Submission on: Submission on Consultation Paper 183 Giving information, general advice and scaled advice Submission: Association of Financial Advisers Ltd 26 September, 2012
26 September 2012 Sophie Waller Senior Lawyer Strategic Policy Australian Securities and Investments Commission GPO Box 9827 Melbourne VIC 3001 Email: policy.submissions@asic.gov.au Dear Ms Waller, Submission on Consultation Paper 183 Giving information, general advice and scaled advice The Association Of Financial Advisers Limited ( AFA ) has been serving the financial advising industry for over 65 years. Its aim is to provide members with a robust united voice, continually improve practices and focus firmly on the exciting, dynamic future of the financial advising industry. The AFA also holds the client to be at the centre of the advice relationship and thus supports policies that are good for consumers and their wealth outcomes. With over six and half decades of success behind it, the AFA s ongoing relevance is due to its philosophy of being an association of advisers run by advisers. This means advisers set the agenda, decide which issues to tackle and shape the organisation's strategic plan. The AFA has been actively engaged in the FoFA debate, and will continue to respond to the ongoing release of regulations and regulatory guidance. This submission has been prepared by the AFA on behalf of its members. 2
Overall View The AFA is supportive of the position set down in this Consultation Paper. We believe that it is a sound position and that it addresses the key issues. As demonstrated in this consultation paper, scaled advice is a very important part of the financial advice landscape. It is important that scaled advice can be delivered in a professional manner where the financial adviser has clarity with respect to their obligations. In this submission we have sought to provide some additional considerations, the perspective of an adviser and some specific feedback. We believe that the inclusion of examples is particularly important. We note that some of the existing examples have been drawn from other sources and may require updating. We have provided some feedback on the examples below. This is an area where ASIC and the industry should work together to ensure that the examples reflect the key advice scenarios and deliver the best possible guidance to advice providers. Specific Points of Feedback on the Examples In addition we offer the following specific feedback: We appreciate that ASIC is seeking input from the industry on the examples and assistance to refine. The industry is willing to support this. The examples cover approximately 100 pages, including 8 examples of superannuation fund cases. We believe that it makes sense to scale this back to the core examples that are common. It may not be necessary to provide versions for factual information, general advice and personal advice under each example. With respect to the financial planning examples, we believe that these could be modified to reflect common cases that would be applicable to scaled advice. For example we would like to see an example that involved personal advice with respect to the consolidation of superannuation funds and the selection of insurance cover. The current financial adviser examples predominantly relate to strategic and non-product advice. It would be most useful if the majority of financial adviser personal advice examples reflect common cases that result in a product placement. In some of the cases there is a lack of clarity in the distinction between the factual information and the general advice cases. This is discussed below, where we express a view that further guidance to show where factual information becomes general advice would be useful. It would be beneficial to include an execution only example. Guidance with respect to execution only situations would also be very useful. When it comes to insurance examples, it is important that there is sufficient emphasis on the key types of insurance and the considerations in products such as TPD and income protection - premium types, payment criteria, waiting period and benefit periods. Example 4 includes a case of general advice where the call centre operator makes the following comment We typically recommend that people between 18 and 30 invest in our High Growth option and people between 30 and 45 invest in our Growth option. In the AFA s view, it is not appropriate to give recommendations of this nature that give no regard to the risk profile of the member, and the fact that it is general advice, may not be clearly understood by the member. We believe that it is essential to emphasize the importance of risk profiling, rather than to use generic views on age based investment option selection. We have identified a few errors in the examples which we will separately advise. 3
Responses to ASIC Questions In the sections below, we have provided responses, in a tabular form, for the questions in each section. Giving Factual Information B1Q1 The guidance is useful and sets out some key issues around the provision of factual information. The concern of the AFA is that this guidance will be of more benefit to superannuation funds rather than financial advisers, as it is often difficult for advisers to leverage, given their increased level of understanding of the client, typically the closeness of the relationship and the expectations of clients. B1Q2 There is a very big difference between an advice or service provider responding to a client s questions as opposed to a service provider seeking to lead a client through a discussion in relation to a particular product (as illustrated in Example C). There needs to be more guidance in relation to the difference between responding to a client s questions and initiating discussion on products. It would not be a good outcome to have a mechanism where the service provider could achieve a product sale through operating