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

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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

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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

The post ASIC’s enforcement priorities – practical adviser implications appeared first on AdviserVoice.

ASIC Report 779 flagged a possible regulatory response to deficiencies it identified in relation to advice around underperforming superannuation options.

Introduction

Superannuation is one of the key pillars of Australian retirement incomes policy, and for many Australians will represent their most significant asset outside their home.  As such, recent years have seen an increasing regulator focus on strengthening consumer protections around individual’s superannuation savings. These protections have an overarching intention of optimising superannuation balances at retirement, a challenge approached by regulators from two sides – reducing the amount of fees eroding balances, and increasing the amount of investment returns growing balances.

These objectives were reflected in two of the most transformative consumer protection reforms seen in superannuation:

• The Protecting Your Superannuation reforms of July 2019, which addressed premiums for default life cover and admin fees for low balance and inactive accounts^[1], and
• The Your Super Your Future reforms of 2021 which introduced new obligations on superannuation trustees to act in their members’ best interests. These obligations included undergoing an annual performance test to prove their right to remain in the system^[2].

To now, the superannuation performance tests – and the accompanying widespread media attention^[3] given to so called ‘dud funds’ – has largely been seen as the sole concern of the funds themselves.

However, in February 2024, ASIC released Report 779 ‘Superannuation choice products: What focus is there on performance?’ which suddenly drew advisers and advice licensees into the fray, calling them out over a lack of monitoring and acting around underperforming funds, and an overreliance on research ratings and APLs when advising clients around specific funds and investment options^[4].

The report was met by consternation in some circles, not only because the obligations it imposes on advisers in relation to superannuation fund performance, but for the calling out of APLs and research ratings, two important resources relied upon when making recommendations.

Background to superannuation fund performance tests

Superannuation performance testing first came into effect in July 2021, and was an outcome of the Productivity Commission Inquiry into the Efficiency and Competitiveness of Australia’s Superannuation System^[5].

The test – which originally only applied to MySuper accounts – is conducted by the Australian Prudential Regulation Authority (APRA) and assesses the performance of a superannuation product by comparing its:

• historical investment performance against a benchmark return, based on the product’s strategic asset allocation, (for example the S&P/ASX 300 Total Return Index for Australian equities, and the Bloomberg Ausbond Composite 0+ Yr Index for Australian fixed interest^[6])
• most recent administration fees against the median fees charged by their peer group.

Products that fail the test are subject to clear legislated consequences – trustees must write to affected members notifying them that their product has failed the test and if a product fails the test two years in a row, it is closed to new members until it passes a future test.

In addition, funds that fail the test can expect to be subjected to heightened supervision from APRA to ensure that trustees are delivering better outcomes for their members.

Since July 2023, the test has also been applied to Trustee Directed Products (TDPs), a subset of the choice accumulation sector.

Positive consumer outcomes from the performance tests

Since the introduction of the tests, 80 MySuper products representing 14 million accounts and $900 billion in assets, and 805 TDPs representing 4 million accounts and $360 billion in assets, have been assessed by APRA^[7].

To date, 14 MySuper products have failed the test, of which 13 have exited the market or have announced plans to do so. This has resulted in over 800,000 member accounts merging with a better performing fund. The remaining MySuper product has since improved its performance.

TDP testing, which began 2 years later, has so far found 12 per cent of TDPs (roughly 100 products) to be underperforming, with trustees forced to advise members in these products that they had failed the test. Interestingly, this 12% failure rate comprised a 25% failure rate for platform TDPs, compared to only 4% for non-platform products^[8]).

TDPs failing the test again in 2024 will be forced to close to new members.

From a consumer protection perspective, the tests are regarded by many observers as a consumer protection success. As Treasury noted in their March 2024 Consultation Paper,

“The test has removed underperforming products in the MySuper sector, improving member outcomes, and enhancing transparency on the performance of their products. Without the test, affected members were unlikely to have known that they were in an underperforming product and would have remained there.” ^[9]

(Whilst there are some experts^[10] who claim that the test actually undermines consumer interests – by encouraging a more conservative investment approach with lower scope for outperformance – this is yet to be proven, and in any case is beyond the scope of this discussion).

The Grattan Institute, in a submission to government^[11], reference a Treasury estimate that the performance test could reap $10.7 billion in benefits over the subsequent decade through under-performing funds improving or exiting. The Grattan Institute also noted that some funds who had failed the performance test had reduced their fees, saving their members around $100m in fees, with the potential future savings even greater.

So where does Report 779 come in?

ASIC released Report 779 in February 2024, its purpose being to examine the role of superannuation trustees, financial advisers and Australian financial services licensees in influencing the investment options that make up member superannuation portfolios as part of a choice superannuation product (including TDPs).

According to APRA, Choice products accounted for 79% of funds under management in retail super funds, and as such, are frequently held as an outcome of financial advic^[12].

What did Report 779 find?

Based on its review (encompassing 10 fund trustees, 21 advice licensees and 88 advice files), the report’s high-level finding was there was:

“Often insufficient focus on performance and a lack of transparency about persistently underperforming investment options”.

The report noted that Trustees, advisers and advice licensees significantly influence the make-up of a choice member’s superannuation investment portfolio, and were concerned that some members may be unaware that the options they are invested in are not performing as anticipated and that there could be better options available to them.

It stated that while members are the ultimate decision makers in relation to their portfolios and bear the risk of underperformance, trustees, advisers and licensees must take steps to:

• support members in earning good net returns from their superannuation investments and meeting their financial objectives, and
• address and reduce member exposure to persistently underperforming options where appropriate.

ASIC observed that ‘For many trustees, advisers and advice licensees this will require improvements to their practices’.

Detailed findings

In conducting their review, ASIC found a number of deficiencies in the way trustees, advisers, and licensees were discharging their legal obligations.

Its review of trustees found – in some cases – insufficient focus on investment performance in deciding to offer, and continue offering, certain investment options. ASIC found that – despite underperformance ranging from 0.2% to 6.7% below the benchmark stated in the applicable PDS – some trustees were failing to take action or even monitor underperforming options. Communication to members about persistent underperformance was also lacking.

ASIC also took trustees to task over the following failures:

• an over reliance on research ratings, and having a low benchmark for such ratings (e.g. neutral rather than investment grade)
• offering products purely to broaden their range, or purely in response to adviser demand
• failing to have triggers forcing the withdrawal and review of the product’s TMD in the event of persistent underperformance.

Trustees were also urged to consider providing additional communications to members who may have ceased an advice relationship, noting that many members were in products designed to be accessed with personal advice, but not all members maintained an ongoing advice relationship.

Advisers not meeting Best Interests Duty in relation to performance

Catching many in the advice profession by surprise, ASIC also shone a spotlight on what it said was failings on the part of advisers and licensees.

Across the 88 advice files reviewed (all involving recommendations relating to underperforming options), only one quarter included a recommendation for a full replacement or redemption for the underperforming option.

For the remaining 66 files, the adviser’s most recent recommendation was to invest in or retain (i.e. hold, increase or partially reduce an existing investment in) the underperforming option.

Further, ASIC found 12% of advice files reviewed contained advice deficiencies relating to the underperforming option that were a major factor in the adviser failing to demonstrate compliance with:

• the best interests duty, and
• the appropriate advice obligation.

ASIC concerns with these files were that they did not:

• demonstrate that the adviser had conducted a reasonable investigation and assessment of the underperforming option
• identify underperformance, and
• explain why it was appropriate for the client to retain the option despite the underperformance.

It should be noted that ASIC does acknowledge there can be sound reasons to keep clients in an underperforming option, including for CGT reasons, or if the switching costs outweigh the underperformance.

In summary, ASIC was less concerned about the actual recommendation to invest in or retain an underperforming option, and more about the lack of investigation and client communication about why that recommendation was being made.

Licensees in the cross hairs too

21 AFSLs were also reviewed for Report 779, with particular focus on the construction of Approved Product Lists. ASIC found almost a third of AFSLs were including superannuation options on their APL solely on the availability of options within certain superannuation choice products or a minimum external product research rating, without records of further research or consideration.

Over reliance on APLs and Research Ratings

Arguably the most significant call out from Report 779 was what ASIC considered to be an over-reliance on third parties – trustees and AFSLs being too reliant on research ratings, and advisers being too reliant on APLs, and research ratings. Special mention was made to the fact that using the benchmark rating of ‘neutral’ to determine whether an option remained available was setting the bar quite low

The message to advisers from ASIC is that ultimately, the adviser is responsible for their recommendation:

“When relevant to the subject matter of the advice, advisers should treat performance as a primary consideration and consider information from a range of sources to develop and support their recommendations.
Advisers should be careful not to over-rely on advice licensee product approvals or external research ratings. The fact that an option is approved by an advice licensee or has a minimum external research rating does not mean that an adviser can ignore the performance of the option when providing personal advice.
Advisers must also ensure that their advice explains the basis upon which the advice was given. Regardless of whether the adviser’s recommendation is to acquire, retain or redeem an underperforming option, they should explain why that recommendation is appropriate despite the underperformance and based on the client’s relevant circumstances.” ASIC Report 779.

Advisers can’t set and forget

It is clear that advisers can’t rely on the appropriateness of their advice at a ‘point in time’ – rather there is an obligation to continually monitor, communicate, and act in relation to superannuation fund performance.

Better practices called out by ASIC

By way of guidance, Report 779 also identified what ASIC regarded as better practices around identifying and making recommendations in relation to underperforming options. These ‘better practice’ examples included advice files which incorporated:

• explanations of why the option was being recommended within a broader diversified portfolio, its performance over various timeframes, and why the outlook was positive
• a copy of the advice licensee’s most recent research about the underperforming option, including details about its objectives, investment approach, asset allocation and performance against a relevant benchmark over various periods
• a copy of the underperforming option’s most recent TMD and a file note recording the adviser’s consideration of the TMD, indicating that the adviser had considered the target market for the option when determining its suitability for the client.

Media coverage and industry reaction

The initial response among the advice profession was one of surprise and alarm. ASIC’s own media release^[13] said they were “considering a range of regulatory responses where there was an indication clients were at risk of detriment as a result of personal advice”, and the accompanying trade media headlines were understandably alarmist^[14].

The overall recommendations about the need to make performance a priority focus in the context of superannuation investment options, and the reminder that advisers shouldn’t blindly rely on research ratings and APL inclusion as a proxy for due diligence likely also came as a shock for many. Indeed, at a time when many advisers have been deliberately unchaining their value proposition from investment performance, Report 779 almost seemed like a backward step^[15].

But is it really?

Or has the assessment of investment performance always been a core part of an adviser’s role, and integral to their Best Interests Duty?

