As part of its ongoing assistance to Australian financial services licensees in complying with their obligations under the Corporations Act 2001, the Australian Securities and Investments Commission (ASIC) has provided guidance on Statements of Advice (SOAs).

The guidance is primarily focused on the requirements for an original SOA.

‘If SOAs are to be meaningful to consumers, compliance with presentation requirements is as important as compliance with content requirements’, ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said.

‘ASIC expects SOAs to be worded and presented in a manner that is clear, concise and effective’, he said.

The advice has been released after ASIC reviewed a large number of SOAs provided by industry associations and identified a number of concerns with them.

Common content issues in the SOAs reviewed include the failure to:

• provide a clear statement of the basis for the advice;
• disclose the costs, loss of benefits and other significant consequences when switching financial products; and
• provide effective disclosure of remuneration and benefits.

‘Information about the consequences of switching is specifically required by the Act and is relevant to all types of financial products. These requirements will be especially important in the context of the choice of superannuation fund regime that commences on 1 July 2005’, Mr Johnston said.

The review also found that the presentation of key information in some SOAs could have been improved. In particular, the poorly presented SOAs:

• did not contain all key information in the body of the document, but rather relegated some of it to an appendix;
• were not tailored to the client and so contained some irrelevant information;
• used industry jargon that was not explained; and
• repeated content (and therefore added unnecessary length).

Further ASIC guidance on SOA disclosure is provided in the attachment to this information release. ASIC also notes the release of the Financial Planning Association’s SOA Guide.

End of release

Attachment to Information Release 04-61

1. Legal requirements

In summary, Part 7.7, Division 3, Subdivision D of the Corporations Act 2001 (the Act) requires that an SOA:

• state the advice provided and its basis;
• contain certain details about the providing entity and the authorising licensee;
• include information about remuneration, benefits and any other interests, associations or relationships that might reasonably be capable of influencing the advice;
• include the prescribed warning where the advice is based on incomplete or inaccurate information; and
• include information about any referral fees.

Importantly, the SOA must be worded and presented in a clear, concise and effective manner.

2. Statements of Additional Advice

Information Release [IR 04-34] ASIC facilitates shorter Statements of Advice describes how information in a statement of additional advice (SOAA) can incorporate by reference, information from an original SOA in the context of an ongoing client relationship. ASIC Class Order [CO 04/576] Statements of additional advice prescribes the conditions that apply in these circumstances. ASIC is currently considering possible refinements to this class order to better reflect the financial planning process.

3. What information needs to be included in an SOA about the basis for the advice?

SOAs should clearly state the advice and the basis for it. They should also include a summary of the client’s needs and objectives, as obtained from the client fact find. The advice should be supported with sufficient information about the recommended product or strategy to demonstrate why the advice meets the client’s needs and objectives and is appropriate for their financial circumstances.

Both the advantages and disadvantages of following the advice should be considered and summarised in the SOA. The document should also clearly state the alternative products or strategies that were considered in reaching the recommendation and why the recommendation is appropriate in light of the alternatives considered.

ASIC also considers that the SOA should clearly disclose if an adviser’s recommendations are restricted to products from an approved product list.

Tax considerations

Where tax considerations are taken into account in providing the advice, these should be stated. ASIC will shortly publish an FAQ on its website at www.asic.gov.au/fsrfaqwhich will contain further information about how advisers can give financial product advice where the relevant tax considerations are beyond the scope of their expertise.

Risk

Risk disclosure should describe the significant risks that the client will bear in relation to:

• acquiring the recommended financial product specifically; and
• acquiring the recommended class of products generally

4. How should information about remuneration and benefits be disclosed?

The SOA must disclose any remuneration or other benefits that might reasonably be capable of influencing the advice. It should disclose:

• the circumstances in which the remuneration or benefit is expected to be received;
• how the remuneration or benefit is calculated; and
• when and to whom the remuneration or benefit is payable, as well as the source of the remuneration or benefit.

Where percentage rates are used, the SOA should clearly state to which amount the percentage rate is applied, e.g. the value of the client’s investment in a financial product. Where soft dollar benefits are disclosed in the SOA because of their potential to influence the advice, their nature and operation must be clearly explained so that the client understands the scale, context, eligibility criteria and source of the benefit.

From 1 March 2005, remuneration and other benefits that may influence the advice must be disclosed in SOAs as amounts in dollars (unless ASIC relief permits otherwise).

SOAs should clearly explain the source of the adviser’s remuneration, e.g. where the product issuer remits commission to the adviser from the client’s investment monies or from the fees charged by the product issuer on the client’s investment monies. If it is possible to negotiate the rate of adviser remuneration, including through the payment of a lower product cost or rebate of part of that cost, this must be clearly explained.

ASIC observed that the SOAs it reviewed also disclosed all fees, costs and charges incurred by the client if the recommendation was followed. It is important to ensure that this information is presented in such a way that the client is able to distinguish between the fees, costs and charges of the product and the remuneration that the adviser may receive from the product issuer if the product is acquired.

5. What information needs to be provided where the recommendation is to switch financial products?

The Act contains specific requirements for SOA disclosure where the advice is to dispose of, or reduce an interest in, a financial product and acquire, or increase an interest in, another financial product. In those circumstances, the SOA must contain additional information about the costs associated with the switch, any benefits (pecuniary or otherwise) that the client will or might lose as a result and any other significant consequences for the client of taking the recommended action.

This information must be provided to the extent that it is known, or could reasonably be found out by the entity providing the advice. Accordingly, advisers need to make reasonable inquiries into the client’s existing financial products and the costs, potential loss of benefits and other consequences of exiting those products so that a clear comparison can be made. ASIC expects advisers to make reasonable inquiries of the client and other relevant sources to obtain this information, where it is not available from public sources.

6. Tips for clear, concise and effective SOAs

Clear, concise and effective presentation of SOAs is required by the Act and promotes consumer understanding of the advice. Useful presentation tools include:

• headings, irrespective of the length of the document;
• a table of contents;
• a description of the purpose of the document;
• an executive summary to highlight the most important information;
• logical sequencing of information and grouping of related information; and
• tables and graphs, which are clearly explained.

Jargon should be avoided and language should be used accurately and consistently throughout the document.

Advisers should refrain from including key information in appendices and should not include generic research or educational materials that are not relevant to the SOA. Including superfluous materials in an SOA tends to detract from effective disclosure of the advice. It is preferable to make generic research and educational materials separately available to consumers on request.

SOAs should also be tailored to the client and avoid repetition. Repetition makes an SOA unnecessarily long. One way of avoiding repetition is to use clear cross-referencing.