, and
• Modernising financial advice.

The ‘new class of adviser’ (previously referred to as ‘Qualified Advisers’) proved to be a controversial topic throughout 2024, with critics claiming it was opening the door to the return of vertical integration.

The policy intent is to create a new tier of advisers who – by virtue of needing lesser qualifications and being restricted to very simple advice – can open up advice to a wider audience by being much cheaper.

Despite fears that this type of adviser might be limited to product providers and super funds, the December announcement clarified that this option is also open to traditional advice licensees, opening up exciting new ways for advice firms to service clients who are lower value, and/or have simple needs for episodic advice.

Licensees will be able to charge for services provided by new class advisers

Critical to making this a viable option for licensees is the government about face on charging fees for the services provided by new class advisers, with licensees being allowed to charge one-off fees for such a service^[6].

New class of adviser – guidelines

• Licensees that employ the new class of adviser will be wholly responsible for the advice provided. Licensees will be subject to additional monitoring and supervision obligations (with civil penalties attached) to ensure that their employees only provide advice within their expertise and authorisation and comply with the Best Interests Duty and other obligations.
• The new class of adviser will be required to complete an AQF level 5 diploma, to ensure they have the expertise to provide high-quality simple advice.
• The new class of adviser will be restricted to advising only on products issued by prudentially regulated entities and will be prevented from providing advice on more complex and high-risk areas such as establishing a self-managed superannuation fund.
• The new class of adviser will be limited to advising existing customers of a licensee, and new customers where the new customer initiates the advice request. This will ensure the new class cannot be used to cold-call new customers or offer unsolicited advice.
• Licensees employing the new class of adviser can opt to charge a fee for the advice provided by the new class of adviser. They will not be permitted to charge ongoing fees or receive commissions to ensure the adviser is focused on providing simple, episodic advice.

Modernising financial advice

The remainder of the package includes, but is not limited to:

• Modernising the Best Interests Duty into an outcomes-focused duty and removing the existing process-based safe harbour steps.
• Replacing Statements of Advice with a principles-based record that is in plain English and addresses the client’s needs.
• Clarifying the rules on what advice topics can be paid for via superannuation.
• Reviewing and updating The Financial Planners and Advisers Code of Ethics
• Reviewing the education pathway for professional advisers with a view to increasing flexibility in support of the growth and continuing professionalisation of the financial advice industry.

Timeframe for Tranche 2

Stephen Jones has previously stated his intention to see Tranche 2 passed by May 2025^[7], however with a federal election to be held before the middle of 2025, there is significant doubt about whether the legislation can be drafted, tabled, and passed before Australia goes to the polls.

While there is uncertainty around the outcome of that election, both major parties are committed to closing the loop on DBFO, with shadow financial services minister, Luke Howarth, previously stating his intention to implement the reforms if there was a change of government:

“We support the [Michelle] Levy review in full and wouldn’t go back to the drawing board. We want to get the industry reform done as quickly as possible as time is of the essence. The work has been done; it just needs to be implemented asap. We wouldn’t be reinventing the wheel.”^[8]

2. New legislation around privacy and cybersecurity

Cyber Security Bill 2024 becomes law

A little left field – but very important for medium to large licensees – is the introduction of compulsory ransomware reporting from May 29^th. This requirement, to apply to all businesses with turnover of $3m or more, was introduced as part of The Cyber Security Bill 2024, passed by Parliament in the last week of November^[9], at the same time as major changes to the Privacy Act (discussed in more detail below).

Part 3 of the Cyber Security Act sets out mandatory reporting requirements for entities that experience a cyber security incident and elect to pay any ransom or extortion payment demanded by the perpetrator of the incident. The reporting obligations also extend to entities who are aware that another entity – e.g. an accountant or lawyer or IT consultant – has provided a ransomware payment on its behalf.

A reporting business entity must make a report – through the cyber.gov.au website – within 72 hours of making the ransomware payment or becoming aware that the ransomware payment has been made.

With the frequency and sophistication of cybercrime continuing to increase, so too will the frequency of firms electing to pay ransoms in order to restore normal business operations. Financial advice firms, with access to sensitive client data, remain an attractive target for cybercriminals which is why this requirement is particularly relevant.

Privacy reforms will also impact medium to large advice firms

The slew of legislation passed by the Federal Parliament at the end of November 2024 also included the first tranche of long-awaited reforms to the Privacy Act^[10].

While the government initially intended to remove the small business exemption – which would have effectively seen all businesses subject to the 13 Australian Privacy Principles – intensive lobbying^[11] by small business representatives proved successful, and the final legislation left the exemption in place for businesses with annual turnover under $3m.

These changes – now more relevant to medium and large advice firms – include:

•  a new cause of action in tort for serious invasions of privacy
• a new criminal offence of ‘doxxing’
• new civil penalty provisions for interfering with the privacy of individuals and new OAIC powers to issue infringement notices and compliance notices
• new Ministerial powers to ‘white-list’ countries that provide substantially similar privacy protections, in order to assist entities disclosing personal information overseas
• a new requirement for privacy policies to include information about automated decision-making
• clarifying that taking ‘reasonable steps’ to protect the security of personal information includes implementing ‘technical and organisational measures’.