Section 961B (2) – of the Corporations Act, which cover the Best Interests Duty, refers to the need to:

“Conduct a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter”^[16]

And in RG 175, ASIC suggests:

“One way an advice provider can conduct a reasonable investigation into financial products, for the purposes of s961B(2)(e)(i), is by benchmarking the product at appropriate intervals against the market for similar products to establish its competitiveness on key criteria, such as: (a) performance history over an appropriate period; (b) features; (c) fees; and (d) risk.”^[17]

In this context, perhaps the recommendations of Report 779 shouldn’t come as a surprise, and for the majority of professional, client centric financial advisers, they are unlikely to require any major overhauling of processes.

Summary

Superannuation Performance Testing is one of the most significant financial consumer protection initiatives of the last decade, and one which has been found to have delivered meaningfully improved outcomes for superannuation members.

Initially applying to default ‘MySuper’ products only, in 2023 the test was extended to Choice products, thus bringing into scope many products used by financial advisers. In Report 779, ASIC examined whether trustees, advisers, and AFSLs were placing enough focus investment performance. Their Report noted several concerning deficiencies in the way advisers and trustees were monitoring, acting on, and communicating instances of underperformance in superannuation options.

ASIC’s high-level guidance for advisers when dealing with underperformance is not to rely on research ratings and APL inclusions as a proxy for due diligence, and instead conduct their own thorough investigations as to the performance of a given option, the reasons for that performance, and the future performance outlook. The details and outcomes of these investigations need to be accurately recorded and communicated to the client. This applies not just at the point of the initial advice but also throughout the duration of the client/adviser relationship.

———–

References:
[1] https://www.superguide.com.au/how-super-works/protecting-your-super-package
[2] https://www.allens.com.au/insights-news/insights/2021/02/your-future-your-super-reforms-introduced-to-parliament/
[3] https://www.afr.com/policy/tax-and-super/super-funds-advisers-keep-customers-in-the-dark-on-duds-asic-20240221-p5f6nz
[4] https://download.asic.gov.au/media/dmifq31x/rep779-published-21-february-2024.pdf
[5] https://treasury.gov.au/sites/default/files/2024-03/c2024-471223-cp.pdf
[6] https://www.selectingsuper.com.au/learning_centre/the-superannuation-performance-test
[7] https://treasury.gov.au/sites/default/files/2024-03/c2024-471223-cp.pdf
[8] Ibid
[9] Ibid
[10] https://www.afr.com/chanticleer/this-fundie-says-benchmark-hugging-is-hurting-super-funds-20240317-p5fcza
[11] https://grattan.edu.au/wp-content/uploads/2024/05/Grattan-2024-Submission-to-the-Treasury-review-of-the-YFYS-performance-test.pdf
[12] https://download.asic.gov.au/media/dmifq31x/rep779-published-21-february-2024.pdf
[13] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-026mr-asic-calls-on-industry-to-improve-oversight-of-choice-super-performance-and-address-issues/
[14] https://www.ifa.com.au/news/33898-regulatory-response-looms-as-asic-finds-deficiencies-in-adviser-oversight-of-super-performance
[15] https://www.advisely.com.au/blog/future-fit-advice/what-does-asic-report-779-mean-for-advice/456
[16] https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s961b.html
[17] https://download.asic.gov.au/media/bbjdpjjc/rg175-published-15-june-2021-20231103.pdf

The post ASIC Report 779 – adviser obligations re superannuation underperformance appeared first on AdviserVoice.

Recent market and regulatory developments have brought digital assets – including crypto-based products – more into the financial mainstream.

Introduction

Still regarded with suspicion by many, cryptocurrencies have continued to grow in popularity in Australia. Despite losing value by more than 60% in 2022^[1], Bitcoin and other popular cryptocurrencies have proved remarkably resilient, to the extent that an estimated 5.6 million Australians^[2] – more than a quarter of the population – have either owned, or expressed an interest in owning, cryptocurrency over the last 12 months.

Increasingly then, financial advisers are finding their clients either already hold crypto, or are enquiring about it – questions which of course advisers are not currently licensed to advise on.

But while the inability to advise on crypto has seen most advisers give it scant attention historically, the first half of 2024 has seen a number of high-profile announcements splashed across the financial media, making the topic much harder to avoid. These announcements include the United States SEC approval of Bitcoin spot price ETFs in January 2024^[3], and more recently, the local launch of ‘Australia’s first spot Bitcoin ETF’ with direct Bitcoin holdings^[4] (a number of existing Bitcoin ETFs held Bitcoin indirectly).

More significant though, from a financial adviser perspective, is the regulatory reform of digital currency platforms currently underway, which is likely to utilise the existing AFSL framework, and is designed to significantly step-up protections for consumers and their digital assets.

To the extent that Australian financial regulation often takes a lead from developments in the US and UK, it seems inevitable that crypto-based products will eventually be regarded and regulated as mainstream offerings. High risk certainly, but arguably no more so than some existing classes of product.

Australian financial advisers should therefore be across developments in the crypto space for two main reasons:

• a growing proportion of their clients already hold crypto or are interested in crypto, and
• coming regulatory reforms are likely to expedite the process by which crypto and crypto-based products find their way onto APLs.

This article will revisit the current and proposed regulatory framework for cryptocurrencies, through a consumer protection lens, to help advisers understand the context already applicable to a small but growing percentage of their clients, and to prepare them for the almost inevitable entry of crypto-based products onto APLs around the country.

Current crypto context – through a consumer protection lens

When assessing current consumer risks and protections in the world of digital assets, Treasury’s four pillars of financial consumer protection⁵ can be a useful starting point:

• product regulation
• disclosure
• financial literacy
• financial advice.

Current product regulation and disclosure

As it currently stands, crypto currency and other digital assets are not themselves classed as financial products under Corporations law, putting them beyond the scope of many regulatory requirements and associated consumer protections.

The issuers of such offerings are not required to be licensed (although this will change under proposed reforms), they aren’t required to act in the best interests of investors, they aren’t subject to any capital requirements, and they aren’t required to be a member of an External Dispute Resolution Body or the Compensation Scheme of last resort (CSLR).

Some crypto-based instruments are already classed as financial products

While the currencies themselves (Bitcoin, Ethereum, etc) are not financial products (in the same way cash isn’t), some instruments based around crypto (such as crypto ETFs) ARE classed as financial products.

As far back as 2021 ASIC issued two Information Sheets relevant to crypto-based products – 225 (Crypto Assets)^[6], and 230 (Exchange traded products: Admission guidelines)^[7].

These Information Sheets address the circumstances where a crypto offering could be classed as a financial product, and then provide more detailed guidance about matters the issuers of such products needed to address, including institutional support of the crypto asset, service providers willing to support the use of the crypto asset, maturity of the spot market for the crypto asset, regulation of derivatives linked to the crypto asset, and the availability of robust and transparent pricing mechanisms for the crypto asset.

Crypto-based ETFs

As already mentioned, a number of providers have been issuing crypto-based ETFs in Australia for a number of years now. These include offerings which indirectly hold crypto currencies, as well as those which tap into the companies operating in the broader crypto ecosystem, including companies building crypto mining equipment, crypto trading venues, and other key services that allow the crypto economy to thrive.

As Managed Investment Schemes, crypto-based ETFs are subject to the strict guidelines applying to other retail financial products, including:

• registering the scheme with ASIC
• establishing a constitution and compliance plan
• obtaining an AFS licence to act as a responsible entity, and
• preparing and issuing a compliant product disclosure statement (PDS) and comply with other disclosure obligations.

Responsible entities (REs) and managed investment schemes are regulated under Chapter 5C of the Corporations Act. They are entrusted with the funds of their investors and must comply with their legal obligations as REs, including to act in the best interests of members of the scheme.

Disclosure requirements for crypto-based financial products

ASIC has also clarified^[8] the types of information it expects to see covered in the PDSs for crypto-based offerings:

• in relation to the characteristics of crypto assets:
  • the technologies that underpin crypto assets, such as blockchains, distributed ledger technology, cryptography and others
  • how crypto assets are created, transferred, and destroyed
  • how crypto assets are valued and traded, and
  • how crypto assets are held in custody.
• in relation to the risks of the crypto assets:
  • market risk – historically, crypto-assets have demonstrated that their investment performance can be highly volatile
  • pricing risk – it may be difficult to value some crypto-assets accurately
  • immutability – most crypto-assets are built on immutable blockchains, meaning that an incorrect or unauthorised transfer cannot be reversed
  • political, regulatory, and legal risk – government and/or regulatory action may affect the value of crypto-assets held by the scheme
  • custody risk – the private keys may be lost or compromised,
  • cyber risk – the nature of crypto-assets may mean they are more susceptible to cyber risks than other asset classes, and
  • environmental impact –some crypto-assets have a large environmental impact because of the energy consumed when mining them.

2024 proposed regulatory reform of digital assets (including crypto)

In October 2023, Treasury released a paper – Regulating Digital Asset Platforms (Proposal Paper) – seeking stakeholder feedback on proposals for a new framework to regulate entities providing access to cryptocurrencies and digital assets and holding them for Australians and Australian businesses^[9].

A number of changes are proposed by Treasury to achieve three main goals:

• introduce a framework for the digital asset industry innovation and growth
• provide certainty and clarity for the digital asset industry, and
• protect consumers and their assets involved in the digital asset space.

One of the headline reforms proposed by Treasury is to extend the definition of financial product to include digital asset facilities. A ‘digital asset facility’ (DAF) is a facility for holding assets and assets backing digital assets.

The issuer of a DAF (or platform) would be the person or persons responsible for the obligations owed to customers under the terms of the asset holding arrangement.

This means a person carrying on a business of providing financial services in Australia in relation to a DAF will need to hold an AFS licence (and comply with all obligations that come with holding an AFS licence).

‘Financial services’ in this context include:

• dealing in a financial product (applying for or acquiring, issuing, varying or disposing of a financial product)
• making a market in a financial product
• providing a custodial or depository service, and
• providing financial product advice.

Given it is the DAFs that are financial products under the proposed regime – rather than the tokens themselves – an entity will only be providing financial product advice when the entity is giving advice about using a DAF and/or investing through it.

Treasury proposes that DAF advice would include advice in relation to acquiring, holding and disposing of digital assets (both financial product and non-financial products) through a digital asset platform.

From an adviser perspective, this nuance is significant, and reinforces the view that regulators are not putting advice providers on the hook for the fluctuating values of crypto assets, but rather for the due diligence around the DAF provider.

A salient example of why this may be more appropriate is the collapse of FTX, specifically referenced in the Treasury Proposals Paper:

“Recent failures of digital asset platforms have led to considerable consumer losses. For instance, the collapse of FTX alone affected approximately 50,000 Australian consumers. The common factors among these failures were: (i) significant loss of assets held on behalf of customers; (ii) ineffective management practices; (iii) inadequate governance structures; (iv) poor operational resilience; (v) instances of fraudulent activities; and (vi) widespread conflicts of interest.”^[10]

FTX was a crypto exchange (an example of a DAF), not a crypto currency, an important delineation!

It’s not about the digital assets, but the platforms on which they sit

A major implication of the proposals is that digital assets – including cryptocurrencies – will not generally be regulated as a financial product.