on the boundary of factual information. We note at paragraph 31, a comment that it will be factual information if the provider states this upfront. It is envisaged that certain operators may seek to use that declaration as a defence, but then proceed to cross the boundary later by providing implied recommendations. B1Q3 It would be valuable to give guidance as to specific cases where the provision of factual information crosses the boundary and becomes general advice or personal advice. Factual information becomes advice where there is a recommendation or a statement of opinion. A recommendation is normally reasonably clear, although can sometimes be delivered in an implied form. Expressing an opinion that results in advice being given is not always so clear. This is illustrated in Example 6, where the comparison between factual information and general advice is not so apparent in some sections. It would be beneficial to provide guidance on the difference between the provision of factual information and the statement of opinion. B1Q4 Yes this guidance does potentially raise consumer protection issues in that it sets up a factual information defence that might be manipulated by some service providers. An explanation of this has been discussed above. 4
Giving General Advice C1Q1 This guidance is beneficial and will help providers to provide general advice. The explanation with respect to the ability to tailor general advice based upon knowledge of the client (i.e. Example D, with respect to age being over 55) is useful. This can be leveraged by advisers with client mail and newsletters. The potential overuse of general advice is however a point of concern. This is illustrated by Example 4, on page 62, where the provider states We typically recommend that people between 18 and 30 invest in our High Growth option and people between 30 and 45 invest in our Growth option. Since this can be done without utilization of the knowledge of a clients relevant personal circumstances this is potentially dangerous. This example may provide a means for providers to get clients to make decisions in a manner where an SoA is not required. As stated previously, greater clarity, including case studies would be useful to highlight where the boundary between factual information and general advice rests. Paragraph 51 refers to the test of whether it is personal advice being based around whether a reasonable person might have expected the adviser to have considered the client s relevant circumstances. In the case of a financial adviser, this is likely to refer to what another adviser would have thought. The factor to consider here is that most licensees would not support the utilisation of general advice, other than in very limited circumstances. The factor of not considering the clients relevant circumstances, when known to the adviser is fundamentally contrary to the conventional financial advice process. C1Q2 There is a need for further guidance with respect to the circumstances where general advice can be provided, given the fact that disclosure documents (SoAs) are not required. Comments such as the one above about which clients they typically recommend to invest in the High Growth option, could be taken a step further, such as general advice about which clients are suited to geared funds or margin lending. C1Q3 The guidance provided does not provide sufficient distinction between the different providers who may be in a position to provide general advice and the normal level of knowledge that the specific provider may possess. Importantly will the general advice provisions apply equally to a call centre operator for a superannuation funds as it will to a financial adviser talking to a client that they have known for a number of years. C1Q4 Consumer protection issues are raised due to the potential risk of clients acting upon general advice when it might not be consistent with the client s relevant circumstances. Recommendations that are made in a one-on-one context are more likely to be considered by the consumer as personal, and thus there is a risk that clients will act, despite any general advice warning that is provided. C1Q5 As a professional association we do not rely on Class Order [CO 05/1195], however we believe that this relief should be reconsidered in the context of the probability of increased advice that is likely to be conducted over the phone and the likelihood that the nature of this warning may be misunderstood. 5
Guidance on General Advice in RG175 C2Q1 RG 175.29 in Section B of RG 175, makes it reasonably clear that it would be difficult for a financial adviser to provide general advice, given all the factors considered and the normal nature of an adviser s relationship with their clients. The important consideration here is whether RG 175.29 is going to be changed as an outcome of CP183. If RG 175.29 is not going to be altered, then the guidance on general advice needs to reflect these limitations in providing general advice. The guidance in RG175 Appendix 1 is broadly consistent with CP 183, so significant change should not be required. CP183 provides more specific guidance about using client information for the purposes of general advice. Giving Scaled Advice D1Q1 The guidance is clear in making points about the same rules applying to simple scaled advice versus complex comprehensive advice. Also the important point is made that scaled advice does not equate to lesser quality advice or to lower the training standard for advice providers. In providing scaled advice there are a few key process points: Agreeing with the client the scope of the advice. Determining the fact-find process in the context of the agreed scope. Confirming that the scope was appropriate in the context of the understanding of the client s relevant circumstances. Clearly communicating to the client the scope and the implications of limiting the scope. With respect to agreeing the