FAAA expresses concern over the impact of AI on privacy

While the FAAA indicated it was supportive of the Privacy Act changes, it did express concern that the changes were not keeping pace with changes in technology, especially Artificial Intelligence, which is increasingly used by advisers when handling client data.

The FAAA noted in its submission on the changes:

“Many financial advisers are adopting technology to assist with day-to-day planning activities, which inevitably involves the handling of client personal and sensitive data. As in many sectors, it is becoming more and more common for AI tools to be used to record client meetings and transcribe these into file notes.
“Given the breadth and often sensitive nature of client data disclosed during client meetings, the use of AI software for this task, while enabling advisers to both deliver a higher quality service and also help more clients, has clear privacy implications – not least being the incidental disclosure of the client’s information to the AI provider.”^[12]

3. What will ASIC focus on in 2025?

On 14^th November 2024, ASIC unveiled^[13] details of its enforcement priorities for 2025. These priorities indicated the areas ASIC will direct its focus, expertise, and resources throughout the year.

Priorities most impacting advisers include:

• Misconduct exploiting superannuation savings.
• Unscrupulous property investment schemes.
• Failures by insurers to deal fairly and in good faith with customers.
• Licensee failures to have adequate cyber security protections.
• Greenwashing and misleading conduct involving ESG claims.
• Member services failures in the superannuation sector.

This list is notable as much for two items it no longer includes – poor distribution of financial products and compliance with the reportable situations regime.

Whether this suggests ASIC is now comfortable with compliance in these areas is unclear. Certainly, the latest breach reporting data, published by ASIC in October 2024, showed that while small licensees have shown improvement, ASIC believes there is still a degree of under-reporting^[14].

With Joe Longo telling an audience in November 2024 that he agreed the regime was too complicated¹⁵, it remains highly possible further changes – to simplify the regime – could be seen in 2025.

Summary

The financial advice regulatory big picture for 2025 remains crowded and complex. Several initiatives that will reshape advice are in play, although the timing and detail of some changes may not become clear until the second half of 2025, after the federal election.

While advisers must clearly prioritise compliance with the known changes already scheduled, an awareness of the big picture remains critical, to ensure key businesses decisions are made with the future in mind.

———–

References:
[1] https://www.superreview.com.au/news/financial-advice/industry-responds-dbfo-passage-following-controversy-over-s99fa
[2] https://www.ifa.com.au/news/34962-treasury-seeks-broad-consensus-on-fee-consent-forms
[3] https://asic.gov.au/about-asic/news-centre/news-items/asic-releases-new-and-updated-guidance-in-response-to-the-dbfo-act/
[4] Ibid.
[5] https://treasury.gov.au/publication/p2024-607305
[6] https://treasury.gov.au/sites/default/files/2024-12/p2024-607305.pdf
[7] https://www.afr.com/wealth/personal-finance/advice-reforms-to-be-legislated-by-may-next-year-stephen-jones-20241029-p5km4r
[8] https://www.moneymanagement.com.au/news/financial-planning/howarth-commits-implementing-dbfo-reforms-current-form
[9] https://www.twobirds.com/en/insights/2024/australia/australias-first-standalone-cyber-security-law-the-cyber-security-act-2024
[10] https://www.minterellison.com/articles/first-tranche-of-privacy-reforms-passed#:~:text=The%20Privacy%20and%20Other%20Legislation%20Amendment%20Bill%202024%20(Cth)%20(,Parliament%20on%2029%20November%202024.
[11] https://www.afr.com/politics/federal/small-business-wants-out-of-privacy-laws-as-data-breaches-rise-215pc-20241014-p5ki4b
[12] https://www.moneymanagement.com.au/news/financial-planning/fasea-lessons-future-privacy-reforms
[13] https://www.moneymanagement.com.au/news/financial-planning/which-priorities-have-fallen-asics-enforcement-list
[14] Ibid.
[15] https://www.moneymanagement.com.au/news/financial-planning/counterintuitive-effect-asics-reportable-situations-complexity

The post 2025 Regulation and compliance schedule – what advisers must know appeared first on AdviserVoice.

While there is no definitive list of ‘red flags, financial advisers are better placed than most to recognise when financial abuse could be occurring.

Introduction

Financial Abuse is a major societal problem, regarded by many observers, and some states, as a form of domestic violence. Although recognised in Commonwealth law, in most Australian jurisdictions it is not yet a criminal offence (Tasmania and NSW being the exceptions), which can hamper the pursuit and prosecution of perpetrators.

The growing scourge of financial abuse – estimates^[1] suggest more than 600,000 Australians will experience financial abuse in a single year – has significant economic and health impacts, and along with financial scams, represents one of the most significant consumer protection challenges we current face as a society.

The significance of the issue prompted the Parliamentary Joint Committee on Corporations and Financial Services to commence – in April 2024 – an inquiry into the financial services regulatory framework in relation to financial abuse^[2].

The committee called for written submissions by 14 June 2024, and amongst the 100 plus organisations and individuals to submit was the Financial Adviser Association of Australia (FAAA).

A major element of the FAAA submission was the crucial frontline role financial advisers can play in identifying, reporting, and preventing financial abuse.