Rather, the focus of the reforms is on the risks created by intermediaries in the digital asset ecosystem, rather than the digital assets themselves.

To many observers, this is a significant change in direction compared to what may have been expected. (Earlier in 2023 the Government undertook an exercise called ‘Token Mapping, leading many to conclude that a token-based/technology-based approach was going underpin any regulatory framework.

The new approach is intended to create consistent regulatory outcomes regardless of the underlying token or technology. while focussing on where the potential harm might be.

Existing consumer law

Consumers are also provided a measure of protection under Australian Consumer Law (ACL) relating to the general offer of services or products (including crypto).

This law prohibits misleading or deceptive conduct in a range of contexts, including marketing and advertising.  Promoters of sellers of any product or service (including crypto offerings) must take care to ensure buyers are not misled or deceived, and they are prohibited from engaging in unconscionable conduct and must ensure that the products they are offering are fit for their intended purpose.

Using powers delegated by the ACCC, ASIC had previously indicated^[11] that it will take action if it detects misleading or deceptive conduct in the following contexts relating to crypto offerings:

• the use of social media to create a sense of inflated public interest
• creating the appearance of greater levels of buying and selling activity for a crypto asset by engaging in certain trading strategies
• failing to disclose appropriate information about the asset; or
• suggesting that the crypto asset is a regulated product when it is not.

ASIC in the courts over crypto

ASIC has been true to its word and has initiated a number of court cases, including recent ones involving Finder^[12], Block Earner^[13], and BPS Financial^[14]. In February 2024 they charged a Queensland based director with carrying on an unlicensed financial services business, after their investigation found he had encouraged clients to set up a self-managed superannuation fund (SMSF), transition their existing super into the fund and invest the funds into his own company which held cryptocurrency among other assets^[15]. In April they successfully seized the passport of the director of collapsed crypto exchange Blockchain Global^[16].

Financial advice and crypto

Financial advisers are of course the ultimate consumer protection, helping clients navigate complex and risky financial markets and products, through expert guidance that enables informed decision making.

But despite the recent developments bringing crypto more into the financial mainstream, advisers are currently hamstrung.

As FAAA CEO Sarah Abood told the Australian Financial Review, advisers are restrained from recommending digital currencies because of prohibitions by the companies that employ them or because their professional indemnity policy does not cover it.

“Most financial advisers would see these types of assets as speculation rather than investments, at this stage [and] very few would be willing to make a recommendation to a client to invest in them. Most advisers, and their licensees, will give them a wide berth at least until there’s a solid performance track record, and an ‘investment grade’ asset consultant rating,” Abood said^[17].

The current state of play undoubtedly leaves consumers at risk. In the words of Blockchain Australia^[18]:

“The crypto asset class has arrived, professional advice with respect to the asset class has not, and consumer protection is being compromised as a result.”

Whilst the inability to access financial advice about crypto remains a hurdle for many retail investors, the sector is too tempting for many to ignore, leaving the door open for them to fall victim to the unlicensed scammers and finfluencers.

Adviser knowledge gap

The proposed regulatory reform in the crypto sector, and its increasing acceptance as a legitimate investment, makes it inevitable that crypto will make its way into the realm of financial advice. However, when it does, a further barrier will present itself – in the form of subject matter expertise. According to Financial Adviser Cody Harmon of Cruz^[19], many advisers currently lack the requisite knowledge, pointing out that “retail investors – and particularly younger ones – know much more [about cryptocurrencies] than the advisers themselves and regulators”.

Making it all the more important to be across developments in the sector, in order to better protect your clients now, and in the future.

Summary

Cryptocurrencies continue to grow in popularity in Australia, with research suggesting over one quarter of the population have shown interest in or owned cryptocurrency recently. Financial advisers will inevitably face increasing queries from clients about crypto, but current regulations prevent them from offering advice.

While market developments – including US SEC’s approval of Bitcoin spot price ETFs and launch of Australia’s first spot Bitcoin ETF will further integrate crypto into the mainstream financial system, the most significant development on the horizon is the proposed regulation of Digital Asset Facilities.

These changes – as proposed by the Treasury – aim to include digital asset facilities under the financial product category, ensuring entities holding or offering digital assets adhere to strict financial services regulations. This approach aims to mitigate risks associated with intermediaries rather than the assets.

Strengthening consumer protection is one of the core tenets of these reforms.

These market and regulatory developments mean it is increasingly inevitable that crypto-based offerings will find their way into the realm of financial advice, making it imperative that advisers prioritise an understanding of developments in the sector.

———–

References:
[1] https://curvo.eu/backtest/en/market-index/bitcoin?currency=usd
[2] https://cfotech.com.au/story/report-reveals-growing-interest-in-crypto-among-australians
[3] https://www.thebanker.com/Much-anticipated-the-US-SEC-approves-bitcoin-ETFs-1705393382
[4] https://www.coindesk.com/policy/2024/06/03/australiass-first-spot-bitcoin-etf-with-direct-btc-holdings-to-go-live-on-tuesday/
[5] https://treasury.gov.au/publication/economic-roundup-issue-1-2012-2/economic-roundup-issue-1-2012/consumer-financial-protection-future-directions
[6]https://asic.gov.au/regulatory-resources/digital-transformation/crypto-assets/
[7] https://asic.gov.au/regulatory-resources/markets/market-supervision/exchange-traded-products-admission-guidelines/
[8] https://asic.gov.au/regulatory-resources/digital-transformation/crypto-assets/
[9] https://www.minterellison.com/articles/proposed-framework-for-regulating-digital-asset-platforms-released
[10] https://treasury.gov.au/sites/default/files/2023-10/c2023-427004-proposal-paper-finalised.pdf
[11] https://www.gtlaw.com.au/knowledge/global-legal-insights-blockchain-cryptocurrency-regulation-2022
[12] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-068mr-asic-appeals-finder-wallet-decision/
[13] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-019mr-court-finds-block-earner-needed-financial-services-licence-to-offer-earner-crypto-product/
[14] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-090mr-asic-wins-first-court-outcome-regarding-a-non-cash-payment-facility-involving-crypto-assets/#:~:text=(24%2D090MR)-,ASIC%20wins%20first%20court%20outcome%20regarding%20a%20non,payment%20facility%20involving%20crypto%20assets&text=The%20Federal%20Court%20has%20found,%2Dasset%20token%20called%20’Qoin.
[15] https://financialnewswire.com.au/investment/crypto-company-director-hit-with-asic-charges/
[16] https://www.theguardian.com/technology/2024/feb/29/former-crypto-director-banned-from-leaving-australia-after-blockchain-global-collapsed-owing-58m
[17] https://www.afr.com/wealth/personal-finance/financial-advisors-say-they-will-likely-give-bitcoin-etf-a-wide-berth-20240111-p5ewkk
[18] https://www.afr.com/wealth/personal-finance/smart-investor-lack-of-crypto-advice-a-hurdle-for-would-be-buyers-20211028-p593zi
[19] Ibid.

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Understanding of the complexities of aged care advice, viewed through a consumer protection and compliance lens.

Introduction

The burgeoning aged care sector is one that financial advisers – directly or indirectly – will increasingly come into contact with. As our population ages, and longevity improves, most advisers will have a number of clients who are either using aged care services themselves, or who are making decisions about aged care on behalf of their parents or grandparents.

Planning for, and eventually funding, aged care costs can incredibly complex, involving life changing financial decisions in areas such as:

• superannuation
• taxation
• health care
• Centrelink
• cashflow, and
• estate planning.

The need for expert advice is clear.

But advice relating to funding aged care services is currently unregulated, leaving a variety of unqualified and potentially conflicted stakeholders – think estate agents, aged care service providers and finance brokers – free to provide services called ‘aged care advice’. Critical to their ability to do this to avoid giving financial product advice, and at first glance, as aged care services are not classed as a financial product, this seems reasonable. And yet as we will explore below, making recommendations about funding aged care from one or more vehicles that are classed as financial products may well see a line being crossed.

In this article, we will explore aged care advice through a consumer protection lens, including:

• the nature of aged care services
• funding options and considerations
• the definition of financial product advice, and
• consumer protections available to retail financial advice clients.

What do we mean by ‘aged care’?

A common expression when discussing aged care is to say that someone is ‘in aged care’, the use of which implies we are talking about people living in dedicated aged care residences. Yet residential aged care is only one of three main categories of aged care assistance, and while the number of Australians in residential aged care is growing strongly, it still represents a minority of aged care being provided.

Types of aged care

According to the Australian Institute of Health and Welfare^[1], there are three main types of aged care:

• Residential aged care provides accommodation and care at a facility on a permanent or respite (temporary) basis. Permanent care is intended for those who can no longer live at home due to increased care needs, while respite provides a break from normal living arrangements.
• Home support (Commonwealth Home Support Programme) provides entry-level support at home for people as well as their carers. Services available through home support include domestic assistance, personal care, social support, allied health and respite services.
• Home care (Home Care Packages Program) provides different levels of aged care services for people in their own homes. It is targeted towards people with needs that go beyond what home support can provide. Ongoing services are available to keep people well and independent (such as nursing care), stay in their home (through help with cleaning, cooking and home maintenance) and remain connected to their community through transport and social support.

Usage of these services

Australian Government data^[2] as of 30 June 2023 revealed:

• around 193,00 Australians were using permanent or respite residential care, and
• 258,000 were using home care.

Over the 2022/23 financial year, over 816,000 people received home support.

In line with our ageing population, these numbers will increase dramatically, with experts projecting the above numbers to almost triple by 2050, when it is estimated 3.5 million Australians will be accessing the various types of aged care service³.

Self-funding aged care

Aged care funding rules are complex.

While the Government fully subsidises aged care costs for people whose main income source is the aged pension, a number of social security thresholds and tests come into play, meaning that the sale of the home becomes a critical financial decision. It also means that the same person can pay different amounts for aged care services depending on how their finances are structured, making expert guidance imperative.

Costs vary, based on the level of care required and the type of care a person is assessed as eligible for.

• A Home Care Package consists of the federal government contribution (the subsidy) and the individual’s contribution.
  1. Fees includes a basic daily fee, an income-tested care fee and additional fees. Fees vary by level of care needed.
• Residential aged care can involve several types of fee, including:
  1. Basic daily fee paid direct from the government to a provider
  2. Means-tested care fee (government subsidised)
  3. Accommodation (government subsidised)
  4. Extra services and additional services fees (not subsidised)

While accommodation fees can be paid on an ongoing basis (like a rental), many choose to pay in advance, via a Refundable Accommodation Deposit (RAD). The RAD is fully refundable to the resident when they leave the provider or is returned to the resident’s estate if they pass away.

While the average RAD in Australia is around half a million dollars, they can vary greatly depending on the individual provider and location. RAD’s exceeding $2 million are not unknown.

How do people pay for their RADs?