scope, we support the clear statement in paragraph 71 that either the adviser or the client can suggest limiting the scope of the advice. The guidance talks in terms of advice complexity, suggesting that complex advice requires a more comprehensive process. It might be worth considering this in two dimension complexity being the technical difficulty of a particular situation and breadth, being the extent of the scope. A case involving a narrow scope, may be a complex advice issue. D1Q2 We believe that this guidance will assist advisers to give good quality scaled advice. D1Q3 We believe that the guidance is consistent with good business practice and the requirements of the FoFA reforms. D1Q4 We believe that further guidance on agreeing the scope of the advice and completing the fact find would be beneficial. This might also be assisted by examples covering common advice situations such as superannuation consolidation. 6
Giving Scaled Advice (cont) D1Q5 As a professional association, we don t maintain advice processes, however it is our view that this guidance will not result in significant change to advice processes. D1Q6 The guidance on the other steps obligation (s961b(2)(g) does not provide a great deal of clarity as to the implications of this piece of the legislation when providing scaled advice. Where possible, further guidance would be beneficial. As previously noted, we believe that it would be beneficial to provide guidance with respect to execution only transactions. We also suggest that, where it comes to advice with respect to a client s loan position, it would be worth making the point about understanding the implications of providing credit assistance or advice, and the need to hold a credit license. The suggestion of holding workshops is a particularly sensible one. This is an area where advice providers need comfort that their approach and understanding is correct. D1Q7 As stated above, we would like to see examples on superannuation consolidation and insurance advice. It would also be beneficial to have a financial advice situation where the scope is limited by the amount of money that the client is willing to spend on the advice. D1Q8 The scaled advice section does not raise any obvious consumer protection issues. D1Q9 Scaled advice was possible under the section 945A obligations and was previously leveraged by a number of stakeholders in the industry. This guidance does not necessarily change the ability to provide scaled advice; instead it makes it clearer how to provide scaled advice. Therefore it is not immediately apparent to us that this guidance will increase the access to advice. 7
Communicating the Service You are Providing E1Q1 This guidance on clarity of the scope is appropriate and consistent with best practice, and the best interests guidance as set out in CP182. E1Q2 Whilst we note the reference to concerns identified in REP 279, it is our view that advisers on the whole, do make a suitable effort to clearly define the scope of the advice that they provide. This is particularly important in the case of scoped advice. The examples in this section are appropriate. E1Q3 We are concerned about the general advice examples included in CP 183 and particularly with Example 4, where the advice includes comments about typically recommending certain investment options for different age groups. We believe that age based investment option selection is very risky. If this is to be done in a general advice context where the client has no record of the advice provided then we have important concerns about the communication. E1Q4 We would like to see additional examples of where insurance advice is provided, but may be limited to some forms of insurance (Life, TPD, Income Protection and Trauma) but not all forms. E1Q5 As discussed above in E1Q3, we do have concerns with respect to consumer protection issues related to general advice recommendations that might result in clients transferring to investment options that do not suit their risk profile. With no record of the conversation given to the client, there must be an obligation on the advice provider to retain a record of the conversation and to make this available to the client in the event that there is a detrimental consumer outcome. Delivering the Information or Advice F1Q1 We agree that all forms of delivery should be possible and available. The guidance is reasonable, however we think that it is important to ensure that the law is being correctly followed in all forms of advice delivery. The new forms of advice delivery including telephone and internet raise particular risk for consumers, and therefore specific surveillance of these delivery channels would be appropriate. F1Q2 As a professional association, we cannot respond to this question. F1Q3 As a professional association, we cannot respond to this question. F1Q4 With the use of internet as a delivery channel it will be important to see how this works in the context of the delivery of a statement of advice. Further guidance on this may be beneficial. F1Q5 As stated above, consumer outcomes may be at increased risk where the adviser is not face to face with the client. As these new channels evolve, it will be essential that ASIC monitors the processes and outcomes to ensure that consumer protection issues are adequately addressed. 8
Conclusion The AFA is supportive of this consultation paper and looks forward to working with ASIC as it is refined. As stated above we support the usage of examples or good quality case studies and in this context encourages ASIC to leverage the resources within the industry to craft suitable examples that can have clear and broad application. The AFA would be happy to assist in organising access to this type of support. Should you have any questions, then please do not hesitate to contact me on (02) 9267 4003. Yours sincerely, Phil Anderson Chief Operating Officer Association of Financial Advisers Ltd 9