(The role of advisers in preventing financial abuse was similarly put forward by the FAAA in their submission to an AUSTRAC Consultation which occurred later in the year).

With the FAAA clearly and publicly putting financial abuse on the radar of all financial advisers, this article serves as a high-level investigation into the nature, incidence, and impact of financial abuse, and the strategies financial advisers can play in its detection, reporting, and prevention.

More than just elder abuse

Elder abuse has received extensive media coverage recently. There is no doubt the cost-of-living crisis and housing affordability challenges facing Australia have contributed to a growing incidence of ‘elder financial abuse’. But while the dark side of ‘impatient inheritor’ syndrome is undoubtedly a major issue (as neatly summed in the article^[3] ‘The Bank of Mum and Dad is exposing Australians to the risk of Financial Abuse’), financial abuse is not only suffered by older Australians.

Indeed, 2020 data^[4] suggests most cases of financial abuse occur between the ages of 25 and 64, with a peak between 35 to 49 years – potentially reflecting the ages when victims’ earning capacity, and household expenses, are typically the highest.

So, what exactly do we mean by financial abuse?

A 2022 Report^[5] by Deloitte Access Economics defined financial abuse as:

“A deliberate pattern of behaviours in which an individual seeks to control, exploit or sabotage their partner’s ability to acquire, use and maintain financial resources.”

Financial abuse can take many forms, but according to White Ribbon Australia^[6], common indicators that a person may be financial abusing their partner include:

• controlling all of the household spending
• refusing to include their partner in financial decisions
• the withholding of money
• forbidding their partner to work
• monitoring what their partner spends
• taking out a loan in their partner’s name.

Early inheritance syndrome and other forms of elder financial abuse

The elderly are particularly susceptible to financial abuse, becoming more vulnerable due to their increasing frailty, increasing dependency and diminished capacity.

In many cases the abuser is a family member or carer, whose illegal or improper use of an older person’s funds or resources might include:

mismanagement of their funds or investments

• pressuring relatives for early inheritances
• pressuring the older person to accept lower-cost aged care or forego medical treatments in order to preserve an inheritance
• living with the older person and refusing to contribute money for expenses
• forging or forcing an older person’s signature
• persuading the older person to change the terms of an existing contract, the clauses in a Will or a POA through deception or undue influence
• convincing the older person to sign over the title/s of property they own or to sell their properties below true market value.

The incidence of financial abuse in Australia

According to the Deloitte Access Economics Report^[7], ‘The cost of financial abuse in Australia’, in 2020 over 620,000 Australian women and men were subject to financial.

Women are more likely than men to suffer financial abuse

A disproportionate number of financial abuse victims are women, with the same research suggesting the 620,000 comprised around 380,000 women and 240,000 men.

In percentage terms, this equates to nearly 1 in 30 women, compared to 1 in 50 men, although most experts believe this considerably underestimates the actual incidence due to under-reporting by women who may be too fearful to come forward, or who don’t realise they are a victim.

Incidence by age

Figure 1 depicts the estimated incidence of financial abuse in 2020, by age and gender.

Financial abuse does not discriminate by household income

While a slight skew towards lower income levels is evident when measuring incidence by household income, even higher income households see significant incidence rates, as shown in Figure 2 below (2016 data).

The cost of financial abuse

In their report, Deloitte estimated the cost of financial abuse in 2020 to be over $11 billion, a figure comprising:

• $5.7billion in direct costs to victims
  • $3.2b – income and savings withheld or controlled
  • $1.2b – refusal of perpetrator to contribute to household bills
  • $0.6b – refusal to contribute to shared expenses for children
  • $0.6b – liability for joint debt.
• $5.2 billion in costs to broader economy
  • $4.6b – lost productivity
  • $0.2b – mental health
  • $0.4b – deadweight losses.

The emotional and physical health burden is more telling

Distilling the cost of financial abuse down to dollars and cents overlooks the heavy emotional toll on its victims, and the disruption to their lives. For many victims, the scar tissue can last a lifetime.

These flow on impacts felt by victims can include:

• financial hardship and insecurity
• continued financial dependence on partner (inability to leave)
• damaged credit scores
• housing insecurity
• employment insecurity
• poor mental health and physical health.

Is financial abuse a growing problem?

What we now term financial abuse has of course been occurring for many, many years, although its recognition as a distinct form of domestic abuse is relatively recent, and for this reason historical data on incidence rates is scarce.

AFCA data certainly points to an increasing number of complaints involving financial abuse, as shown in Figure 3, below.

Experts agree that economic pressures, and societal and demographic trends make it highly likely that the incidence of financial abuse is indeed increasing.

Some of the key factors contributing to this likely increase include:

• Economic pressures
  • Cost of living pressures have resulted in significant increases in the cost of groceries, housing costs (rent/mortgage), energy and healthcare, creating a stronger incentive to manipulate and exploit vulnerable family members for financial gain.

• Growing population with CALD background
  • Increased migration is seeing more people of culturally and linguistically diverse (CALD) backgrounds in Australia. Language barriers and cultural norms and traditions amongst some migrant groups make them more susceptible to financial abuse.