The financial stakes are obviously very high, and it is clear that to fund their aged care costs, especially RAD’s, most individuals will need to access amounts from within their savings and wealth holdings, which could include:

• their home
• investments including investment properties, shares, and managed funds
• term deposits, and
• superannuation.

Most of these options clearly involve financial products, and with 2024 Aged Care Taskforce report^[4] recommending those with the means make a bigger contribution towards their own aged care costs, structuring and accessing funds from these options will become an even more critical issue, making expert advice increasingly essential.

Unlicensed aged care advice – how it exists

The Corporations Act 2001 does not specifically capture advice regarding aged care accommodation as financial product advice.

Section 766B of the Act^[5], defines the meaning of financial product advice, personal advice and general advice thus:

“Financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

1. is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
2. could reasonably be regarded as being intended to have such an influence.”

Section 763A of the Act^[6] defines a financial product as:

“A financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:

1. makes a financial investment
2. manages financial risk
3. makes non-cash payments.”

At the moment, Refundable Accommodation Deposits are not regarded as being captured by the definition of financial product, allowing aged care advice to be given without an AFS licence, provided the advice is restricted to information and advice about fees and services in aged care, and, if financial products are discussed, that discussion is restricted to factual information only.

While a person providing credit advice and products must hold an Australian credit licence, advice about buying or selling property – including the family home – is exempt from both the Australian Financial Services (AFS) and consumer credit licensing provisions.

Similarly, the provision of information about Centrelink is not limited to licensed financial advisers

All of which means there are plenty of ways an individual can set out their shingle as an

‘Aged Care Adviser’ without the need to be a licensed, registered financial adviser.

The question is, given the increasing number of people needing aged advice, and with Australia’s 16,000 financial advisers already stretched and overworked, is this such a bad thing?

Consumer protections forfeited under the current framework

A number of consumer protections are afforded to individuals when talking to licensed financial advisers about financial products.

On the product side, protections include:

• 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 (as responsible entities of schemes with retail investors must hold an AFS licence), 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.

On the advice side, retail advice clients also benefit from significant additional protections under the Corporations Act when receiving financial advice, 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 changes notwithstanding, give a retail client a statement of advice (s946A).

Financial advisers are also required to have Professional Indemnity Insurance, affording clients a measure of confidence when seeking financial remedies if advice contains errors, or the adviser was negligent.

Why these protections are especially important with older clients

By definition, the vast majority of people entering residential aged care are older (the exception being some young people who live in aged care in the absence of dedicated facilities).

Indeed, 76.5% of people in residential aged care are aged 80 and over^[7].

This brings a range of issues into focus, including diminished mental and physical capabilities, and conditions like dementia.

Elderly Australians are more likely to use instruments such as Enduring Powers of Attorney, which can put important financial and care decisions in the hands of those holding those powers.

While this is normally caring and loving family members, it does raise the spectre of elder financial abuse. The cost-of-living crisis, rising housing costs, and evolving family structures have made the ‘impatient inheritor’ phenomenon real, and many older Australians may find themselves under pressure from their younger family members, to either sell their home and other assets. The application of the various income and assets tests means these decisions can have major ramifications for the cost of aged care, and in turn the quality of care that is affordable.

Is unlicensed aged care realistic?

Mindful that many accountants may find themselves advising clients about aged care, the CPA issued a Guidance Note^[8] to its members on the topic. The note is instructive as it highlights the types of questions asked about aged care, and the ways to provide guidance without straying into the realm of financial advice.

The questions they believe their members could expect include:

• What options are available for aged care?
• What are the potential costs?
• What alternatives are there for paying the Accommodation Payment?
• Should I retain sell or rent the family home?
• Will my social security entitlements be affected by my choices?
• Will I have enough cash flow to sustain aged care costs?
• Are there any strategies to reduce costs?
• Could it impact my estate planning?

The Guidance Note goes on to describe the types of advice that can be provided on an unlicensed basis:

While the CPA guidance is absolutely correct, it does beg the question as to how realistic it is – in the context of discussions about how to fund a RAD of $500k or more – to provide effective advice that doesn’t involve discussions about financial products, or doesn’t recommend a course of action such as selling the family home.

Even in the event that an aged-care adviser can stay on the right side of the law, one has to question how effective that advice can be, given the factors that should be taken into account.

The complexity of aged care leaves most clients confused

2021 research by National Seniors Australia^[9] revealed that planning for aged care was relatively uncommon and there was a great deal of confusion about aged care costs and their own obligation to contribute.

According to their research, approximately one-third of Australians 65 and older use some form of age care services, only 14% of seniors had planned for aged care costs. In the majority of cases, this was because respondents didn’t know enough about them to actually plan. Indeed, a previous National Seniors report^[10] showed 80% of people did not understand consumer contributions to aged care.

While the Government pays for the lion’s share of aged care costs, people still have to pay for services depending on their income and/or assets. There are many fees and charges, co-payments and deposits that are in place which people are understandably ignorant about until they need to access care.

The danger is that many care recipients will be caught off guard by these unplanned costs and may either struggle to access the right level and quality of care, or they feel pressured, and rush into making big financial decisions without truly independent, expert guidance.

So back to the question, is unregulated aged care advice a problem?

Not all decisions relating to aged care are financial ones, but those that are involve major, life-changing amounts. Complex decisions about the interplay between home ownership, Centrelink, superannuation, estate plans, and cash flow need to be made, and many of these decisions will be hard to undo.

While it is legally permissible to offer aged care advice outside the realms of licensed financial advice, it seems likely that such advice would be very superficial. It would also not be accompanied by the various consumer protections afforded people when dealing with financial products, and with licensed financial advisers. Arguably, these protections are more important for older, possibly more vulnerable, Australians than for others.

Calls to regulate aged care advice are frequent. As far back as 2016, The Council on the Ageing (COTA) argued that aged care financing should be considered a financial product, thereby requiring advisers to obtain a financial services licence from ASIC.

“Aged care financing is not a financial product and is not governed by ASIC. We are pressing for that to change. We will pursue whoever is next in government to change that provision,” COTA chief Ian Yates said at the time^[11].

More recently the topic was in the news when Aged Care Steps called for the sector to be regulated, and announced an industry consultation to bring more focus and attention on the issue.

The firm said that though aged care advice is an inherently complex area, unlicensed and unregulated businesses and services are increasingly providing this financial advice on aged care. According to them, the result is superficial, often conflicted advice, no regulatory oversight, and a lack of essential consumer protections, which could place the client at substantial risk and lead to decisions that are not well-informed¹².

“The variety of care options, rush to make immediate decisions, cost of advice, complicated fee structures, conflicts of interest, and raw emotions are just a few of the challenges people face when accessing aged care advice,” said director Louise Biti.

“This situation underscores the need to reassess the regulatory framework governing aged care advice, ensuring that where financial options and outcomes are considered by an ‘advice provider’, the advice is holistic rather than solely strategic, legally compliant, and consumer-focused, she said.

Summary

The aging population is driving an increased demand for aged care services, presenting significant financial planning challenges. Funding aged care is complex, involving superannuation, taxation, health care, Centrelink, cash flow, and estate planning. Despite the need for expert advice, aged care advice is currently unregulated, allowing unqualified stakeholders to provide guidance without a financial services license. This situation poses a consumer protection challenge, as decisions about funding aged care often involve financial products.

The three main types of aged care in Australia are residential aged care, home support, and home care, with usage projected to rise significantly. Self-funding options typically involve substantial financial assets, necessitating expert advice. Current unlicensed aged care advice lacks the consumer protections afforded by licensed financial advice, raising concerns about the quality and safety of such advice.

Calls for regulatory reforms are increasing, with the aim of ensuring all aged care advice is comprehensive, legally compliant, and prioritises consumer interests.

———–

References:
[1] https://www.aihw.gov.au/reports/older-people/older-australians/contents/aged-care
[2] https://www.gen-agedcaredata.gov.au/topics/people-using-aged-care#Aged_care_use_by_age
[3] https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/pubs/BriefingBook44p/AgedCare#:~:text=Significantly%2C%20by%202050%20an%20estimated,of%20services%20available%20to%20them.
[4] https://www.health.gov.au/resources/publications/final-report-of-the-aged-care-taskforce?language=en
[5] https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s766b.html
[6] https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s763a.html
[7] https://www.gen-agedcaredata.gov.au/topics/people-using-aged-care#Aged_care_use_by_age
[8] https://www.cpaaustralia.com.au/-/media/project/cpa/corporate/documents/tools-and-resources/financial-planning/guidance-note-advising-on-aged-care-20-feb.pdf?rev=3b8d33bb25aa45c0bf43571e5ed833c7
[9] https://nationalseniors.com.au/uploads/Planning-for-care-costs-24.8.21.pdf
[10] https://nationalseniors.com.au/uploads/09183073PAR-RBD18-ResearchReport-AgedCareLiteracy-Web.pdf
[11] https://www.afr.com/companies/healthcare-and-fitness/call-for-aged-care-financial-advice-to-be-regulated-by-asic-20160617-gpllly
[12] https://www.ifa.com.au/news/34086-aged-care-steps-flags-worrying-trend-of-unlicensed-aged-care-advice

The post Aged Care Advice – the consumer protection challenge appeared first on AdviserVoice.

The Sophisticated Investor Test – a vital component of the financial consumer protection framework in Australia – is the subject of a series of changes by regulators.

One of the most topical conversations around financial consumer protections is the forthcoming changes to the Sophisticated Investor Test. The subject of much scrutiny and debate since its introduction in 2001, the Sophisticated Investor Test is once again in the news, forming part of a wide-ranging Government review into Managed Investment Schemes.

Whilst at the time of publishing, the outcomes of this review were not yet finalised, submissions and recommendations on changes to the test – including those made by ASIC at the end of 2023 – almost universally have called for the test to be tightened, especially the assets and income thresholds under which a person can qualify as ‘Sophisticated’. To the extent these thresholds have not been changed since 2001, the number of individuals qualifying to invest on a wholesale basis – and therefore forfeiting retail investor protections – has skyrocketed^[1], from 1.9% of the population in 2001, to around 16% in 2022.

This article will examine the current context for Sophisticated Investors, from the current criteria and the inherent flaws to the potential changes and their implications, for individual investors, financial advisers, and other parts of the financial services ecosystem.

The current context – why Sophisticated Investors are ‘in the news’

In the 22/23 Federal Budget announced a review into the regulatory framework for Managed Investment Schemes^[2]. The stated purpose of that review was to examine whether the existing regulatory framework is fit‑for‑purpose, identify potential gaps, and consider what enhancements can be made to reduce undue financial risk for investors.

Treasury kicked off the review by releasing a consultation paper^[3] in August 2023, seeking submissions on a number of matters including the Sophisticated Investor test.

