how to nail advice reviews
We have, over the years, reviewed thousands of advice files. Great files are unfortunately still the exception rather than the norm. But there has been a lot of progress. Here are some top tips for how to get yourself an ‘A’ rating on your next review.
- Tailor the advice. Of course, some templated SOA text is useful, even desirable. But your SOAs should be tailored to each individual client. Objectives should be specific, not generic. Recommendations should tie into those objectives.
- Explain the Why. It seems so simple: who, what, why, how and when – they are your guiding lights in ensuring your advice documents pass muster. Demonstrating the rationale for your advice is key. Why are you recommending a particular product replacement? Why is that relevant to the client? How will it help them achieve their objectives? (Of course, if more than one product or strategy could be used to help the client achieve their objectives, explain the rationale as to why this one is recommended as opposed to others).
- Document everything. If a reviewer can’t find it, it doesn’t exist! The best files document meetings, research, developments, decisions, authorisations and more. The more complete the picture you present, the easier it is to demonstrate to a reviewer that you did all the right things.
- Get the scope right. A product is never a scope! To properly articulate the scope, ask “what is the problem the client is engaging me to solve” or “what is it the client want to achieve”. That is the scope. Not just ‘insurance’ or ‘super’!
- Cut out the irrelevant. If it is not relevant to the particular advice, cut it out (unless it’s a required disclosure of course). Take advantage of incorporation by reference. This will help ensure the SOA is clear, concise and effective.
legal briefs – news from the courts
Conflicts – courts to decide
After taking no action for years when the big banks were all vertically integrated and owned their ‘distribution’ (aka ‘advice’) businesses as well as the investment managers and products, ASIC has launched two separate actions in the last few months that belatedly tackle the vexed issue of conflicts in financial services.
Both actions have the potential to both clarify what the courts really thinks is allowable in terms of ‘managing’ conflicts and radically turn existing practices on their head. The outcomes of these cases could be wide reaching, affecting not only the big end of town but any financial services business that relies on managing their conflicts in order to meet regulatory requirements or pays some type of incentive to advisers or others.
For many advice businesses, think about any SMAs you may run and earn a fee from. Think about any associated and allied business you cross refer clients to and from. Think also about any incentives and bonus arrangements you may offer to advisers or others. Even though the two cases do not deal directly with these same issues, the principles that the court determines apply to conflicts and conflicted remuneration has the capacity to impact all conflicts (including conflicted remuneration) arrangements.
The first case ASIC filed was against CBA and CFS for ‘payment of banned conflicted remuneration’ in late June 2020. In a nutshell, ASIC argues that payments CFS made to CBA ($22m) for the distribution of a superannuation product owned by CFS was banned under the conflicted remuneration laws.
The second case, against Dixon Advisory, was a bit more of a hamburger with the lot as ASIC alleges conflicts, best interests failures and inappropriate advice. The case involves representatives recommending clients invest into related products in circumstances where ASIC alleges such recommendations were not in the clients’ best interests.
We will be keeping a close eye on both cases and will provide commentary and analysis when they have been decided.
Hot Tip: If you haven’t done so already, we suggest now would be an excellent time to re-visit any conflicts you may have in your business and how you manage them. N.B. FASEA has a lot to say about conflicts.
Cybersecurity in the spotlight
Continuing on with its ‘why not litigate’ mantra ASIC has also commenced legal proceedings against RI Advice Group Pty Ltd for failing to have adequate cyber security systems. Following a number of cyber breach incidents, including a ‘brute force’ cyber attack on some of RI Advice’s authorised representatives, ASIC alleges that RI failed to implement (including by its ARs) adequate policies, systems and resources that were reasonably appropriate to manage cybersecurity and cyber resilience risks.
As you are probably aware, there has been a proliferation of cyber attacks generally in the last couple of years. Financial services businesses, and financial advisers particularly, are being targeted because they hold so much sensitive and valuable information for fraudsters.
Hot Tip: If you haven’t done so already, do an in-depth review of the breadth and effectiveness of your cybersecurity and cyber resilience arrangements. To help, we have developed a Cyber Survey to help you identify where you may need to make improvements. Simply ring or email us and we will get a copy of the Cyber Survey to you.
Wagyu and Shiraz still on the menu for lenders
ASIC has thrown in the towel after Justice Perram’s now famous ‘wagyu and shiraz’ responsible lending decision. In that decision, Justice Perram colourfully described that a person seeking credit has it within their grasp to tighten their belts and to refrain from eating high end, expensive foods and drinking expensive wine if having additional loan obligations requires it.