• Ageing population
  • Older adults, especially those with declining cognitive abilities or who depend on family members for care, are more susceptible to exploitation
  • Family dynamics can also contribute, with adult children or relatives pressuring older Australians for money, property, or assets.

• Digitisation of financial services
  • The rise of digital and online financial systems has increased opportunities for exploitation through fraud and scams.
  • Vulnerable individuals, such as older adults, may lack confidence with technology, making them more susceptible to exploitation.

• Systemic issues with financial products and processes
  • Gaps in financial literacy and legal protections make some Australians more vulnerable. For instance, joint accounts, power of attorney arrangements, and informal lending agreements can be exploited.

• Generational Wealth Transfers
  • The intergenerational transfer of wealth, such as inheritances or property, creates opportunities for exploitation. Inheritance impatience or disputes within families often lead to financial abuse.

Inquiry submission – language and cultural enablers of financial abuse

Financial Counselling Australia told the Financial Abuse Inquiry about the “almost ubiquitous” dowry abuse in some cultures, giving testimony that, “of 24 newly migrated women attending a financial literacy day in Melbourne, 16 did not know whether they had a bank account or not.”^[11]

Inquiry submission – lack of tech confidence facilitates elder financial abuse

Elder Abuse Action Australia told the Inquiry the risk factors for older people to experience financial abuse have been exacerbated in recent years through the closure of bank branches and the resulting increased digitisation of banking and financial services. “Large numbers of older people report a lack of confidence in managing their finances in the online world and are thus granting account access or pin numbers to family members for assistance, a recent estimate found that approximately 25% of Australians over the age of 65 had provided either account access or a pin number to a family member for this reason.”^[12]

Inquiry submission – systemic issues with products and processes

The Council of Australian Life Insurers told the Inquiry that the guaranteed renewable nature of life insurance, and the primacy of the policy owner in making all decisions relating to a policy can limit the ability of insurers to terminate or change details of a policy in cases of suspected financial abuse.

For example, if a couple shares debts and decide to take out a joint life insurance policy, and they decide to separate or divorce,” there is no option for one to remove themselves, spilt the joint policy or cancel the policy without the consent from both people.” 

“As financial products and insurance policies, various legislative provisions require notifications to be given to policy owners in respect of the policies that they hold. Reconciling these requirements with the need to protect a victim-survivor’s location and other details from an alleged abuser, can cause particular difficulties in the case of joint and cross-policy ownership.”^1[13]

Submissions on behalf of superannuation funds and bodies noted similar difficulties relating to member communication.

Consultation Submission – FAAA calls out issues with non-standard identification

In its submission to an AUSTRAC consultation, the FAAA argued that financial and elder abuse should be taken into account when considering the use of non-standard identification documents.

“We are concerned about the risk of undue influence of Australians occurring in relation to their interactions with financial services. We encourage AUSTRAC to take an active interest in this area as part of its approach to financial inclusion and family and domestic violence. We note the government’s ongoing commitment to address financial abuse (particularly elder abuse) through the Attorney-General’s Department. AUSTRAC guidance may present an opportunity to support victims of financial abuse, including through the current consultation. Undue influence can occur under a variety of circumstances, and we agree this should be a consideration in instances where a person does not have access to standard documentation for identification verification prior to the provision of a designated service.”^[14]

Advisers have a key role – but lack a consistent framework

Referencing its own submission to the Financial Abuse Inquiry, FAAA CEO Sarah Abood noted that the financial advice profession lacks consistent protocols for handling suspected financial abuse, and there are significant barriers to effective collaboration due to privacy laws and insufficient whistleblower protections.

Abood told FAAA members^[15]:

“Financial advisers are uniquely positioned to detect signs of financial abuse due to their close relationships with clients and their families. Despite this, research conducted by the FAAA alongside members shows that there is no clear method of reporting or assisting clients who are subject to financial abuse.”

“Through clear guidance, training, and support, financial advisers can help protect clients and other family members from financial abuse and support them in regaining financial independence.”

The FAAA put forward seven key recommendations^[16] to help reduce the impact of financial abuse:

• Take action to raise public awareness of financial abuse.
• Create a central source of training, information and support for affected people, including the financial professionals who are the ‘frontline’ in identifying this abuse.
• Establish a hotline for consumers and service providers.
• Review the privacy and whistleblower protection laws to ensure relevant information can be safely shared, where financial abuse is suspected.
• National harmonisation of currently state-based estate planning laws.
• Establish a national register of Powers of Attorney.
• Develop a standard identification, reporting and escalation framework.

Recognising the red flags of financial abuse

While there is no definitive list of ‘red flags, financial advisers – by virtue of the length of client relationships, and the visibility they have of the client’s financial and personal circumstances – are better placed than most to recognise when financial abuse could be occurring.

Identifying changes in financial behaviour is critical for recognising potential financial abuse, particularly among vulnerable individuals. Signs of abuse often manifest as unusual or unexpected financial decisions. Examples include large or unexplained withdrawals, major transactions, or investments made without the usual involvement of an adviser. A sudden reluctance to discuss finances or share financial information with trusted individuals can also be a warning sign.

Other indicators include unexplained or unusually large gifts, often given to unexpected recipients, and abrupt changes to wills that conflict with previous intentions, such as disinheriting close family members or benefiting strangers.

