In this edition of Reviewer’s Hot Take, we delve into the interesting world of compliance, offering a hot take on the evolving landscape of regulatory requirements.

(Imperfect memories and replacement product advice)

A few weeks ago, Ben and Manny duked it out over product replacement. Both of these Compliancers® are still feeling the effects of the battle and sporting gold-rimmed sunglasses to hide the bruises. Collectively and publicly, they’ll say it was too close to call, but individually they know who won. 

For this edition of THT, they have taken off their gloves to less pugnaciously discuss some of the issues faced by advisers recently and provide insights on how to avoid repeating them. 

Giving advice is not easy. We appreciate there is so much more to do in the current climate to get advice written and put clients in better positions. The majority of advisers we work with are all over their obligations and don’t have too many things to worry about, but sometimes details can be missed in most companies. On rare occasions, the file that has been randomly selected (or specifically provided for review) just isn’t a great example of what the adviser is capable of. Effective advice-giving requires ongoing practice and continuous improvement. Constructive feedback should be given regularly and in real-time to help advisers continuously improve their performance.

In this edition, Ben has chosen to address the importance of keeping complete and accurate records. 

Manny will subsequently address the appropriateness of advice regarding fees and client objectives. 

Memoirs of an Adviser

Maintaining complete and accurate records is a mandatory requirement under FASEA Standard 8. 

This Standard emphasises the importance of documentation that supports the advice and adviser’s processes, ensuring accountability, transparency and adherence to obligations. 

It is relatively straightforward in its intent and one of the most important obligations to satisfy (in my humble opinion). It is very hard to prove anything if the evidence isn’t available for that only reason.

The complex and ever-changing landscape in financial services can be challenging at the best of times, and if anyone requests information from an adviser – whether it be a client, colleague, licensee, solicitor, AFCA, or ASIC – the information needs to be readily available for most people.

Whether the advice files are under internal or external review by an independent party, the process will involve a retrospective examination of the file, with the outcome determined by its contents. Evidence of meeting relevant duties and obligations and acting in the client’s best interest will be sought. If it’s not found, then it didn’t happen. 

“Files need to be able to stand on their own, without [an adviser’s] memory or recollections being needed to clarify matters. More so than the use of template file notes, or the fact that there is inexplicably two contradictory file notes of the same meeting on a file, it is that the file notes and SOAs consistently didn’t contain the full story which I consider is most concerning, and relevant to determining if ASIC has reason to believe that [the adviser] is not adequately trained or not competent.” 

– ASIC 

Further to this, there have recently been some FSCP outcomes that were associated with failing to keep adequate records. While they may not have resulted in any banning orders, a remedial approach was adopted, and ASIC were involved. 

31 August 2023 (Mr O)

Alleged Misconduct: Mr O contravened sections 946B(3A), 961B(1) and 921E(3) of the Corporations Act 2001 by failing to keep adequate records of advice provided to three clients. The Panel alleged that personal advice was presented as general advice, and the records maintained by the adviser could not provide evidence of the process followed by the adviser. 

Panel’s Decision: A written direction was issued under section 921L(1)(a)(iii) of the Corporations Act 2001, requiring Mr O to engage, at his own cost, an independent person to audit 10 SOAs and report back to ASIC.

31 August 2023 (Mr H)

Alleged Misconduct: Mr H contravened sections 946B(3A), 961B(1) and 921E(3) of the Corporations Act 2001 by failing to keep adequate records of advice provided to three clients. The Panel alleged that personal advice was presented as general advice, and the records maintained by the adviser could not provide evidence of the process followed by the adviser. 

Panel’s Decision: A written direction was issued under section 921L(1)(a)(iii) of the Corporations Act 2001, requiring Mr H to engage, at his own cost, an independent person to audit 10 SOAs and report back to ASIC.

Whilst ASIC have basically confirmed they won’t ask, licensees and compliance staff don’t have that luxury. An understanding of what occurred is vitally important so that appropriate remediation can occur, and the adviser’s recollection needs to be relied upon for this. This is where the human factor can pose additional problems. 

The use of digital file management systems, automated note-taking, and other technologies can help financial advisers overcome the limitations of human memory and ensure a comprehensive, tamper-evident record of client interactions and advice provided. 

“Or maybe I’m remembering it wrong”

– Kazuo Ishiguro ‘Never let me go’

In some respects, our brains are like a hard disk drive (HDD). Memories aren’t stored in their entirety in one place. Rather, they are stored within the brain through a complex network and when called upon, the fragments are collected and reconstructed for us. This process is far from perfect and can lead to a number of inaccuracies and distortions of the event(s) over time. 

Cognitive limitations and external factors pose a risk to the integrity of an individual’s memory, which can be seen in the failings of eyewitness testimony. Leading questions and repetitive questioning with subtle variances can also cause someone to incorporate incorrect information into the memory itself. 

Now, I’m not suggesting that an adviser will be exposed to any of these factors above, I’m just illustrating a point that the human memory isn’t as perfect as we might think and is easily influenced. This causes problems when trying to remember discussions and events long after their occurrence, and it is highly likely that there will be some level of distortion and inaccuracy – it’s unavoidable really – so why leave it to chance?  

Licensees need to consider their risk appetite in these situations. The remediation process may involve the provision of additional documents to the client, but whether they are advice/execution will come down to the adviser’s recollection and the licensee’s acceptance of the adviser’s order of events and particulars of the historical meetings with the client(s).  

“I don’t remember, I don’t recall

I got no memory of anything at all”

– Peter Gabriel 

We know that memories can be unreliable and that our brains can overwrite existing memories, as part of an ‘updating’ process. I am a little relieved to hear this because I sported some questionable haircuts when I was younger. Hopefully, these a la mode structures have been remembered differently by everyone I know.

In the past, file reviews from certain licensees may have felt like an interrogation, but it’s important to focus on the goal and work together to achieve it. The quicker we can figure out what happened, the quicker we can remediate and address strategies to avoid reoccurrence and that would be amazing. Managing emotions during this time is also very important, as the adviser’s psychological state may affect their ability to remember what occurred.

The risk that advisers face when their files are incomplete is that inferences and assumptions will be made. There is a possibility that the starting point will be the ‘worst-case scenario’ because this is what will have the greatest impact on the client, adviser and licensee. And if it isn’t effectively addressed, there may be further impact. 

The only defence is to ensure the file is complete and accurate in the first place. 

• It may be a little conservative, but the best place to start is if you touch it, save it. 
• Document all client meetings and relevant conversations. 
• Ensure documentation is up to date and referred to in file notes.
• Follow the licensee’s direction when providing advice. 
• Ensure that appropriate advice documents are provided. 
• Evidence the implementation process. 

If you need help, our team of experienced compliance professionals can you build better record-keeping practices that will endure regulatory scrutiny and help you provide better advice. Reach out.