Among the many submissions made to Treasury was one from ASIC^[4], which contained recommendations to apply inflation indexing to the various financial thresholds underpinning the Sophisticated Investor tests (Assets, Income, and Product Value thresholds).  Were indexing to be applied on a blanket basis, the financial thresholds would increase dramatically, with the annual income threshold rising to $450,000 and the assets threshold rising to $4.6 million in 2024 including the family home.

While the Treasury consultation process on Managed Investment Schemes closed in September 2023, and is yet to be formally responded to by the Government, a separate Parliamentary Joint Committee (PJC) review of the Sophisticated Investor test remains very much in progress^[5], issuing a call in March 2024 for written submissions, thus effectively re-opening the door to feedback.

Wholesale v retail investors

First of all, it needs to be clarified that the terms Wholesale Investor and Sophisticated Investor are NOT interchangeable. Sophisticated Investors are just one category of investor who is able to access wholesale investments. There are four other categories, as explained below.

A client can be treated as wholesale if they meet one of the 5 eligibility tests referred to in Sections 708 and 761G of the Corporations Act^[6]:

• Price or Value Test– the product being invested in or advised on has a price or value exceeding $500,000 (excludes life insurance and superannuation funds)
• Wealth or Income Test – a person owning net assets of $2.5 million (including the family home but excluding non-SMSF super) or having earned a gross income of $250,000 or more per annum, in each of the two previous years, as certified by an accountant
• Professional Investor Test – a range of institutional investors with defined attributes, including licenses, bodies regulated by APRA and those controlling a trust or body with at least $10 million in net assets
• Size of Business Test – having more than 20 employees – or more than 100 employees if the business is or includes the manufacture of goods
• Sophisticated Investor Test – persons that an AFSL holder is satisfied have sufficient experience in using financial services and investing in financial products to allow them to assess the merits of the product or service, the value of the product or service, and the risks associated with holding the product.

Looking through a consumer protection lens

The various thresholds in place – including the Sophisticated Investor test – to limit access to wholesale investment products exist entirely to protect consumers from financial harm, by limiting their ability to invest in products that are likely to be more complex, involve higher investment amounts, and carry a higher risk of loss. These products can include unlisted bonds, pre-public IPOs, infrastructure, and private and venture capital opportunities. They can be illiquid in nature, and many come with capital calls.

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 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.

Recognising the flaws and the need to change

The legislation as it currently stands is problematic for many reasons:

• Using wealth or income as a proxy for financial sophistication/literacy is flawed. Some people are wealthy by courtesy of an inheritance, not through their own sound financial judgement – a situation that will only increase in frequency as the Great Intergenerational Wealth Transfer unfolds.
• The thresholds are not indexed, so with surging real estate prices (especially in capital cities), and the impact of wage inflation since 2022, the thresholds are becoming easier to reach and therefore less meaningful than when first introduced.
• Tests based on quantification of wealth exclude clients who have the requisite level of financial literacy but not the requisite wealth.
• In many cases a client can be treated as wholesale without requiring their consent – or even knowledge.
• The eligibility tests can be complex to apply where assets are jointly owned (as is common for most couples).
• The Sophisticated Investor test is based on the judgement of the AFSL holder, leading to misclassification on one hand, and a reluctance to apply it for fear of liability on the other.
• Guidance around the business use criteria used in some tests is vague.

The misclassification issue

A frequent criticism of the Sophisticated Investor test is the extent to which it can be ‘gamed’ to avoid providing protections to investors who actually need them.

ASIC is on record with their concern that some accountants were inappropriately providing ‘Sophisticated Investor’ certificates.^[7]

The FAAA also observed that mis-classifying retail clients as Sophisticated Investors was “unfortunately becoming much more prevalent and quite widespread” throughout the industry^[8].

More recently, The Australian Financial Complaints Authority (AFCA) warned of an increase in complaints from clients who satisfied financial thresholds but were clearly not ‘sophisticated’^[9]. Indeed, this has led to AFCA revising its guidelines such that it can consider complaints regarding wholesale products, where there is evidence of misclassification (more on this below).

The greater the number of wholesale investors, the greater the risk of harm

As the various thresholds for wholesale investing become easier to satisfy, the number of individuals investing in risky, poorly understood products increases, as does the likelihood of financial harm.

This was neatly summed up In Mayfair Wealth Partners Pty Ltd v Australian Securities and Investments Commission (2022), when the Full Federal Court held that it could not be assumed that all people who meet the product value or individual wealth test have knowledge or experience in financial products^[10].

Potential changes to the tests

Ahead of the recommendations of the abovementioned PJC Inquiry and the subsequent Government response, it is hard to know if the changes to tests will be limited to simply changing the financial thresholds – either by CPI or some other amount – or include other changes, such as tightening the rules around assessing investor knowledge and/or experience.

The simple act of indexing the thresholds (as proposed by ASIC) significantly reduces the number of individuals who would have access to wholesale investments, as shown below.

The FSC’s alternative proposal

Perhaps feeling that the hefty increase in indexed limits was an over-correction, and might inappropriately deny some client segments (e.g. young professionals) access to the greater earnings potential of wholesale investment opportunities, the FSC proposed a different approach revising the various tests.

Their submission^[12] to the MIS Review, released publicly in January 2024, made several specific recommendations, within an overall intent to:

• expand the number of consumers who were ineligible to be treated as a wholesale client (and therefore increasing the number of ‘protected’ retail clients) and
• make it clearer in what circumstances the Sophisticated Investor test can be used (Noting in their submission the lack of standardised approach to its implementation and some reluctance of Responsible Entities due to the risks of investors claiming they were misclassified, given the test is subjective and lacks implementation guidance).

Specifically, the FSC proposed:

• Product value test – retain this at $500,000. (The FSC argues this is still a substantial amount, and it is still reasonable to assume people investing such amounts either have adequate knowledge or can afford to acquire advice.)
• Individual wealth test –either
  • increase to $5 million (including the family home) OR
  • maintain at $2.5 million (exempt the family home).
• Gross income test – retain at $250,000.
• Improve the Sophisticated Investor test through regulatory guidance or a safe harbour.
• Rather than indexation, periodically review the limits to determine appropriateness.
• Accompanying these changes should be a two-year transition and grandfathering of existing clients.

How do other markets deal with this issue?

The approaches of international markets have been given particular relevance by many stakeholders in this process. Indeed the terms of reference for the PJC Inquiry specifically call out the experiences of overseas jurisdictions^[13].

In its MIS Inquiry submission^[14], ASIC references the approaches of several markets with similar regulatory frameworks, including:

• New Zealand, where an investor is classified as a wholesale client if they have net assets of NZ$5 million or more (equivalent to around A$4.6 million based on current exchange rates)
• The United States and the United Kingdom, where asset thresholds are lower, but in both cases exclude assets such as the primary residence. Both markets also supplement thresholds with restrictions on retail investor access to specific products, including illiquid investments.

But perhaps the truest and most accurate measure of a client’s level of sophistication should be based purely on their demonstrated knowledge and experience, rather than income and assets which can be poor proxies for knowledge. In this regard, Singapore should be held up as a shining example.

The Monetary Authority of Singapore denies retail investors access to certain products (including investment linked life insurance products and unlisted unit trusts) unless they can satisfy the Customer Knowledge Assessment (CKA)^[15]. Ways to satisfy the CKA include:

• Holding a Diploma or Higher qualification in related fields (e.g. Accountancy, Finance, Economics etc.)
• Hold finance-related professional qualifications (e.g. Chartered Financial Analyst, Certified Public Accountant etc.)
• Have investment experience: Traded a total of at least 6 transactions in Unit Trusts / Mutual Funds over the preceding 3 years.
• Working experience: A Minimum of 3 continuous years in the preceding 10 years of relevant working experience in Finance.
• Undergone and passed a specified online course (available on many provider websites) on Unit Trusts and Investment-linked Insurance Products.

Those that “fail” the assessment are deemed to lack suitable experience or knowledge and are required to receive financial advice before investing.

AFCA and wholesale investing – changes to guidelines effective July 2024

One of the most important consumer protections forfeited by wholesale investors is access to redress via AFCA. However, AFCA will consider complaints from wholesale investors if there is evidence that they have been misclassified.

As previously mentioned, the incidence of misclassification has been growing in frequency, and AFCA has been exercising its discretion to consider an increasing number of such complaints.

However, the use of this discretion has, up until recently, lacked transparency and clarity, a point acknowledged by AFCA themselves. Speaking at the Stockbrokers and Investment Advisers Conference in June 2023, AFCA advice lead ombudsman Shail Singh responded to queries regarding the authority’s use of discretion when assessing cases brought by wholesale clients^[16].

“What Treasury said was for Chapter 7 purposes – for Sophisticated and Professional investors – they should be outside jurisdiction unless there is an issue with the classification,” Singh said. He went on to say that AFCA would be proposing changes to its Operational Guidelines in line with Treasury’s’ views.

In March 2024, AFCA announced^[17] that ASIC had approved the proposed changes, and new Operational Guidelines would come into effect on 1^st July 2024. As well as providing further guidance and clarity on the exclusion of complaints lodged by Professional or Sophisticated investors, the new Guidelines also provide AFCA more power to manage unreasonable or inappropriate conduct within the scheme from Complainants and Paid Representatives and ensure greater transparency and understanding of AFCA’s decision making.

Where to from here?

At the time of publishing, the PJC Inquiry into the Wholesale and Sophisticated investors had only just commenced, and so any potential changes remain unknown and some time away from implementation. Similarly, the QAR reforms which impact on some retail investor protections (such as the Statement of Advice) still lack detail as well as being uncertain in their timing.

Regardless of what changes are made to Wholesale and Sophisticated Investor tests, it is clear that working with clients on a wholesale basis – which undoubtedly comes with many advantages for both advisers and clients – is something that should be done with great care, full transparency, and comprehensive client communication, to ensure this is absolutely the right path for the client, and is done with their genuinely informed consent.

Summary

While the outcomes of the Federal Government review into the Sophisticated Investor Test are- at the time of publishing – still pending, there is a consensus among submissions to tighten the test’s criteria, especially the assets and income thresholds. Widespread concerns also exist about the growing incidence of misclassification and the resultant increase in the number of wholesale investors, potentially exposing more individuals to financial risk.

Various proposals have been put forward to address these issues, including indexing thresholds for inflation and refining the test’s application. International approaches offer fresh insights, suggesting a focus on knowledge and experience rather than solely on wealth. Additionally, changes to AFCA guidelines aim to enhance transparency of their decision making and address misclassification issues.

Whatever form the changes ultimately take, Advisers must apply cautious consideration and transparency when navigating wholesale investment scenarios, ensuring the best outcomes for clients.