Financial abuse can also involve someone moving into the victim’s home without contributing financially, or a third party quickly becoming overly involved in the victim’s life, potentially isolating them from friends and family.

Behavioural or health changes are another red flag. Victims may become withdrawn, depressed, anxious, or neglect personal care, further signalling vulnerability.

These patterns often occur behind closed doors, with abusers taking steps to hide their actions and motives. This makes it difficult to detect and address such issues.

Discussing these concerns with clients is also challenging due to sensitivity, cultural considerations, and family dynamics. Despite these difficulties, it is crucial to support at-risk individuals by identifying these signs early and taking appropriate steps to protect their financial well-being.

Knowing your client, not only in terms of their financial arrangements, but also their family situation and general patterns of behaviour, is critical to detecting even the slightest deviation from what would be considered normal.

Reporting suspected financial abuse

If there are red flags suggesting the client may be the victim of financial abuse, advisers should make the client aware and report the issue to the relevant providers and authorities, which may include the client’s bank/super fund, and, if in NSW or Tasmania, the police.

Conclusion

Financial abuse is a growing societal and consumer protection challenge, with far-reaching economic, emotional, and health impacts on victims. Financial Advisers are uniquely positioned to serve as the first line of defence against this abuse, yet systemic barriers and a lack of clear frameworks often hinder their efforts. To tackle financial abuse effectively, a multi-faceted approach is essential.

The FAAA has highlighted the significant role advisers play in detecting and addressing financial abuse. Their deep, long-standing client relationships allow them to spot red flags, such as unexplained financial decisions, sudden changes in wills, or unusual gifts. However, the profession faces challenges, including privacy laws that restrict information sharing and restrictive product features and processes.

Recommendations to empower advisers include establishing a standardised identification and reporting framework, creating a national register for Powers of Attorney, and harmonising estate planning laws across states. Additionally, raising public awareness, providing advisers with targeted training, and setting up dedicated hotlines for victims and professionals could significantly enhance the ability to combat financial abuse.

Ultimately, financial advisers must navigate sensitive family dynamics and cultural considerations while remaining vigilant for subtle deviations from a client’s usual behaviour. With proper guidance, training, and systemic reforms, they can act as trusted allies in safeguarding clients from exploitation and supporting them in regaining financial independence.

———–

References:
[1] https://rlc.org.au/news-and-media/news/more-600000-australians-experienced-financial-abuse-past-year
[2] https://www.abc.net.au/news/2024-04-04/parliamentary-inquiry-examine-role-banks-prevent-financial-abuse/103670636
[3] https://www.newcastle.edu.au/hippocampus/story/2024/the-bank-of-mum-and-dad
[4] https://www.commbank.com.au/content/dam/caas/newsroom/docs/Cost%20of%20financial%20abuse%20in%20Australia.pdf
[5] Ibid.
[6] https://www.abc.net.au/news/2020-08-15/coronavirus-financial-abuse-domestic-violence-money/12554234?nw=0&r=HtmlFragment
[7] https://www.commbank.com.au/content/dam/caas/newsroom/docs/Cost%20of%20financial%20abuse%20in%20Australia.pdf
[8] Ibid.
[9] https://research-repository.rmit.edu.au/ndownloader/files/50158380/1
[10] https://www.afca.org.au/media/1921/download
[11] https://www.financialcounsellingaustralia.org.au/docs/financial-abuse/
[12] https://www.aph.gov.au/DocumentStore.ashx?id=5e8e75a6-292a-48c0-b5fd-60e7b752a105&subId=758586
[13] https://financialnewswire.com.au/life-insurance/life-insurers-canvas-law-changes-to-address-financial-abuse/
[14] https://www.ifa.com.au/news/34969-faaa-highlights-role-of-advisers-in-stopping-financial-abuse
[15] Ibid.
[16] https://faaa.au/wp-content/uploads/2024/06/20240614-FAAA-submission-to-PJC-inquiry-into-financial-abuse.pdf

The post Consumer protection brief – advisers at the frontline of preventing financial abuse appeared first on AdviserVoice.

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

Introduction

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

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

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

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

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

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

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

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

But, just like McMansions, SOAs have been supersized.

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

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

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

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

Research shows less is more

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

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

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

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

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

In the QAR/DBFO cross-hairs

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

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

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

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

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

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

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

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

Importantly, ASIC also requires that the information be:

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

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

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

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

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

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

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

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

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

ASIC offers relief for digitally delivered advice documents

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

ASIC sets out its aims for RG 221 as including:

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

SOA or ROA?

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

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

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

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

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

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

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

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

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

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

Information to include in an ROA

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

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

ROAs can be video or audio recordings

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

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

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

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

Will compliance teams be the handbrake to SOA reform?

