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

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

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

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

AFCA – the single dispute resolution body

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

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

The role of AFCA

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

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

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

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

AFCA’s remit

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

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

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

Importantly – and sometimes controversially ­– AFCA may use its discretion to consider complaints relating to wholesale/sophisticated advice clients.

Financial limits can limit AFCA’s involvement

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

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

AFCA processes

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

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

In some circumstances, AFCA will skip the ‘arbitration’ stage and go straight to a determination. Examples of these circumstances^[3] include:

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

Determinations are binding

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

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

The costs of AFCA to practices and licensees

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

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

As of March 2025, the current fee schedule applies:

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

Complaints trends

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

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

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

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

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

How does AFCA calculate loss in financial advice complaints?

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

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

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

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

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

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

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

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

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

Case Study – compensation for inappropriate asset mix

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

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

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

Criticism of the ‘but for’ approach

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AFCA and wholesale advice

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

Commenting on the issue, AFCA Lead Ombudsman Shail Singh stressed that if someone is properly classified as wholesale, and are properly informed of the consequences it is highly unlikely they would pursue those complaints^[17].

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

Conclusion

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

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

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

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

The post CPD: Consumer protection essentials – AFCA and advice complaints appeared first on AdviserVoice.

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

Introduction

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

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

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

Why record-keeping matters

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

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

What records are advisers obliged to keep?

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

ASIC requirements – what records?

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

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

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

ASIC requirements – how long?

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

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

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

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

Why the controversy?

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

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

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

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

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

The code of ethics and record-keeping

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

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

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

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

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

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

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

Keeping records safely and securely

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

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

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

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

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

Professional association guidelines

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

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

Record-keeping in the spotlight

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

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

Poor record-keeping is poor advice

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

Case study 1: SOA fails to adequately record client objective

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

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

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

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

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

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

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

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

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

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

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

Will the end of SOAs change much?

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

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

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

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

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

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

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

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

The AI revolution, making record-keeping easier

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

The post Record-keeping in financial advice – the key to compliance and consumer protection appeared first on AdviserVoice.

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

Introduction

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

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

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

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

What are alternative investments?

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

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

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

Consumer risks unique to alternatives

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

Illiquidity

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

Higher risk of loss

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

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

Opacity and complexity

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

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

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

Valuation challenges

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

Evolving regulatory regime

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

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

Consumer protections when accessing wholesale investments

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

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

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

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

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

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

What protections are offered to wholesale investors?

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

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

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

A knowledge gap to be filled

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

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

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

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

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

The importance of communication

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

Key skills and methods advisers must focus on include:

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

Compliance essentials when recommending alternatives

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

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

In summary

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

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

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

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

———–

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

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

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

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

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

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

Structure of this article

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

1. DBFO: Key dates in 2025

Key Date number 1: January 10, 2025

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

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

A recap of that change:

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

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

Key aspects of this reform include:

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

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

Introducing the new reference date

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

Key date number 2: July 9^th, 2025

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

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

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

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

ASIC updates regulatory guidance to support DBFO changes

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

The new Information Sheets are:

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

Updates were also made to RG 246, and 175.

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

So what about DBFO Tranche 2?

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

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

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

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

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

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

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

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

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

New class of adviser – guidelines

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

Modernising financial advice

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

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

Timeframe for Tranche 2

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

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

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

2. New legislation around privacy and cybersecurity

Cyber Security Bill 2024 becomes law

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

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

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

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

Privacy reforms will also impact medium to large advice firms

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

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

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

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

FAAA expresses concern over the impact of AI on privacy

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

The FAAA noted in its submission on the changes:

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

3. What will ASIC focus on in 2025?

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

Priorities most impacting advisers include:

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

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

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

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

Summary

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

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

———–

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

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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

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

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

Introduction

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

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

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

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

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

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

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

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

But, just like McMansions, SOAs have been supersized.

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

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

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

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

Research shows less is more

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

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

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

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

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

In the QAR/DBFO cross-hairs

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

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

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

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

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

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

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

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

Importantly, ASIC also requires that the information be:

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

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

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

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

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

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

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

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

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

ASIC offers relief for digitally delivered advice documents

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

ASIC sets out its aims for RG 221 as including:

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

SOA or ROA?

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

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

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

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

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

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

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

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

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

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

Information to include in an ROA

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

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

ROAs can be video or audio recordings

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

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

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

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

Will compliance teams be the handbrake to SOA reform?

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

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

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

As one expert told IFA magazine:

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

Summary

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

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

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

———–

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

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

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

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

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

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

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

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

A quick refresher – how ASIC operates

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

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

ASIC 2025 focus areas at a glance

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

Media coverage gives advisers clues

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

Deeper Dive – DDO

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

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

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

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

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

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

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

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

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

Deeper Dive – Artificial Intelligence

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

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

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

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

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

ASIC likely have two major concerns here.

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

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

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

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

Deeper dive – offshoring

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

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

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

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

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

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

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

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

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

Deeper dive – private markets

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

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

Speaking on the issue, ASIC chair Joe Longo said:

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

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

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

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

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

Deeper dive – dispute resolution

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

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

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

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

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

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

Summary

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

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

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

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

———–

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

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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

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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.

The post Compliance primer – Crypto regulatory reform, consumer implications appeared first on AdviserVoice.

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

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