———–

References:
[1] https://www.afr.com/policy/economy/more-than-3-million-aussies-are-now-sophisticated-investors-20211007-p58y13
[2] https://treasury.gov.au/review/review-regulatory-framework-managed-investment-schemes
[3 https://treasury.gov.au/consultation/c2023-404702
[4] https://treasury.gov.au/sites/default/files/2023-11/c2023-404702-asic.pdf
[5] https://financialnewswire.com.au/financial-planning/key-parliamentary-committee-reopens-sophisticated-investor-debate/
[6] https://sophiegrace.com.au/types-of-clients-retail-vs-wholesale/
[7] https://www.adviservoice.com.au/2017/07/asic-takes-action-misuse-sophisticated-investor-certificates/
[8] https://www.afr.com/wealth/investing/misclassifying-sophisticated-investors-widespread-20200226-p544ie
[9] Ibid.
[10]https://treasury.gov.au/sites/default/files/2023-11/c2023-404702-asic.pdf
[11] https://fsc.org.au/resources/2700-assessing-options-for-modernising-the-wholesale-investor-test/file
[12] https://fsc.org.au/resources/2685-fsc-submission-review-of-the-regulatory-framework-for-managed-investment-schemes/file
[13] https://financialnewswire.com.au/financial-planning/key-parliamentary-committee-reopens-sophisticated-investor-debate/
[13] https://treasury.gov.au/sites/default/files/2023-11/c2023-404702-asic.pdf
[14] https://help.endowus.com/hc/en-sg/articles/900006148383-What-is-the-Customer-Knowledge-Assessment-CKA-for-Retail-Investors-SG
[15] https://www.professionalplanner.com.au/2023/06/afca-defends-use-of-discretion-to-hear-complaints-from-wholesale-investors/
[16] https://www.afca.org.au/news/latest-news/material-changes-to-afca-scheme-approved-by-asic

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Financial scams are the biggest consumer protection challenge facing the financial services sector.

Introduction

Financial scams are arguably the biggest consumer protection challenge facing the financial sector in 2024. With data suggesting scams are costing Australian consumers more than $3 billion each year^[1] – a figure that is growing all the time – regulators and product providers are facing an unprecedented challenge in protecting consumers from significant financial harm from the perpetrators of increasingly sophisticated scams.

As trusted experts relied upon to protect and grow their client’s wealth, financial advisers are on the frontline in the battle against financial fraud and are ideally placed to help their clients identify and avoid potential scams, and to help them respond and rebuild in the event that they fall victim.

This article examines the scale and nature of financial scams, and proves that even educated, vigilant individuals can be duped. The mechanisms in place to help protect consumers against scams will also be explored, as will the specific role of financial advisers in tackling this growing issue.

The scale of the problem

According the 2023 Targeting Scams Report^[2] – published by the ACCC – Australians lost a record amount of more than $3.1bn to scams in 2022, up significantly on the previous year.

The report compiles data from several sources, including the Federal Government’s Scamwatch service and major banks and money remitters.

Many experts believe the true figure is much bigger, with an estimated 30% of incidents going unreported due to victims a lack of willingness/ability to share their experiences^[3].

According to the Report, investment scams caused the most financial loss, with accounting for around $1.5b, followed by remote access scams ($229m) and payment redirection scams ($224m).

Covid brought a spike in financial scams in Australia^[4], with a combination of financial hardship and unique opportunities (the superannuation early release program) contributing to a then record amount of financial fraud. And that growth trajectory continued, with the losses reported to Scamwatch increasing 224% between 2020 and 2022, and 76% between 2021 and 2022, to a total of $569 million.

While the losses reported to Scamwatch in 2023 were lower^[5] – at around $476 million – the number of incidents reported jumped by around 26% to almost 302,000.

ASIC and AFCA data reinforces the scale of the issue

In early 2024, AFCA released its 2023 annual data, which showed it had received over 100,000 complaints in a single year, the highest ever. Among the complaint categories experiencing the largest increases, the standout was scams, with the 8987 complaints related to scams representing an increase of 95 per cent over the 4611 recorded in 2022^[6].

ASIC data released in March 2024 provided additional perspective^[7], revealing nearly 3,500 investment scam websites have been knocked out by ASIC’s scam website takedown capability since it was launched in July 2023.

The nature of the problem

While scams come in many shapes and sizes, for reporting purposes, there are several common categories they can fall into, including:

• Investment scams, where victims are tricked into investing into vehicles which either don’t exist, or don’t perform in the way promoted, resulting in losses.
• Remote access scams where criminals gain access to a person’s computer to steal data, demanding a ransom to give it back.
• Payment re-direction scams where criminals change the payment details on legitimate invoices, seeing victims pay money to the wrong people.
• Romance scams, where victims are persuaded to send money to romantic partners with whom they have a ‘digital only’ relationships.
• Phishing, where people are tricked into providing personal data, which is then used to access their bank accounts and superannuation.

ACCC data shows investment scams to be the largest single category of loss, by a considerable margin, followed by remote access, then payment redirection scams.

The same report revealed the top contact methods used by scammers to be:

• SMS (33% of reported scams)
• phone (29%)
• email (22%)
• 6% internet
• 6% social media platforms.

Why we fall victim to scams

Research^[9] conducted by Dr Kam-Fung Cheung and Shesha Maheshwari of the UNSW Business School identified six key reasons people fall victim to scams.

1. Financial desperation: Significant financial strain or a craving for quick monetary gains renders individuals more susceptible to scams promising easy wealth or lucrative investment returns. Under such circumstances, the urgency to alleviate financial woes can cloud judgment, making individuals more vulnerable to fraudulent schemes.

2. Social engineering: Scammers adeptly exploit personal relationships and connections to manipulate their victims. Leveraging information obtained from social media and other sources, they tailor their scams to appear more genuine and trustworthy. Victims, swayed by this false sense of familiarity, are more likely to fall victim to such deception.

3. Lack of awareness: Many individuals remain unaware of the diverse array of scams and the sophisticated tactics employed by scammers. Ignorance regarding evolving scam techniques, including those involving cryptocurrencies and blockchain, increases vulnerability. Uninformed individuals inadvertently heighten their risk of succumbing to scams.

4. Emotional manipulation: Scammers frequently exploit emotions such as urgency, fear of missing out, or excitement to sway their targets. They also tap into cognitive biases, such as our default assumption that people are truthful, or our need to be seen as consistent in decision making (so we can’t say no if we have previously said yes). Criminals also rely on the sunk cost bias, with some scams starting with a request for a small amount, and then requesting a larger amount to ‘complete the transaction’. A victim’s fear of losing the money, time, or effort they had already invested will often see them comply.

5. Trust and authority: Impersonating trusted individuals or authoritative figures is a prevalent tactic among scammers. By posing as government officials, company representatives, or law enforcement officers, scammers exploit trust to solicit personal information, access financial accounts, or facilitate financial transactions. The ATO example is a very real and current example of this. Victims receive a phone call – purporting to be from the ATO – telling them they have a tax debt, and that it must be paid quickly to avoid criminal charges. The payment methods offered are often unusual (such as pre-paid gift cards or cryptocurrency).

6. Lack of vigilance: Busy lifestyles and constant distractions contribute to a lack of attentiveness, causing individuals to overlook warning signs or suspicious behaviours. Failing to conduct adequate research, verify the authenticity of communications or offers, and safeguard personal information leaves individuals vulnerable to exploitation.

Even the financially literate and vigilant can fall victim

While the victims of financial scams are often ‘victim blamed’ (a phenomenon which contributes to underreporting) and assumed to be naïve and uninformed, the increasing sophistication of scams means even financially literate and vigilant individuals can be scammed.

In early 2024, news broke^[10] that AFCA’s Chief Operating Officer, Justin Untersteiner, had fallen victim to a banking scam to the tune of $4,000.

In this scam, criminals are able to mimic the phone number of a victim’s bank, sending them an SMS telling them their account has been compromised and to call an emergency number. The victim has often received other (legitimate) messages from that number, and so the scam SMS appears real. Upon calling the emergency number (fake), they are then asked to provide their personal details, and to generate a one-time passcode on their phone, which they are asked to give to the person on the phone (who then uses it to access the victim’s account themselves).

The bond scam

Another example of a sophisticated scam is the fixed income bond scam which made news in Australia^[11] in 2021.

In this fraud, investors were duped by fake high-yield bond prospectuses, badged as from some of the world’s largest financial brands.  Rather than reaching out to victims, the fraudsters instead relied on luring victims to them via Google searches and fake investment comparison websites.

FAAA phishing attempt

Criminals can also be clever with the use of email addresses and website URLs, making changes so small as to be imperceptible, and thus seeming legitimate. An example of this was the attempted phishing attack on FAAA members^[12]. In early 2024, members were sent an email purporting to be from ‘S.Abood@ member-fpa.org’, a non-existent address.

What is being done to fight scams in Australia?

Tackling scammers must be done at all stages of the chain, and consumers, governments, regulators, and financial institutions all have a crucial role to play. Advisers should make themselves aware of the various initiatives and bodies operating in this space, which includes, but is not limited to:

1. Established by the ACCC in 2002, Scamwatch acts as a central repository where consumers can report scams. These details are then published on their website as a way of alerting other consumers.

2. The National Anti-Scams Centre: Building on the work of Scamwatch, the federal government launched the National Anti-Scam Centre in July 2023^[13]. The role of the Centre is to coordinate government, law enforcement and the private sector to combat scams. The goals of the Centre include providing better information about scams more quickly, and make it easier to report scams by building new reporting tools and strengthening connections between reporting systems.

In July 2023, the Centre announced its first fusion cell, designed to specifically identify ways to disrupt investment scams. Jointly led by ASIC and the ACCC, the fusion cell will include representatives from the banks, telecommunications industry, and digital platforms.

3. Scam-Safe Accord: November 2023 saw the launch of the Scam-Safe Accord^[14], between Australia’s community owned banks, building societies, credit unions and commercial banks. The Accord will see the development of a comprehensive set of anti-scam measures across the entire industry, including a $100 million investment by the industry in a new ‘confirmation of payee’ system to be rolled out across all Australian banks. This system will reduce scams by ensuring people can confirm they are transferring money to the person they intend to.

4. AFCX and FRX: The Australian Financial Crimes Exchange (AFCX) is an independent body funded by Australia’s major banks, designed to be the primary channel in the fight against financial and cybercrime. In May 2023, AFCX announced the launch of the Fraud Reporting Exchange^[15], designed to disrupt fraudsters and scammers by allowing the reporting of scam payments in close to real time, boosting the likelihood that funds can be frozen and returned to customers.

5. SMS Sender Registry: December 2023 saw the Australian Communications and Media Authority (ACMA) roll out a pilot of the SMS Sender ID Registry scheme^[16]. Under the scheme, text messages from official sources such as MyGov will be protected from being impersonated by scammers. When fully rolled out this will help prevent the ‘intrusion’ of scammers into text chains from legitimate sources, such as MyGov, Medicare, the ATO, and financial institutions.

6. IDCARE: IDCARE is a national support centre for victims of identity crime, offering offers a free service to assist victims with repairing the damage to their reputation, credit history and identity information.

