SOA relief is within your reach

Being a financial planner in Australia is rewarding. But it isn’t easy from a legal-compliance perspective. Since licensing was born in 2004, you’ve had to learn lots of lingo. You know all about AFSLs, FSR, FSGs, PDSs, SOAs, SOAAs, ROAs, and GAWs.

Not only that, but you’ve had to learn what to do with all this stuff. For example, if it’s a disclosure document, when to give it to the client.

If you get it wrong, well, that’s a breach, and you may need to dob yourself in to the regulator, if it’s a significant one. Regardless, you certainly need to report it internally.

As a compliance consultant (and a lawyer, too), I spend lots of time with financial planners like yourself.

You always want to know what the latest regulatory changes are and how you can better streamline your existing processes to minimise risk, save time, save trees, and, at the end of it all, know what to do without worrying about breaching your (or your dealer group’s) Australian Financial Services Licence.

So, I’d like to tell you a story about a financial planner, Johnny Doright.

His actions demonstrate various ‘rules’ and ‘relief’ that are available to you.

For the purposes of the illustration, assume his clients are all retail clients.

Also, I’m only touching on a few issues (not all of them) that relate to the advice-giving process.

About Johnny

Johnny is an authorised representative of Financial Planning Pty Ltd, a privately owned dealer group. He runs his own practice, which is a Corporate Authorised Representative (CAR) of the dealer group.

He knows what he can and can’t do

He knows that the dealer group has authorised himself and the CAR to provide advice, personal and general, in relation to a broad range of financial products, but not derivatives. He is saddened by this, because he loves derivatives, and trades them personally.

Two weeks ago, he told a long-time client about how much he loved derivatives, and how they were the “cherry on the cake” when it comes to trading.

When he told the dealer group’s compliance officer (after the event), he was shocked to discover that what he said constituted general advice.

Apparently, it was a statement of opinion (by Johnny) that could be reasonably regarded as being intended to influence the client to start trading derivatives himself.

Advice rule

You can only provide financial services (eg, advising or dealing) in relation to products in which you are authorised to advise and deal.

‘Advice’ is defined as a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

Johnny was required by the licensee to write to the client to clarify that he had not intended to give advice.

Also, he had to provide his file notes of the conversation to the compliance officer, who recorded a breach in the dealer group’s breach register.

Johnny was told that, if he did it again, the dealer group may have to tell the Australian Securities and Investments Commission (ASIC) about it.

He wrote to the client (as directed by his compliance officer) clarifying that the client should under no circumstances act on any of the statements he made about derivatives.

Importantly, he now knows what he can advise on, and what he can’t. He also knows that he can help his clients vary, acquire or dispose of the same products as those on which he can advise. He recalls that this is called “arranging to deal”.

Johnny has a secretary/paraplanner named Jemima. She has an electronic version of the dealer group’s licence and authorised representative agreement stored in the ‘compliance’ folder on the server.

If he forgets the exact scope of his authorisations, Jemima can tell him after a few clicks of the mouse.

He knows when to give the FSG and GAW

Arriving at 8am, Jemima (who arrived at 7.30am) reminds Johnny that he’ll be meeting with a new client, Clive, at 9am.

Johnny takes the time to prepare his ‘new client’ pack. It includes a Financial Services Guide (FSG), a blank fact finder, a welcome letter and a dealer group newsletter.

Clive arrives at 9am, and they meet in the boardroom. Johnny listens carefully to Clive, and after half-an-hour they agree on the scope of the advice that Johnny is to provide to Clive. Johnny then takes him through the documents.

He asks Clive to complete a fact find, which can be discussed at the next meeting.

FSG rule

An FSG must be provided as soon as practicable after it becomes apparent that the financial service (eg, advice or dealing) will be, or is likely to be, provided to the client.

Note: If you can’t give the FSG before you start, you must give it within five business days of communicating with the client.

If it’s a new client (or an old client who does not have your latest FSG), before you start, explain to them how you’re paid and any other relevant interests or associations.

Johnny refers Clive to the newsletter (produced by the dealer group) that discusses the latest products and strategies. Johnny also says “of course, anything in this newsletter is just general advice — it might not be appropriate to your circumstances”.

The newsletter also includes a more detailed general advice warning (GAW).

GAW rule

If you give general advice verbally, you must say something like: “This is general advice only — it may not be appropriate to your needs.”