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

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

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

As one expert told IFA magazine:

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

Summary

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

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

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

———–

References:
[1] https://treasury.gov.au/publication/c2014-fsi-final-report
[2] https://www.professionalplanner.com.au/2021/04/fsc-punts-safe-harbour-steps-in-third-simple-vs-complex-advice-pitch/
[3] https://www.sciencedirect.com/science/article/pii/S2405918823000193
[4] https://www.moneymanagement.com.au/news/financial-planning/soas-are-alienating-clients
[5] https://www.sciencedirect.com/science/article/pii/S2405918823000193
[6] https://www.moneymanagement.com.au/features/editorial/compliant-complicated-what-lies-store-soas
[7] Ibid.
[8] https://treasury.gov.au/sites/default/files/2023-01/p2023-358632.pdf
[9] https://insideadviser.com.au/banks-and-funds-to-re-enter-advice-soas-scrapped-in-landmark-advice-reform-package/
[10] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-175-licensing-financial-product-advisers-conduct-and-disclosure/
[11] https://www.assuredsupport.com.au/articles/the-problem-with-models/
[12] https://www.legaledocs.com.au/files/Guides/DoverGuide-PreparingAnEffectiveStatementOfAdvice-Sept-2011.pdf
[13] https://www.ifa.com.au/news/34724-are-licensees-breaking-the-law-with-their-soa-requirements
[14] https://insideadviser.com.au/asic-neutral-on-soa-format-video-statements-good-to-go/
[15] https://www.moneymanagement.com.au/news/financial-planning/fscp-warns-adviser-over-roa-usage
[16] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/faqs-records-of-advice-roas/#preparing-roas
[17] Ibid.
[18] https://www.smsfadviser.com/news/21337-fpa-releases-new-toolkit-for-video-soas
[19] https://www.ifa.com.au/news/34907-will-licensees-maintain-onerous-soa-requirements-despite-dbfo-changes

The post Do longer SOAs break the law? When is an ROA more appropriate? (And other key questions about the communication of advice) appeared first on AdviserVoice.

Advisers need practical knowledge to navigate emerging compliance challenges, particularly in areas such as AI, offshoring, dispute resolution, and private markets.

ASIC is fundamentally a consumer protection agency. The various functions it performs, including market oversight, surveillance, enforcement and education, ultimately all roll up to one core purpose – ensuring good conduct by financial services providers in order to protect consumers of those services from bad outcomes.

Each year ASIC publishes its enforcement priorities for the following year, essentially flagging to all market participants what they see as the most problematic areas worthy of extra attention and resources.

In August 2024, ASIC published their 2025 enforcement priorities^[1], and as well as giving insight into how the industry is evolving, they also convey a more practical purpose for industry participants – including financial advisers and licensees – providing a checklist of items necessary to ensure one remains compliant.

According to the 2024 Adviser Ratings Financial Advice Landscape Report^[2], over 94% of advice practices comprise 5 advisers or less, with around 60% comprising single advice licensees, and the more we see advisers acting as licensees, the more these enforcement priorities become directly relevant to the adviser population.

In this article, we will examine the consumer protection role played by ASIC, through the lens of its 2025 priorities, drilling down into some of the newer ones and those likely to have the most impact on advisers. Readers will gain an understanding of the way ASIC performs its role, and the specific aspects of the advice value chain that should be evaluated to ensure advisers are operating compliantly and delivering positive outcomes for their clients.

A quick refresher – how ASIC operates

ASIC performs a number of activities in order to promote integrity and consumer protection within the Australian financial system. These include:

• Enforcement and compliance
  • Including areas that impact market integrity or cause consumer harm
  • ASIC administers and enforces compliance with many of the regulatory instruments directly relevant to financial advisers, including the Corporations Act 2001, and Delivering Better Financial Outcomes (DBFO).
• Supervision and Surveillance
  • Through mechanisms such as file sampling, mystery shopping and targeted reports, ASIC seeks to ensure providers are acting in the best interests of consumers, operating fairly and efficiently, and within the terms of their licence.
• Guidance
  • Laws are generally very complex and hard to translate into practical application.
  • Through its familiar ‘Regulatory Guides (‘RGs), ASIC provides guidance about how they will administer and enforce the law, and what they consider to be good practice.
• Licensing and registration
  • ASIC assesses a range of license and registration applications, including for AFSLs and Managed Investment Schemes.
• Regulatory relief
  • Where appropriate ASIC provides relief from laws, to facilitate business and promote innovation in the industry.
• Engagement
  • With peer regulators in Australia and overseas, and external panels of experts in order to understand developments and systemic risks.
• Education
  • Financial literacy is a key consumer protection pillar, and through its longstanding Moneysmart website, ASIC provides consumer facing education, information and tools.
• ASIC Registers
  • ASIC administers more than 30 legal registers including the Financial Adviser Register (FAR).

ASIC 2025 focus areas at a glance

ASIC’s focus areas are a subset of its overarching strategic priorities, as summarised below:

Media coverage gives advisers clues

Financial media coverage^[4,5] – at the time the ASIC priorities were launched – highlighted a number of specific areas directly impacting advisers and practice owners, including the use of Artificial Intelligence and offshoring, as well as Internal Dispute Resolution (IDR) processes. In truth though, a broader range of themes also relevant to advisers, including greenwashing, superannuation fund performance and DDO obligations, featured extensively in the media over prior months.

Deeper Dive – DDO

The Design and Distribution Obligations are intended to protect consumers by ensuring firms take a consumer-centric approach to the design and distribution of financial products. While the Target Market Determination (TMD) document is the most visible manifestation of DDO, the regulations are less about disclosure and more about the supporting processes and governance around aligning customers and products.