Role of the adviser

Unlike the UK, where legislation to come into effect in 2024 will require banks to reimburse fraud victims who have been tricked into sending money to scammers^[17], Australia has not yet formalised such protections, leaving the consumer to shoulder more of the risk. As such, the role of the financial adviser as educators, advocate and sentinel for their clients becomes even more critical.

There are several important ways advisers can help protect their clients:

• educating them about how to spot and avoid scams
• giving them the confidence to report scams
• providing an infrastructure in which client data is secure
• monitoring client behaviour for any red flags
• assisting with reporting and seeking remediation when scammed.

Education

Advisers should themselves be alert to techniques used by scammers and provide the means for their clients to spot these techniques. This education could be simply verbal or through the content created for clients such as newsletters, blogs, videos, and checklists.

For those advisers thinking about providing their clients with a checklist, the following guidance from AFCA may be useful:

• If you are contacted by someone purporting to be from your bank, telecommunications company, or a government agency, before giving access to any of your personal details, contact the relevant body to check it was them who contacted you.
• If someone is putting pressure on you to send funds or a deal seems too good to be true, you should pause; take time to review the suggestion and maybe discuss it with a trusted family member, friend, or adviser.
• Never send money or give credit card details to someone you don’t know, or a business you do not trust.
• Always check a business is legitimate before sending funds or personal details to it – such as by searching its name on the ACCC’s Scamwatch website or ASIC’s MoneySmart website.
• Never send online account details or copies of personal documents to anyone you don’t know or trust.
• Lock your mailbox and use passwords for email.
• Shred sensitive documents and store any digital versions using security software.
• Do not forward or open strange or unreliable emails or website links.
• Check your credit report at least once a year. You can use a reputable credit reference bureau to help you monitor and catch unauthorised activity.
• Always report a scam to help others from falling victim.
• If you have been making regular payments to an account and you get an email telling you the account details have changed, always call the recipient of the payment to check they made the change.

Make your clients feel confident to come forward

Scam victims often feel shame and embarrassment at being duped and can be reluctant to come forward – a major contributor to the significant under-reporting of scams. Victim blaming is also rife, compounding the issue.

As your clients confidante, financial coach, and mentor, you should put them at ease and educate them about the sophistication of scams, which sees even highly educated, vigilant people fall victim. Reporting scams not only helps them, and opens up the potential for remediation, it can help others falling victim.

Provide a secure infrastructure for client data and communications

Financial firms – including advice practices – make juicy targets for scammers, with smaller firms often the most vulnerable. Protecting client data is a legal and ethical obligation for advisers.

But beyond the obvious mechanisms and protocols most firms have in place around the storage of client data and access to the firm’s network, the advisers who are leading in this space are also turning their attention to the channels through which they communicate with clients.

Award-winning Australian adviser Peita Diamantidis has called for a shift away from traditional communication channels, such as email and SMS, cautioning that they are too easily breached by scammers^[18]. Diamantidis is one of the growing number of advocates for client portals, which are increasingly being seen as a hygiene factor for truly customer focused advisers.

Monitor client behaviour for red-flags

Ensure you have oversight of your client’s major financial transactions, and be alert to any unexplained requests for large and/or unplanned withdrawals. If something is suspicious, check with the client and remind them of the checklist above.

Help your clients report and recover from scams

Unfortunately, there is a high chance that at least some of your clients may fall victim to scams. In the event that happens, your role is to help them respond as quickly as possible.

Again, guidance from AFCA, in the form of the following steps, is useful here:

• If you’ve sent money or shared your banking or credit card details with someone you don’t know, the first priority is to contact your financial firm or bank immediately.
• If the scam occurred on social media, report it to the social media platform.
• If you’ve given your personal information to a scammer, visit IDCARE.
• Ask for a credit report from a reputable credit reference bureau.
• Take the time to warn your friends and family about scams and do not share or forward unreliable emails or website links.
• Report a scam to Scamwatch.

Conclusion

The escalating threat of financial scams poses a formidable consumer protection challenge within Australia’s financial sector. The multifaceted nature of scams, and their increasing sophistication, underscores the critical need for comprehensive strategies to safeguard individuals and businesses against fraudulent activities.

Collaborative initiatives such as the National Anti-Scams Centre and the Scam-Safe Accord are examples of a concerted effort to enhance consumer protection measures and strengthen the resilience of Australia’s financial ecosystem against scams.

Ongoing vigilance and adaptation is needed to combat this pervasive threat, with education and awareness being critical.

Financial advisers, as frontline defenders against financial fraud, play a pivotal role in educating clients, identifying potential scams, and assisting victims in navigating the aftermath of fraudulent incidents.

———–

References:
[1] https://www.theguardian.com/australia-news/2023/apr/17/australians-report-record-31bn-losses-to-scams-with-real-amount-even-higher-accc-says
[2] https://www.accc.gov.au/system/files/Targeting%20scams%202022.pdf
[3] Ibid.
[4] https://www.accc.gov.au/media-release/scammers-capitalise-on-pandemic-as-australians-lose-record-851-million-to-scams
[5] https://www.scamwatch.gov.au/research-and-resources/scam-statistics?scamid=all&date=2023
[6] https://www.professionalplanner.com.au/2024/01/afca-records-over-100k-annual-complaints-for-the-first-time/
[7] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-037mr-asic-shuts-down-nearly-3-500-scam-websites-steps-up-surveillances-in-push-to-protect-consumers/
[8] https://www.accc.gov.au/system/files/Targeting%20scams%202022.pdf
[9] https://www.unsw.edu.au/newsroom/news/2023/09/cracking-the-code–why-people-fall-for-scams
[10] https://au.finance.yahoo.com/news/financial-watchdog-boss-scammed-out-of-4000-235544537.html
[11] https://www.afr.com/companies/financial-services/police-probe-bond-scam-as-hsbc-vanguard-pimco-are-hijacked-20210420-p57kq6
[12] https://www.professionalplanner.com.au/2024/01/faaa-members-hit-with-phishing-email/
[13] https://www.accc.gov.au/national-anti-scam-centre
[14] https://www.ausbanking.org.au/new-scam-safe-accord/
[15] https://www.ausbanking.org.au/australian-banks-join-new-fraud-reporting-exchange-digital-platform-to-help-halt-payments-to-scammers/
[16] https://www.smh.com.au/national/are-we-getting-better-at-spotting-scams-maybe-but-not-for-long-20240131-p5f1ac.html
[17] https://www.theguardian.com/money/2023/jun/07/uk-banks-to-reimburse-victims-under-new-rules-regulator-confirms
[18] https://www.ifa.com.au/news/32955-it-s-time-for-advice-practices-to-revamp-their-comms-adviser-says?highlight=WyJzY2FtcyJd

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Almost every adviser will have at least one vulnerable client so understanding and recognising the red flags are vital.

One of the most significant consumer protection challenges within financial advice – and financial services more broadly – is the protection of vulnerable clients.

Regulators around the world are becoming increasingly concerned about the financial and emotional harm that can occur at the intersection of complex financial products and vulnerable individuals and groups.

In its 2023 -2027 Corporate Plan^[1], ASIC continues to list among its enduring enforcement priorities: “Misconduct involving a high risk of significant consumer harm, particularly conduct that targets financially vulnerable consumers”.

But while issues such as financial abuse – especially of the elderly – are firmly on the radars of most advisers, having received widespread media coverage in recent years, the issue of vulnerability is far more fundamental, and encompasses a much wider spectrum of individuals and situations than may be obvious.

Indeed, for financial advisers, the concept of informed consent – so central to compliant advice – is borne out of the knowledge asymmetry that automatically exists in over 99% of adviser – client relationships. The client, by virtue of their comparative lack of knowledge about increasingly complex financial products and regulations, is immediately at a disadvantage in any advice interaction, and would be vulnerable to that knowledge gap being exploited, were it not for the Advice Code of Ethics and other consumer protection mechanisms put in place by regulators.

Complaints to AFCA involving vulnerable clients soared in the wake of Covid^[2], and with the soaring cost of living crisis leaving even theoretically comfortable clients financially vulnerable, another spike seems likely, as the impact of poor financial decisions are felt more keenly.

In this article, we will consider the broader context of consumer vulnerability within financial advice, examining what we mean by vulnerability, the signs of vulnerability advisers should watch out for, and the steps they can take to develop a vulnerable clients policy, to ensure they are delivering optimal outcomes for their clients, in a caring and compliant way.

What does vulnerability look like?

Following a comprehensive 2016 research program^[3] into vulnerability, The European Commission defined a vulnerable consumer as:

“A consumer, who, as a result of socio-demographic characteristics, behavioural characteristics, personal situation, or market environment:

• Is at higher risk of experiencing negative outcomes in the market;
• Has limited ability to maximise his/her well-being;
• Has difficulty in obtaining or assimilating information;
• Is less able to buy, choose or access suitable products; or
• Is more susceptible to certain marketing practices.”

ASIC, in their 2019-2023 Corporate Plan^[4], noted that “Any individual consumer can experience vulnerability as a result of any number of factors, including:

• the actions of the market or individual providers (e.g. being targeted by products that are inappropriate for a particular consumer, or being given inadequate or overly complex documentation)
• experiencing specific life events or temporary difficulties (e.g. an accident or sudden illness, a relationship breakdown, family violence, job loss, having a baby, or the death of a family member)
• personal or social characteristics that can affect a person’s ability to manage financial interactions (e.g. speaking a language other than English, having different cultural assumptions or attitudes about money, or experiencing cognitive or behavioural impairments due to intellectual disability, mental illness, chronic health problems or age).

While there is no legal definition of a vulnerable consumer, it is clear that vulnerability can be either enduring, or a point in time condition. Furthermore, it is clear that almost everyone, at some time, will be in a position where they are vulnerable to making poor decisions. Indeed, A 2017 study by the U.K.’s Financial Conduct Authority (FCA) found that 46 percent of U.K. adults display one or more characteristics that signal their potential vulnerability^[5], and one suspects an Australian survey would find similar results.

Language barriers

Australia is a culturally diverse country, and according to the last census, just under one quarter of Australians speak a language other than English at home.

Financial communication, disclosure, and advice are often laden with complex legalese, posing a significant challenge even for native English speakers with high literacy levels.

Despite occasional translations into other languages, such as Chinese, financial services predominantly operate in English. This presents an added layer of complexity considering the diverse dialects within languages like Mandarin, which boasts 93 variations. Additionally, we can’t assume people to be literate even in their own language.

ASIC has never required disclosure documents to be provided in languages other than English. Doing so would entail immense logistical and financial hurdles for product issuers and distributors.

Advisers face the challenge of meeting obligations under the Corporations Act and the FASEA Code of Ethics, which implicitly assume that they have addressed any language or literacy barriers hindering a client’s comprehension of the advice they receive.

Unsurprisingly, language difficulties are central to a significant number of disputes and complaints received by AFCA, so much so that in their Systemic Issues Insights Report^[7] – published in October 2023 – they listed misleading language given to non-English speakers as one of three systemic issues within life insurance. Of course such issues are equally common with investments, as the case study below illustrates.