If you give general advice in writing, you need to say, in your own words:

> the advice has been prepared without taking into account the client’s objectives, financial situation or needs; and

> before acting on the advice, the client should consider whether it is appropriate to them; and

> if the advice relates to a financial product, the client should obtain and consider the Product Disclosure Statement (PDS) before making a decision in relation to the product.

General advice is when you provide advice (see the advice rule, above) that doesn’t consider one or more of the person’s objectives, financial situation and needs (and a reasonable person would agree that you haven’t considered them, either).

They arrange a second meeting.

He knows when to give a PDS and SOA

Johnny returns to his office and starts to finalise a Statement of Advice (SOA) that had been prepared by Jemima for another new client, Darren.

Johnny was quite pleased at its length — a bit shorter than usual: ‘I’ll save some trees today,’ he thought to himself.

The reduced length was because of the new ‘incorporation by reference’ relief that came out in late 2007. The SOA referred to, but didn’t repeat, a lot of information already included in the FSG that had been provided to Darren.

Incorporation by reference relief

Your SOA can be shorter if you choose to incorporate information from another document by reference, as long as that document can be uniquely identified (eg, a FSG with a date on it), and you tell the client it’s available upon request for no charge if they have, say, lost it.

If you’re referring to a document other than the FSG, it must be provided at the same time as the SOA, unless it has already been provided to them (like the FSG).

You can remove anything you like from the SOA if it’s contained in the other document, including your remuneration details, but not the required warnings about incomplete or inaccurate information, or the information required when you are replacing one product with another. You just need to refer to it in the SOA.

The SOA was to be provided to Darren following a meeting they had just over a week ago.

In light of Darren’s job situation, the SOA recommends that Darren take out a particular income protection policy.

Johnny finalises the SOA, which reflects the personal advice in relation to income protection that he provided orally during the meeting.

At their meeting, Johnny also provided Darren with a PDS of the recommended income protection product.

PDS rule

If you provide personal advice that the client should obtain a financial product, you must give them a PDS at the same time (or before) the personal advice is provided.

An exception is if the particular financial product does not have/require a PDS (e.g, a security).

Note: If the client wants to buy the product before getting the PDS, give them the PDS within five business days of them buying the product.

He e-mails the SOA to Darren.

SOA rule

You must provide an SOA to the client when the advice is provided, or as soon as practicable after the advice is provided, and before you provide the client with any other financial services (like dealing) that is connected with the advice.

Note: If the client wants to implement your advice (that is, deal) before you give them a SOA, give them the SOA within five business days of implementing the advice.

He knows when to give a SOAA

At 11am, Johnny goes back into the boardroom to meet with an existing client, Bart.

Bart has received lots of personal advice from Johnny in the past, and has called a meeting because he has just received a large inheritance.

Johnny takes detailed notes about the inheritance, and provides Bart with personal advice about investing the inheritance.

He says, “I’ll confirm this all in writing”. Bart then leaves the office. Johnny gives his file notes to Jemima and says, “Please draft up a Statement of Additional Advice (SOAA) for me”.

SOAA Relief

If you have previously provided a SOA to the client, and you provide further personal advice, and there has been a change in the client’s circumstances (e.g, receiving an inheritance) or the basis of your advice has changed, then you can provide a SOAA to the client. The same timing requirements for SOAs apply here.

So, in this situation, it must be provided ‘as soon as practicable’ or, if the client wants to immediately implement the advice, within five days of the implementation.

He knows when to make an ROA, and when to give an ROA

After lunch, Johnny receives a call from an existing client, Chantelle.

She has been looking at a few mining stocks, and is thinking about buying some through her self-managed superannuation fund (SMSF), which Johnny helped her set up six months earlier.

“What do you reckon about the mining stock MGX?” she asks him.

Johnny happens to know the stock well, and recommends then and there that she purchase a certain amount, in light of her current growth risk profile (which he confirmed remains unchanged from when the last SOAA was provided to her) using funds from her cash management trust account, which had built up over time.

He explains to her that if she goes ahead with the stock purchase, he will receive a 20 per cent commission from the broker on the brokerage that she incurs as a result of making the share purchases.

He also explained that this was a rebalance and quickly went through the risks and consequences of moving funds from the CMT into the MGX shares.

He hangs up the phone, makes a file note and puts it on Chantelle’s file.

