Is it time to put the SOA out to pasture?

Alex Burke,  Senior Writer,  No More Practice Education

When ASIC opened its advice affordability project to submissions late last year, it was clear the conversation would expand beyond the scope of the regulator's initial consultation paper - which largely focused on regulatory provisions for limited advice. 

After all, there are myriad factors which could be said are increasing the cost of advice for the general population, as the results of our own NMP community surveys have reinforced. The initial briefing on ASIC's findings suggests the regulator also understands this; while it also focuses on limited advice, other topics touched on include ASIC's direct engagement with advisers, the FASEA Code and the idea that new regulatory guidance should be "consumer-tested". 

One major issue the briefing also identified, though, was the SOA system. 

The costs of producing an SOA - along with the hours required to make it, its considerable size and the fact that clients don't find it particularly useful - have arguably been one of the advice industry's biggest bugbears for quite some time. In 2019, we covered the presentation by Advice Intelligence head of partnerships Fraser Jack at an FPA conference, where he argued the SOA system reflects how the industry is trapped in 1998. 

He described the SOA as a "long legal document written by lawyers, for lawyers" which advisers then combined with "the most incredible piece of tech we had at the time: Windows 98 and Microsoft Word." Since then, he added, "not a lot has changed from that scenario." 

Multiple advice businesses and industry bodies, including the FPA itself, have proposed various modernisations of the SOA system. Now, the Financial Services Council has joined the chorus. 

In its report, Affordable and Accessible Advice, the FSC argues that "outdated documentation and record-keeping requirements have arisen as a result of over-regulation and regulatory duplication," which detracts from advice being "clear, concise and effective". 

As a result, the FSC recommends "simplifying the documentation and disclosure requirements for all forms of financial advice. Feedback from industry is that reduced documentation requirements would have the single largest impact on lowering the cost of financial advice." The report adds that the FSC's consumer testing also revealed consumer support for reduced documentation, which respondents indicated was a "good idea to reduce cost".

Noting that the typical SOA costs between $2,400 and $3,000 and can sometimes reach 80 pages in length, the report recommends completely abolishing the SOA. In its place, the FSC has recommended a Letter of Advice (LOA), which is intended to be a "scalable document focused on the information that a consumer needs to understand what recommendations are being made and how they are appropriate for a consumer’s personal circumstances." 

According to the report, a LOA should outline advice sought, relevant circumstances and the adviser's recommendation and rationale (at a minimum). 

The report continues: "Requirements of the LOA should be driven by the need for consumer to understand and make informed consent when receiving advice that is higher risk. 

"The content of that advice should be whatever the consumer needs in order to make an informed decision about whether or not to follow the advice. Unnecessary disclosure that does not add value for a consumer should be removed." 

While we don't yet know how much traction the idea of eliminating the SOA will get in Parliament, ASIC is clearly aware that the amount of documentation required for an individual client (regardless of their circumstances) is a barrier to reducing the cost of advice. 

This was highlighted in its initial advice affordability briefing, which explained that regulator is "considering possible guidance on ROAs and plan to raise ROAs as a key topic for discussion in the roundtables for exploring issues raised [in submissions]."

ASIC added: "We are also considering possible relief to expand the situations where a ROA can be used, for example when providing limited advice or strategic advice."

This sentiment isn't quite in line with the FSC's recommendation that SOAs be scrapped entirely, but modifying the advice disclosure system is clearly part of the conversation. To what extent do you think the FSC's proposal would increase the affordability of advice? 

 


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Anyone remember the old CAR (Customer Advice Record)? This is what the SoA replaced. The content originally specified in the Corps Act 2001 indicated that the SoA requirements had been lifted straight from the CAR. It only morphed into the beast it is today because of ASIC's interpretations and regulatory guides, followed swiftly by legal teams at financial institutions. As it was obviously originally intended the SoA should have been a very useful document to clarify in writing what was decided between the client and the adviser. As it is now, its worse than useless. I've seen "compliant" SoA's which are of no help at all to clients in understanding what they are being asked to sign up to. In fact, clients are left floundering in a morass of verbalese and meaningless motherhood statements. Revisiting the concept of the SoA- ie Letter of Advice, WILL NOT IMPROVE MATTERS because the same process of morphing will occur. In fact our aging population which owns the wealth will find it more and more difficult to get advice that is meaningful to them. I guess this is what the banks are hoping for. Customers with money who won't trust anyone else to park it for them regardless of the paltry income they earn on their parked money. And by the way, under the Corps Act 2001, strategic advice and asset allocation advice don't require an SoA at all. Its only when a specific financial product is recommended to be purchased or sold that an SoA is required. How come ASIC has gone so far beyond what the legislation originally intended? And how come the FPA didn't stand up to ASIC way back in 2002 when all this morphing was taking place??

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