“Licensees and their compliance divisions [are] playing it too safe .. to the detriment of advisers and their clients.”
— Commissioner Danielle Press. Professional Planner. August 4, 2020.
Never mind the length.
We want a shorter SoA – we just don’t know how to use it…..
There’s still a view, amongst some advisers, that it’s impossible to provide advice in less than forty pages.
Part of this peculiar form of adviser anxiety is the result of self-consciousness driven by concerns of value, compounded by fears of ASIC’s critical appraisal and exacerbated by licensees’ view that more is better.
The reality, as both industry experts and ASIC have long argued, is that disclosure is a blunt instrument and a better consumer outcome might be achieved by focusing on what consumers actually want (and need). If you consider ASIC Report 632, and the way that the FASEA Standards promote engagement, understanding and consent over disclosure, you might start to appreciate that a larger SOA might cause more problems – less clarity, more confusion and more errors – than it aspires to solve. And, as our industry moves from product sales to becoming an advice profession, we might start to realise that the quality of the advice – its clarity, conciseness and effectiveness – is a better measure of value than size.
In fact, as the costs of SOA production inexorably and inevitably increase, the commercial pressures and professional obligations should drive us towards shorter Statements of Advice.
We’ve consistently argued for shorter SOAs (and highlighted ASIC’s support for this change) but licensees and advisers often respond that brevity is hard to achieve in the face of complexity, significant regulatory consequences and software providers’ unwillingness to change.
We understand the reasons why structural change may be difficult , but there are techniques you can use to simplify and shorten your advice documents that don’t require you to budge the 800 pound IT gorilla.
This is where Incorporation By Reference can help.
Building on the known
In the old days, when FSR first emerged to professionalise advice, the demands for ongoing advice led to the emergence of the Statement of Additional Advice.
When the use of the SoAA was revoked in 2009 ,based on the onerous requirements to be able to use one in practice, the main advice document available to advisers were the Statement of Advice (SoA) and the Record of Advice (RoA).
However there is one more option that is seldom discussed and seldom used.
Incorporation by reference.
What is “Incorporation by Reference”?
To understand how this technique can be used for both transition and ongoing advice, we need to consider Disclosure more generally and, explicitly, ASIC’s good disclosure principles.
Incorporation By Reference simply recognises that, in reality, consumers are inundated with reams of duplicate disclosure and that, for everyone’s benefit, we should be able to (subject to some qualifications) rely on previous disclosure to avoid redundant and repetitive disclosure.
The industry accepted incorporation by reference in Product Disclosure Statements (PDSs), but Licensees were slow to embrace it notwithstanding that advisers were also able to rely on incorporation by reference provisions for Statements of Advice.
The effect of this regulation is quite profound; a Statement of Advice can exclude previously-provided information that:
- can be specifically identified;
- is adequately identified so that a consumer can assess its impact; and
- can be provided, free of charge, if required.
There are some important qualifications to this discretion.
- First, implicitly, the information on which you’re relying (or the disclosure on which you’re using to manage your obligations) must be current and relevant disclosure. It’s not explicit, but, reasonably, you’re unlikely to be adequately satisfying your professional obligations if you’re incorporating and relying on historic disclosures that you know to be inaccurate, invalid or irrelevant.
- Second, you cannot incorporate by reference the statements or information that is required when you replace financial products. What this means is that your s947D obligations need to be addressed each, and every time, you recommend that a client replace one financial product with another. Likewise, and for equally obvious reasons, you still need to warn your client (s961H) that, if your advice is based on incomplete or inaccurate information, they must consider the appropriateness of your advice and their own relevant circumstances, before acting on your advice.
- Third, your failure to satisfy these requirements may be reportable situations under the new breach regime.
When can it be used?
ASIC Regulatory Guide 168 “Disclosure: Product Disclosure Statements (and other disclosure obligations)” addresses the ability to use Incorporation By Reference in a Statement of Advice.
It is not easy to decipher, which may explain Licensees’ recalcitrance, but the regulation provides significantly more flexibility than advisers acknowledge.
From our perspective, incorporation by reference is particularly valuable where a client scenario is too significant for an ROA, but not significant enough to justify the production of a new SOA.
As an example, consider your transition from your old Licensee. In most cases, you’re obliged to produce a new Statement of Advice within twelve (12) months. Depending on the size of your client base, and your internal resources, this can be a significant imposition – particularly for clients that have recently been reviewed and whose arrangements remain appropriate.
Producing a document (titled ‘Statement of Advice’) that incorporates by reference the previous advice document and addresses any relevant changes may be a far simpler, and more effective, way of satisfying both your contractual and professional obligations. Better yet, you’re not required to disclose for disclosure’s sake, so your IBR-based SOA could be significantly shorter, clearer and more effective.
You’ll no doubt want to include additional information, but the regulations provide you with the scope to provide the information your clients need without the repetition and duplication that makes many Statements of Advice unreadable and incomprehensible.
For Example
“An accumulator client who was provided advice on super and insurance attends their review. They have 2 young children. They have decided they want to save extra for their children and an Insurance Bond is the strategy being considered. As this is a new strategy and new product offering, the advice is unable to be advised via an ROA however, an incorporation be reference (IBR) SOA can be used. Given your knowledge of their relevant personal circumstances (disclosed in the SoA dated Day/Month/Year) you won’t need to produce a full SOA but can rely on the content of the previous SoA. So you can issue a significantly shorter advice document (SOA) that recommends the Insurance Bond, a PDS provided and their previous SOA referenced. Future ROAs for ongoing reviews would reference both documents.”
Or
“An existing client has received an unexpected inheritance valued at 50% of their existing investments in super. It is a significant change in the client’s circumstances however, it is apparent the funds can be used to make a contribution to super. The amount involved would be deemed as significant, hence an ROA would be unable to be used. An incorporation by reference SOA recommending a contribution or multiple contributions to super invested in line with client’s current portfolio would be able to be utilised.”
It may be unnecessary and duplicated disclosure, but we must reiterate that although IBR provides you with discretion and flexibility, the following information however CANNOT be incorporated by reference into an SOA:
- A warning in accordance with section 961H if the advice is based on incomplete or inaccurate information – as contemplated by sections of the Corporations Act 947B(2)(f) and 947C(2)(g); and
- Information regarding the charges and benefits that a client may incur or lose where the advice recommends the replacement of one product with another – as required by section 947D of the Act.
Information can only be incorporated by reference where the client has already been provided with the document containing the relevant information otherwise the document must be given to the client at the same time as the SOA.
Read RG168
Tips for use.
We can certainly help you develop (or refine) templates and business rules to help you embed the use of IBR into your advice process.
IBR may require different advice templates and accompanying guidelines for use. In any case, to get you started you would need to be mindful of the following:
- If incorporating by reference, all incorporated documents referenced must be listed in the SOA with a unique identifier such as a version number or date (usually date of SOA, version number of strategy papers and PDSs for example).
- The documents being referred to must have been previously provided to the client.
- Ensure you clearly explain the benefits and risks of your strategy and how it will enable your client to achieve their goals and objectives and put them in a better position.
- The information being incorporated by reference needs to be explained sufficiently so that the client can make an informed decision to proceed with the advice and whether they should re-read the previous information received.
- An IBR SOA can only refer to previous advice documents if the information being referred to remains relevant to the clients circumstances.
- Generic information about risks and benefits of strategies can be incorporated by reference to Strategy Flyers.
- You may consider sending the original statement of advice to the client with the IBR SOA for informed consent.
