New regulations bring SoAs closer to the holy grail

New regulations bring SoAs closer to the holy grail

Back then, the Corporations Act and ASIC Policy Statement 175 required SoAs to have a ‘reasonable level of detail’ and be ‘clear, concise and effective’ in their wording and presentation. The overarching purpose of an SoA was to ‘communicate to the client important and relevant information about the advice, so that they can make an informed decision about whether to act on the advice’

However, while providing information to clients has been tacitly recognised as the surface objective of these documents, the underlying compliance requirement has largely driven SoA content up until now. 

‘Less is more’ has not been the mantra of many advice providers when producing their SoAs.  Instead many SoAs appear to have been put together on the basis of a compliance-driven ‘if in doubt, put it in’ approach. In essence, the desire not to risk falling foul of the regulator has overridden the ‘clear, concise and effective’ intention of the original statement.

The industry has made several attempts to ‘de-cludge’ the format of statements of advice SoA.  ASIC introduced Regulatory Guide 90 in 2005 and the FPA released A guide to the development of effective Statements of Advice in October 2006. Both documents sought to explain the purpose of each element of an SoA, underlining the need for the document to be focussed on the client, rather than on compliance.

And while SoA providers have welcomed this change in focus, the fact remains that, until recently, compliance has trumped communication, hampering any real attempt to make SoAs user-friendly.

Through its “Simpler Regulatory System” legislative program, the former Coalition government had been seeking to redress this situation. With the recent introduction of the Corporations Amendment Regulations 2007 (No. 10), the providers of SoAs can now incorporate information by reference. This promises to facilitate shorter and simpler disclosure documents. 

The change in focus is a significant step forward. A number of leading advice houses are already weighing the meaning of the new regulations in the context of their own offerings. The key questions now become ‘what statements or information can be incorporated by reference?’ and ‘what format can that incorporated material take?’.

The key changes are reflected in new Regulation 7.7.09B (Statement of Advice from providing entity – information not included in the Statement), which states, in part:

1)	For paragraphs 947B (4) (b) and 947C (4) (b) of the Act, a providing entity is not required to include a statement or information mentioned in Part 7.7 of the Act, except a statement or information that is required by sections 945B and 947D of the Act, in a Statement of Advice to the client if the Statement of Advice:
	a)	refers to the statement or information; and
	b)	provides sufficient details about the statement or information to enable the client:
		i. to identify by a unique identifier the document, or part of the document, that contains the statement or information; and
		ii. to decide whether or not to read the state of information or obtain a copy of the statement or information; and
	c)	states that a copy of the statement or information may be obtained from the providing entity on request, at no charge.
2)	Subject to subregulation 3), the providing entity must give the client the document, or part of the document (whichever is applicable), unless the providing entity has already given the document or part of the document to the client.
3)	If the providing entity is an authorised representative of an Australian financial services licensee, the document, or part of the document (whichever is applicable), may be provided to the client:
	a)	by another authorised representative appointed by and acting on behalf of the licensee; or
	b)	by the licensee.
4)	If a client requests a copy of a statement or information that the providing entity is not required to include in accordance with subregulation (1), the providing entity must provide the copy as soon as practicable, at no charge.
5)	If a statement or information is not required to be included in a Statement of Advice because of subregulation (1), the statement or information is taken to be included in the Statement of Advice

Translated from the legalese (which certainly is not drafted to be clear, concise and effective!), any information mentioned in Part 7.7 can be incorporated by reference into a Statement of Advice.

There are two key exceptions; the “incomplete information” warning under s.945B and the information required by s.947D when the advice recommends the replacement of one product with another, both of which must remain in the SoA. 

The SoA must make specific reference to the information and provide sufficient details about it, to enable a person (a) to identify by a “unique identifier” the document or part of the document containing the information and (b) to decide whether to read or obtain a copy of the information.

The SoA must also state that a copy of the information may be obtained on request, free of charge.

The providing entity must give the client the document that contains the incorporated information, unless it has already done so.  If the providing entity is an authorised representative, the document may be provided by another authorised representative acting on behalf of the licensee, or by the licensee itself. 

What does it all mean in practice?

The new regulation opens the door for providing entities to reduce the length of initial SoAs.  It also appears to provide an alternative means of providing a statement of additional advice, instead of having to rely on the relief provided under Class Order 04/1556.

The requirement for providing entities to give a client the document that contains the incorporated information unless it has already done so will mean that clients will initially receive from the providing entity both an SoA and a document containing the incorporated information, but in subsequent interactions only an SoA will need to be given.

It is clear that SoAs must provide individuals with the opportunity to make informed decisions about whether the advice and recommendations they have been given suit their personal circumstances. However, much of the explanatory or educative material providing entities have included in SoAs to date is generic, equally applicable across the range of clients. 

This weight of information has contributed not only to the length of SoAs, but in large part to the unwillingness of clients to read them, thereby compromising their importance as decision-making tools.

With the new regulation authorising incorporation by reference, SoAs can be substantially trimmed, making them a much less daunting read.

Just as importantly, providing entities will now have the opportunity to take a fresh look at the way that supplementary information can be provided to clients. 

We are likely to see licensees and systems providers putting their heads together with communications experts to use this opportunity to boost the level of engagement with clients, not only reviewing the words, but potentially redesigning the way the information is presented.

Given the law has construed “document” broadly in the common law, providing entities may now have a much wider range of formats available to them for presenting the information now able to be incorporated by reference. Information booklets, electronic formats like CD and DVD and online via website access now appear to be possible, providing the specific terms of the regulation are met. 

So not only are we likely to see much shorter and simpler SoAs, but there is now a very real opportunity for adviser groups to produce material that goes much further towards meeting the initial objective of the Act and the original Policy Statement, the provision of ‘clear, concise and effective’ information.

The spin-off benefits are obvious.  First of all, if the material is presented in a more user-friendly and engaging format, there is a much better chance advice seekers will actually and actively embrace the information and use it to make properly informed decisions. 

This in turn is likely to create a stronger affinity with the advice provider (“they talk to me in my language”), and a greater chance the provider has of building a stronger long-term relationship with the client.

Add in the likelihood of reduced costs over the medium term, particularly if paper-based information is replaced by website access. Then there’s the very positive and increasingly influential corporate citizenship/social responsibility aspect of reducing reliance on paper and the environmental costs associated with print production processes.

Material benefits aside, the introduction of the new regulation encourages advice providers to step back from the ‘we’ve always had to do it this way’ approach to client communication, giving them the opportunity to start from an almost clean page. 

There’s a very real chance that their clients will soon be able to benefit from clearer and more convenient information to explain and support the recommendations given. 

The holy grail of ‘clear, concise and effective’ information is now well within the grasp of the advice industry.