ASIC Report 795, issued in September 2024, contained the results of DDO surveillance between October 2023 and August 2024. Their review revealed^[6]:

• many issuers had limited due diligence arrangements to assess and monitor third party distributors
• some issuers of high-risk products were relying on broad search terms in online marketing
• many issuers used poor quality consumer questionnaires, and
• only a few issuers monitored consumer outcomes and product performance.

The report recommends issuers improve distribution practices regarding the selection and supervision of distributors, training staff, marketing materials, consumer questionnaires, and information and monitoring outcomes.

Advisers also have reporting and record keeping obligations under DDO, both in terms of justifying and documenting any cases where a product recommendation is inconsistent with the TMD, and in terms of providing data to product issuers around complaints and significant dealings.

As detailed in ASIC Information Sheet 264^[7], advice licensees and financial advisers are required to report to issuers:

• if they receive a complaint, how many complaints they have received during a reporting period
• any other information that the issuer specifies in the TMD to assist the issuer to determine whether an event or circumstance has occurred that would reasonably suggest that the TMD is no longer appropriate, and
• when they become aware of a significant dealing in the product that is not consistent with the TMD.

Financial advisers must also keep records about the above distribution information in relation to products for up to seven years.

In light of ASIC’s heightened focus and recent successes in prosecuting issuers, it seems almost inevitable that product providers will review their own processes and interactions with distributors. Financial advisers should probably expect fund managers and insurers to step up their demands for distribution data and reporting, and should thus consider whether their existing approach can stand up to any such demands.

Deeper Dive – Artificial Intelligence

AI will undoubtedly transform many industries, and indeed many advisers expect it to be a significant driver of efficiencies across many aspects of the advice value chain.

In a survey by AR Data^[8], advisers were asked which areas of advice they expected AI to impact:

• 15% said portfolio management
• 54% said SOA/ROA production
• 56% said marketing, and
• 61% said client engagement.

Many practices have already put AI platforms such as ChatGPT and Microsoft Co-Pilot to use in their marketing and communication, leveraging its ability to generate high quality written content (not traditionally a strength of most advisers).

Of more concern to ASIC however is the use of AI in generating SOAs and ROAs, and even more fundamentally, the actual advice contained in these documents.

ASIC likely have two major concerns here.

One is in the capacity for AI to make errors. It is well documented that ChatGPT can make errors in both facts, and in data analysis. A quick google search will find examples of error rates ranging from 7% to over 50%, depending on the scenario.

As the ones ultimately still responsible for their advice, advisers using AI, whether it be to craft documents, or for tasks such as product comparisons, cash flow analysis, and scenario modelling, still need to quality check every output produced by AI.

ASIC’s second concern is likely around data protection and privacy. Loading sensitive client data up to generic off-the-shelf AI platforms such as OpenAI (ChatGPT) is fraught with risks, including the lack of security of that data and even potential legal complications around data ownership.

Advisers have extensive ethical and legal obligations around protecting client data, and before using AI with client data should do a thorough due diligence around these issues before selecting and using a platform.

Deeper dive – offshoring

An enduring narrative within advice circles has been the quest for efficiency. The rising cost of providing advice has put it out of reach for many Australians, and threatened the financial viability of many practices.

Various studies have found cost to be the single biggest barrier to clients seeking financial advice, and the last few years has seen this issue tackled by policymakers – most recently through the Quality of Advice review – and by the profession itself through the adoption of technology and outsourcing to bring costs down.

Advisers are an expensive resource, capable of generating significant hourly revenues, and thus using them for low value tasks such as data gathering, completing application forms, and ongoing client administration makes little economic sense. Many advisers have reached this realisation and have chosen to outsource to providers who can perform the tasks at a much lower cost.

The most significant cost savings – from 30% to 70% in hourly rate terms – are made when that outsourcing provider is offshore, where wage and other employee costs are lower. The Philippines, for example, is home to a number of outsourcing providers who are supporting thousands of Australian advisers with services including client onboarding, document production, paraplanning, fact finds, insurance quotes and renewals, and client administration.

So strong has been the growth of offshoring, ASIC have specifically called it out in their enforcement priorities, highlighting data security and privacy as a particular concern, stating:

“We will review how investment managers and financial advisers manage the risks of using offshore service providers. In particular, we will look at how they manage risks related to technology, data sharing and privacy. We will also publish resources that will help licensees improve the security of client data when sending it offshore.”^[9]

ASIC’s concern around third party providers and data risks had been raised earlier, in late 2023, when ASIC Chair Longo said, in response to their ‘cyber pulse’ survey findings:

“For all organisations, cyber security and cyber resilience must be a top priority. ASIC expects this to include oversight of cyber security risk throughout the organisation’s supply chain – it was alarming that 44% of participants are not managing third-party or supply chain risks. Third-party relationships provide threat actors with easy access to an organisation’s systems and networks.”^[10]

Advisers and Licensees working with offshore providers are thus on notice to ensure their own risk management frameworks are robust, not only in the initial selection of a provider, but in the ongoing governance around provider engagement, including staff training, monitoring, reporting, and cyber resilience testing.