That case served up not only wagyu and shiraz but also an emphatic repudiation of most of ASIC’s main arguments about what constitutes responsible lending conduct. ASIC appealed the decision but was again roundly defeated, albeit by majority and not unanimous decision this time. It decided to throw in the towel soon after, announcing it would not appeal to the High Court.
So, as it stands, the responsible lending provisions are not prescriptive. That is, a lender has flexibility as to how it makes its lending assessments. It is not obliged under the responsible lending provisions of the National Consumer Credit Protection Act 2009 to take into account a prospective borrower’s actual/declared expenses.
As Justice Gleeson stated:
‘The Act cannot be construed to require Westpac to consider the total figure for declared living expenses in each case for the purpose of assessing the consumer’s likely ability to meet their financial obligations…’
‘The language of the Act does not support the degree of prescription contended for by ASIC. Rather, the Act leaves it open to the licensee to decide:
(1) what inquiries it will make under s 130(1)(a) and (b), provided that those inquiries are reasonable;
(2) what steps it will take to verify the consumer’s financial situation under s 130(1)(c), provided that those inquiries are reasonable; and
(3) how it will use the results of its inquiries and verification to make the unsuitability assessment, provided that it in fact assesses whether the contract will be relevantly unsuitable for the particular consumer and noting that the licensee is otherwise motivated by the Act to refrain from entering into an unsuitable contract.’
However, clearly this is not a licence for lenders to be irresponsible. What it means is that a lot will turn on what inquiries are ‘reasonable’
More Change in the Air for Financial Services?
The Australian Law Reform Commission has been tasked with looking at the potential simplification of financial services laws. Hallelujah, we say! Through various landmark amendments and a band aid approach to cauterising wounds, the laws have become an unnecessarily complex spaghetti bowl of overly prescriptive rules.
The inquiry is part of the government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
We truly hope for a complete re-think and re-write of the existing laws. Being principles-based instead of highly prescriptive as currently would be our first wish. That’s the fervent hope and pipe dream at this point. Of course, the corollary of giving participants more latitude in deciding what they must do to comply is that there must unfortunately but necessarily be a fairly big stick that comes with it to deter participants from adopting low, ineffective standards.
Unfortunately, the terms of reference are quite narrow and do not provide scope for the ALRC to recommend policy changes. The inquiry is “more technical in nature and seeks to facilitate a more adaptive, efficient, and navigable framework … within the context of existing policy settings”.
Matter C in the terms of Reference give some hope: “How the provisions contained in Chapter 7 of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth) could be reframed or restructured so that the legislative framework for financial services licensing and regulation:
- is clearer, coherent and effective;
- ensures that the intent of the law is met;
- gives effect to the fundamental norms of behaviour being pursued; and
- provides an effective framework for conveying how the law applies to consumers and regulated entities and sectors.”
Whether the wholesale simplifications and improvements are possible within that scope, only time will tell. We have our fingers crossed as the existing rules are inefficient, largely ineffective in material ways, too reliant on disclosure and unbefitting a true profession. Whatever change comes, it won’t happen fast. The first interim report is due by 30 November 2021 and the third and final report is due by 30 November 2023.
Watch this space, though, as we will be observing progress with keen interest.
ASIC Naughty Corner
There is, unfortunately, a long list of current and former financial services participants who are subject to civil proceedings or have already been banned or paid massive compensation. Look through them carefully and you will find numerous salutary lessons.