He stops for a moment and shakes his head in sympathy for one of his other financial planning buddies, who is so unsure about when Records of Advice (ROA) and SOAAs can be used, that he does a full SOA every time.

So much time and paper wasted! This ROA took Johnny about five minutes.

Normal ROA relief

If you have previously provided an SOA to the client, and you provide further personal advice and there has been no change in the client’s circumstances or the basis of your advice, then you can record your further advice in writing, and don’t need to provide it to the client (unless they ask for it).

However, your file note needs to show that you told the client about:

1. Your further advice and brief details of its basis;

2. The details of any associations and benefits (including remuneration) you receive as a result of the advice; and

3. The charges, losses of benefits or consequences if your further advice recommends a replacement of product.

Also, you need to keep your ROA on file for seven years.

No sooner had Johnny put Chantelle’s file away than he receives a call from Dave, a prospective client.

Dave has two superannuation funds but wants to roll one into the other. Both funds have $5,000 in each of them.

Dave will be making superannuation guarantee contributions totalling $4,000 over the next 12 months.

Johnny asks a few questions, and then makes a recommendation. However, he tells Dave that he’ll confirm it in writing.

Johnny e-mails Dave a FSG straight away. After hanging up, Johnny gives his file notes to Jemima, and asks her to draft an ROA.

He knows that, even though he’s never given a SOA to Dave, he can take advantage of the ‘small investment advice’ exemption, for advice on amounts less than $15,000, as long as the advice doesn’t include advice on general insurance or life risk insurance (except as it relates to super) or derivatives (but that’s a non-issue for Johnny, anyway).

He also knows, however, that in these situations, the ROA needs to be given to the client.

Small investment ROA relief

Put simply, when you provide investment advice to a client that relates to less than $15,000, you don’t need to provide an SOA.

You do, however, need to provide an ROA to the client.

Calculation of advice on shares, debentures and stapled securities need to be calculated to include the total value of all financial investments that would be committed (or disposed of).

Calculations of advice on superannuation, MIS or non-derivative instalment warrants need to be calculated to include the total value over 12 months (if the investment is not finite) and must include other amounts committed by the client or reasonably related to the divestment.

If you can’t work out the total value then the advice is deemed to exceed the threshold and you must provide a SOA.

The timing for the ROA is the same as for a SOA. The content requirements of the ROA are the same as the content requirements of the normal ROA relief, outlined above.

Johnny then gets a phone call from Akmal.

Akmal is in an almost identical situation to Chantelle.

However, in this situation Johnny recommends that Akmal neither buy nor sell his shares — just hold.

Johnny hangs up, makes a file note (a record of the advice) and puts it on the file.

No recommendation to buy or sell ROA relief if:

1. You provide personal advice, but make no recommendation to acquire or dispose of a particular financial product or products of a specific issuer, or no recommendation to modify the client’s investment strategy or contribution levels (e.g, if you make a ‘hold’ recommendation); and

2. You, the licensee, a director or employee of the licensee doesn’t receive directly any remuneration from the advice; then you don’t need to provide the client with an SOA. You just need to keep a copy of the ROA on the file.

The content requirements of the ROA are the same as the content requirements of the normal ROA relief, outlined above.

He knows when he doesn’t have to use an SOA, SOAA or ROA.

At 3pm, Johnny provides an update to Pauline, one of the practice’s A-grade clients, on the performance of her funds under management.

He uses software to provide charts and summaries of the performance.

He refers to the information in a cover letter, and sends it off to Pauline.

He knows that it doesn’t contain any financial product advice, because it contains no recommendation or opinion and contains just factual information.

Therefore, a SOA, SOAA or ROA is just not required.

At 5pm, Johnny prepares to head off to a compliance professional development session, run by the dealer group’s compliance officer.

I hope this one isn’t too boring, he thinks to himself.

Being Johnny Doright, he sucks it up, puts on a good smile and reminds Jemima (on his way out the door) to record the session in his annual training plan.

Limited relief

As you can see, the latest round of relief offered to financial planners is fairly limited in scope.

It remains to be seen whether planners will actually use the new ROA and SOA options.

If you have feedback on this relief, then please tell us. You can contact us by going to www.holleynethercote.com.au/HN/Contact.aspx.

Paul Derham is a solicitor with Holley Nethercote CommercialLawyers .