Case study

In one complaint^[8] upheld by AFCA, a client from a non-English speaking background invested money in a market-linked product which subsequently lost half its value. The investor complained that she didn’t understand the information provided when first making the investment, nor did she understand the remediation offer made to her by the product provider when they first received her complaint. As a result she stayed in the product and lost even more money. She then escalated the complaint to AFCA who found in her favour.

Dementia – its growing prevalence and the potential consequences

One less desirable consequence of our improving life expectancies is the increasing number of people living long enough to suffer cognitive decline.

According to the latest figures from Alzheimer’s Australia^[9], around 480,000 Australians currently live with dementia, of whom just under 90,000 received their dementia diagnosis in 2023.

As people’s cognitive abilities decline, so does their ability to process information and make logical decisions. In the context of complex decisions, such as those pertaining to financial and legal matters, the potential to suffer harm is amplified.

From an advice perspective, a client’s journey through dementia can be a straightforward (although obviously sad) one – where the only issue is a reduced capacity to understand advice, make decisions and issue instructions to their adviser – or a more sinister one, where the client is exposed to financial abuse, often by a family member.

Early inheritance syndrome and cost of living crisis drives elder abuse

Elder financial abuse is characterised by the illegal or improper use of an older person’s funds or resources, with examples including:

• mismanagement of their funds or investments
• 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
• pressuring the older person to accept lower-cost aged care or forego medical treatments in order to preserve an inheritance.

Additionally, increasing life expectancies are pushing out the wealth transfers which occur on death by 10 years or more, giving rise to the much discussed ‘impatient inheritor syndrome’. Impatient to get their hands on their inheritance earlier than would otherwise be the case, and increasingly so in the face of rising real estate values, family members are resorting to a variety of tactics to bring forward that inheritance.

The growth of this phenomenon saw it specifically mentioned by the NSW Ageing and Disability Commission when launching their 2022/23 annual report.

Speaking at NSW budget estimates in November 2023, NSW Ageing and Disability Commissioner Robert Fitzgerald said they had received more than 1400 complaints about financial abuse – including exploitation, misused power of attorney and theft – and that upward trend was partly attributable to growing “inheritance impatience”.

Fitzgerald said: “Our children – my children – will have to wait much longer for the wealth transfer to occur, and that wealth transfer is being pushed out by five to 10 years. What we know about adult children is that they are not patient, so inheritance impatience will, in fact, grow.”¹⁰

Recognising the red flags

While there is no definitive list of ‘vulnerability indicators’, financial advisers – by virtue of the length of client relationships, and the visibility they have of the client’s financial and personal circumstances – are ideally placed to recognise when a client may be exhibiting signs of vulnerability.

1. Aside from being vigilant around specific events or health conditions which may contribute to vulnerability, advisers should be alert to the general patterns that serve as red flags of client vulnerability, which can include:
2. Dramatic departure from previous intentions., including abrupt changes in instructions without explanation
3. Decision-making leading to negative outcomes may possibly indicate vulnerability due to health issues or undue influence
4. Rambling or incoherent instructions, or difficulty in providing clear instructions, even after clarification attempts
5. Heightened and erratic emotions, not aligning with the situation or the client’s usual demeanour; and
6. Instructions relayed through third parties, especially if the client isn’t included/copied in communication or if the third party restricts direct interaction between client and adviser.

Noddy syndrome – informed consent, or just consent?

Advisers should also understand the concept of the ‘Noddy syndrome,’ a term coined by Dr. John Lloyd, a consultant neuropsychiatrist specialising in elderly care. In a 2009 court case Nicholson v Knaggs, he explained how he used the term to explain the tendency of elderly individuals to simply agree with suggestions to avoid causing trouble or inconvenience¹¹. This can apply equally to suggestions from family members, or from their adviser, and encapsulates the difference between ‘consent’ and ‘informed consent’.

Digital exclusion

The digitalisation of most aspects of our lives is generally seen as a positive development, driving both convenience and cost savings, and empowering consumers across most categories by democratising information and education.

But in the rush to develop digital channels for service, transacting, and communication across financial services, we are arguably increasingly the vulnerability of clients who- for a variety of reasons – lack the access to those channels, or lack the digital literacy to use them.

The Australian Digital Inclusion Index (ADII) shows that while digital exclusion is slowly dropping across Australia, there remains a substantial digital divide in Australia.

According to the Index, around 1 in 4 people in Australia are still digitally excluded^[12]. 11% are classed as ‘highly excluded’, meaning they either don’t have access to affordable internet, or don’t know how to use it.

And there is often a correlation between digital exclusion and other signs of vulnerability. People with low levels of income, education, and employment, those living in some regional areas, people aged over 65 and people with a disability are at particular risk of being left behind. If even if they do have access, UK research suggests vulnerable consumers are less likely to be confident with technology^[13].

To the extent that many advisers have enthusiastically adopted the use of virtual meetings, online documentation, educational videos, and secure client portals, it is worth pausing and considering whether this is leaving some clients at heightened risk of vulnerability – at the very least through lack of access to information that is only available through digital channels.

Developing a policy for dealing with vulnerable clients

The Financial Planning Standards Board (FPSB) – of which Australia’s FAAA is a member – is the global standards-setting body for the financial planning profession. To ensure the profession, and its individual practitioners, are equipped to meet the needs of vulnerable clients, they published a guide¹⁴ to help advisers develop their own Vulnerable Client Policy. Developing such a policy will allow advisers to deliver a better, more considered, and more consistent experience for their clients, while also protecting themselves from consumer complaints or regulatory action.

Areas the FPSB recommend for inclusion in such a policy include:

1. Acknowledging the vulnerability of clients who are new to managing finances, recognising their potential lack of experience in investing, and their need for additional education and guidance on risk and reward trade-offs. Such clients may require more time to grasp presented information.
2. Consideration of how to categorise vulnerable clients and how to implement checks and balances within the existing advice model to adequately address their specific needs.
3. A process for identifying vulnerable clients; serving vulnerable clients, including safeguards or additional steps to ensure that a vulnerable client understands what is happening; communicating the vulnerable client policy and any subsequent updates to clients; and helping clients feel protected from financial abuse.
4. Consideration of factors such as resilience or the impact of life events when seeking to identify vulnerable clients.
5. When providing financial planning advice to vulnerable individuals who may be accompanied by family members or trusted individuals, be clear about whom is being advised. The financial adviser, in the absence of a Power of Attorney, should not take indirect instructions on behalf of a vulnerable client; instead, they should arrange to take instructions personally from the client.
6. Recognition of the increased capital security needs of vulnerable clients, especially those no longer active in the workforce, and consideration of the investment term, access to funds, and potential implications of future premium increases.
7. Maintaining diligence in safeguarding the confidentiality of vulnerable clients, especially concerning medical conditions that may be disclosed.
8. Incorporating questions into the advice process to uncover potential vulnerabilities in clients, including those related to physical and mental health, life events, language barriers, and financial literacy levels.
9. Documenting any client observations or disclosures regarding vulnerabilities according to the vulnerability policy to establish a baseline for potential mental and/or physical vulnerability and track deterioration over time.
10. Advisers should consider developing connections with professionals who could help identify changes in the vulnerability of clients or be able to offer additional support and expertise to the adviser and/or the vulnerable client.
11. Advisers and their employees should seek ongoing training opportunities to improve their engagement of, and service to, vulnerable clients.

Their guide also includes a list of considerations in how to best structure meetings with vulnerable clients. Suggested considerations include:

• Meeting duration – it may be better to conduct several, shorter meetings instead of one lengthy meeting with a vulnerable client.
• Meeting location – it may be better to conduct the meeting at the client’s home, or via video.
• Meeting time – The vulnerable client may feel more alert and capable of communicating with the financial planning professional during a certain period of the day.
• Including a third party in meetings – if it is necessary for a caregiver or guardian to be present at a meeting between the adviser and the vulnerable client, the adviser should consider client confidentiality and potential conflict of interest issues, such as discussing long-term care and welfare costs with the named beneficiary in the room. The adviser should consider the role of a third party and the third party’s ability to influence the vulnerable client during financial advice discussions.

Summary

Safeguarding vulnerable clients within the realm of financial advice has emerged as a critical financial consumer protection imperative, with regulators worldwide intensifying their focus on this issue. The multifaceted nature of vulnerability demands a comprehensive approach from financial advisers, extending beyond mere compliance to a proactive stance that prioritises client well-being.

Recognising vulnerability necessitates an understanding of its diverse manifestations, from health-related challenges to life events and digital exclusion. By acknowledging vulnerability’s prevalence and fluidity, advisers can cultivate a more nuanced approach to client engagement, enhancing their ability to identify and address client vulnerability effectively.

The development of a Vulnerable Client Policy emerges as a foundational step in this endeavour, offering a structured framework to guide advisers in navigating complex client scenarios. By integrating considerations such as client categorisation, communication protocols, and meeting strategies, advisers can foster an environment that promotes trust, transparency, and resilience.

Ultimately, the pursuit of consumer protection in financial advice demands ongoing vigilance and adaptability. As the landscape evolves and client needs evolve with it, advisers must remain committed to upholding the highest standards of ethical conduct and client care. Through proactive measures and informed decision-making, advisers can navigate the complexities of vulnerability with empathy, integrity, and professionalism, ensuring that all clients receive the support and guidance they need to achieve their financial goals and aspirations.

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References:
[1] https://download.asic.gov.au/media/2cshqbxb/asic-corporate-plan-2023-27-focus-2023-24-published-28-august-2023.pdf
[2] https://www.afca.org.au/news/media-releases/a-year-on-11000-covid-19-complaints-scams-on-the-rise
[3] https://commission.europa.eu/publications/understanding-consumer-vulnerability-eus-key-markets_en
[4] https://download.asic.gov.au/media/5248811/corporate-plan-2019-23-published-28-august-2019.pdf
[5]https://www.fca.org.uk/publication/research/financial-lives-experiences-of-vulnerable-consumers.pdf
[6] https://profile.id.com.au/australia/language?BMID=50
[7] https://www.afca.org.au/media/1660/download
[8]https://service02.afca.org.au/CaseFiles/FOSSIC/736690.pdf
[9] https://alzheimersresearch.org.au/
[10] https://www.smh.com.au/national/inheritance-impatience-driving-rise-in-elder-abuse-20231107-p5ei7x.html
[11] https://www.adviservoice.com.au/2015/11/elder-abuse-planners-need-to-recognise-the-warning-signs/
[12] https://www.digitalinclusionindex.org.au/digital-inclusion-the-australian-context-in-2023/
[13] https://insight.rwabusiness.com/blog/posts/2021/september/digital-exclusion-and-vulnerable-customers/
[14] https://faaa.au/wp-content/uploads/2019/12/191126_pub_VulnerableClientGuidanceNote_FINAL.pdf

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