Deeper dive – private markets

While it remains much smaller than the public market, the Australian private equity market has grown significantly over recent years. Assets under management in Australian-focused private equity funds – an important component of the private equity market – nearly tripled in size – to $66 billion – between 2010 and 2024^[11].

Private credit offerings have also grown rapidly, so quickly in fact that research houses have sounded alarm bells. But with more and more people meeting the sophisticated investor test, the access to new investment opportunities is sure to propel further growth, prompting ASIC – concerned about the opacity and illiquidity of private market offerings – to ramp up their scrutiny.

Speaking on the issue, ASIC chair Joe Longo said:

“While Australia’s private markets are dwarfed in size by our listed equity markets, their opacity presents an outsized risk to market integrity, particularly as more investors become exposed. The addition of a new strategic priority aimed at driving consistency and transparency across markets and products puts all market participants on notice.”^[12]

One of the biggest issues faced in this space is the knowledge gap, especially with clients.

A global survey^[13] of investment advisers found around 70 per cent were planning to increase clients’ allocation to the asset class compared with 12 months ago, driven by the opportunities for diversification and performance.

That same survey found that while over 90% of advisers rated their own knowledge of private markets as advanced or intermediate, 50% rated their clients’ knowledge as beginner level or non-existent.

While the availability of retail private market offerings in Australia remains limited, advisers working with clients on a wholesale basis are on notice to not only do exhaustive due diligence around individual recommendations, but more broadly to address client knowledge levels significantly lower than that seen with more traditional investment products.

Deeper dive – dispute resolution

Also due for increased ASIC scrutiny is the adequacy of internal dispute resolution (IDR) arrangements.

Their latest Corporate Plan notes they will undertake a cross-sector surveillance of compliance with IDR requirements outlined in Regulatory Guide 271 Internal dispute resolution (RG 271)^[14].

This surveillance will check whether entities have fair and efficient dispute resolution processes in place, and identify areas where licensees need to improve.

In 2024, ASIC will publish observations from the first year of IDR data reported by all firms, while in 2025 they will publish firm-level IDR data.

ASIC’s handling of dispute resolution data itself came under scrutiny from a Senate Inquiry earlier in 2024, with the Inquiry Report noting that 93 per cent of reportable situation reports made by AFSLs were assessed as requiring no action in 2022–23, representing more than 26,000 reports^[15].

This pressure on ASIC is likely to be passed down, and AFSLs are therefore on notice to ensure their IDR arrangements are formalised, operating fairly and efficiently, and all reporting obligations are being complied with.

Summary

As the entity responsible for financial consumer protection, ASIC’s enforcement priorities, published each year via an updated Corporate Plan, provide financial advisers with both valuable insights into new trends and issues within the financial system, and practical signalling around the specific areas that will come under increased scrutiny going forward, allowing advisers to similarly tighten their compliance in a targeted way.

In August 2024, ASIC publicly released their priorities for 2025, highlighting a range of areas of focus, including climate risks, retirement outcomes, and cyber resilience.

Through the media, various ASIC spokespeople also highlighted emerging areas of concern with direct relevance to financial advisers and licensees, including IDR processes, offshoring, the growth of private markets, DDO governance, and the use of Artificial Intelligence in advice.

By understanding the dynamics within these issues, and the concerns held by ASIC, advisers and licensees will be better equipped to position themselves for the future and to ensure they are compliant and delivering positive consumer outcomes.

———–

References:
[1] https://www.moneymanagement.com.au/news/financial-planning/asic-unveils-strategic-enforcement-priorities-fy25
[2] https://www.adviserratings.com.au/news/2024-australian-financial-advice-landscape-report/
[3] https://download.asic.gov.au/media/1t4gbqvs/asic-corporate-plan-2024-25-published-22-august-2024.pdf
[4] https://www.professionalplanner.com.au/2024/08/asic-places-offshoring-and-ai-in-advice-under-magnifying-glass/
[5] https://www.moneymanagement.com.au/news/financial-planning/asic-unveils-strategic-enforcement-priorities-fy25
[6] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-200mr-asic-calls-on-product-issuers-to-review-distribution-practices-for-ddo-compliance/
[7] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/faqs-design-and-distribution-obligations-for-advice-licensees-and-financial-advisers/#how-the-design-and-distribution-obligations-apply
[8] https://www.adviserratings.com.au/news/2024-australian-financial-advice-landscape-report/
[9] https://download.asic.gov.au/media/1t4gbqvs/asic-corporate-plan-2024-25-published-22-august-2024.pdf
[10] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-300mr-asic-calls-for-greater-organisational-vigilance-to-combat-cyber-threats/
[11] https://www.rba.gov.au/publications/bulletin/2024/apr/the-private-equity-market-in-australia.html
[12] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-184mr-asic-expands-strategic-priorities-for-coming-12-months/
[13] https://www.ifa.com.au/news/34364-advisers-need-to-tackle-private-markets-knowledge-gap
[14] https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-271-internal-dispute-resolution/
[15] https://www.moneymanagement.com.au/news/financial-planning/asic-unveils-strategic-enforcement-priorities-fy25

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