- A director was charged with fraud after allegedly making false representations to an investor to obtain a loan for a related entity. He also allegedly made false representations to a number of other people to induce them to invest a significant sum of money (more than $1m in all). https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-176mr-former-director-charged-with-fraud/
- Former financial adviser jailed six years for misappropriating $1.8m of client funds https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-177mr-former-financial-adviser-sentenced-to-six-years-imprisonment-for-dishonest-conduct/
- Pershing Securities Australia (a provider of settlement and clearing facilities among other things) became the first company in Australia to be convicted of criminal offences for breaching client money provisions after it failed to segregate client investment monies from other assets https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-178mr-pershing-sentenced-for-breaching-client-money-offences/
- AMP, CFS, Equity Trustees, IOOF (inc OnePath), Intrust, Netwealth and Suncorp compensate superannuation members for classifying members as smokers by default, leading to increased insurance premiums https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-180mr-superannuation-trustees-compensate-members-wrongly-classified-as-smokers/
- A finance broker was permanently banned after giving a client a letter falsely stating they had been formally approved for a home loan and failing to pay an amount due under an AFCA determination as well as failing to comply with a number of conditions on his credit licence https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-182mr-asic-permanently-bans-brisbane-finance-broker-and-cancels-credit-licence/
- Civil proceedings were commenced against GoGetta for allegedly unlicensed consumer lending https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-183mr-asic-commences-action-against-gogetta-equipment-funding-pty-ltd-for-unlicensed-consumer-leasing/
- ASIC wound up an illegal unregistered MIS https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-185mr-asic-winds-up-illegal-unregistered-managed-investment-scheme-and-askk-investment-group-pty-ltd/
- ASIC obtained interim orders against a company and its sole director after the parties allegedly obtained almost $7m in investor funds from cold-calling and operating websites https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-187mr-asic-obtains-interim-injunctions-against-larry-dawson-and-pw-kitt-co-pty-ltd/
- ASIC cancelled or imposed conditions on SMSF auditors who had not maintained ‘an appropriate level of audit experience’ https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-188mr-asic-acts-against-smsf-auditors-who-no-longer-have-practical-experience/
- StatePlus Super is the subject of ASIC civil proceedings alleging fees for no service https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-189mr-asic-commences-civil-penalty-proceedings-against-stateplus-super-for-charging-fees-for-no-service/
- BT and Asgard are subject to ASIC proceedings alleging fees for no service and misleading statements https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-190mr-asic-commences-civil-penalty-proceedings-against-bt-funds-management-and-asgard-capital-management-for-charging-fees-for-no-service-and-misleading-statements/
- ASIC commenced proceedings against RI Advice alleging they failed to have adequate cyber security systems https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-191mr-asic-commences-proceedings-against-ri-advice-group-pty-ltd-for-alleged-failure-to-have-adequate-cyber-security-systems/
- Six of Australia’s biggest licensees have now paid more than $1bn in compensation for fees for no service or non-compliant advice https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-193mr-asic-update-on-compensation-for-financial-advice-related-misconduct/
- ASIC banned a financial adviser for five years after ASIC found he had failed to provide appropriate advice that was in clients’ best interests. https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-194mr-asic-bans-adelaide-adviser-for-five-years/
- Sam Henderson pleaded guilty to dishonesty and defective disclosure charges https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-196mr-royal-commission-witness-and-former-financial-adviser-sam-henderson-pleads-guilty-to-dishonesty-and-defective-disclosure-charges/
- A former financial adviser was charged with fraud after allegedly withdrawing funds from clients’ SMSFs without authorisation, among other things https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-200mr-former-financial-adviser-brett-gordon-charged-with-fraud/
- A former finance broker was charged with fraud and forgery https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-203mr-former-perth-finance-broker-charged-with-fraud-and-forgery/
- A mortgage broker was charged with making false statements to ASIC in his licensee’s annual compliance certificates https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-204mr-finance-broker-charged-with-making-false-statements-to-asic/
- Interim injunctions were awarded against companies and a director in the Mayfair 101 Group https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-205mr-asic-obtains-interim-injunctions-against-james-mawhinney-and-appointment-of-provisional-liquidators-to-mayfair-debenture-issuer/
- A representative of an online cryptocurrency scheme and platform was banned for seven years after ASIC found he provided unlicensed advice and engaged in misleading and deceptive conduct https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-206mr-asic-bans-former-national-representative-of-bitconnect-cryptocurrency-investment-scheme-from-providing-financial-services-for-seven-years/
- Civil proceedings started against Dixon Advisory for conflicts, best interests failures and inappropriate advice https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-207mr-asic-commences-civil-penalty-proceedings-against-dixon-advisory-for-alleged-conflicts-best-interest-failures-and-inappropriate-advice/
- An insider trader was sentenced to 3 years imprisonment https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-209mr-insider-trader-sentenced-to-three-years-imprisonment-for-trading-in-big-un-ltd-shares/
- In fee for no service proceedings, NAB super trustees are to pay $57.5m in penalties for false and misleading statements about their entitlements to charge plan service fees and members’ obligations to pay the fees. MLC and NULIS also failed to ensure they provided financial services efficiently, honestly and fairly https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-210mr-court-rulings-support-asic-s-position-on-notice-compliance-and-legal-privilege/
- ASIC commenced civil proceedings against current and former directors of Linchpin and endeavour https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-212mr-asic-commences-civil-penalty-proceedings-against-current-and-former-directors-of-linchpin-and-endeavour-for-alleged-breaches-of-duties/
- Used car financier acted illegally in providing high cost credit to consumers https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-213mr-court-finds-used-car-financier-rent-2-own-cars-australia-acted-illegally-in-providing-high-cost-credit-to-consumers/