As noted in our previous article, a statement of advice is the main document that records advice provided to retail clients.
The advice process
Individuals obtain information about financial products in a variety of ways and in a variety of settings. An individual may talk to friends and family, their lawyer, their accountant and others who they trust when considering a financial product.
Where advice is sought from a financial advisor, a financial services guide (FSG) will typically be provided to a client in the first meeting between the client and advisor. A statement of advice (SoA) will then either set out the advice or record the advice that was given. If the statement of advice is not itself the means by which advice is provided, then it must be provided to the client when the advice is provided or as soon as practicable thereafter.
If the statement of advice is not given to the client when the advice is provided, the licensee or representative must inform the clients of information which would be required to be included in the statement of advice including a disclosure of remuneration or other benefits that the providing entity and its associates will receive in connection with the advice, and must disclose interests which may affect the recommendations within the advice.
There are a number of Regulatory Guides and reports that have been published by ASIC and which assist advisors in understanding their obligations. These include:
- Regulatory Guide 90: Example Statement of Advice: Scaled advice for a new client (RG 90).
- Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) (RG 168).
- Regulatory Guide 175 Licensing: Financial product advisers— Conduct and disclosure (RG 175).
- Regulatory Guide 221 Facilitating digital financial services disclosures (RG 221).
- Regulatory Guide 244 Giving information, general advice and scaled advice (RG 244).
- Report 413 Review of retail life insurance advice (REP 413).
The statements and information in a statement of advice must be worded and presented in a clear, concise and effective manner (see s947B(6) and 947C(6) and RG 175). ASIC recognises that “the style, content, layout and length of an SoA will vary depending on various matters, including the scope and complexity of the advice.”
Section 947B of the Corporations Act 2001 sets out the required content of a statement of advice provided by an advisor. The statement of advice must include the following:
- A statement setting out the advice (see s947B(2)(a) and 947C(2)(a));
- Information about the basis on which the advice is or was given. This information should include an explanation of the basis on which the advice is or was given including consideration of the clients objectives, financial situation and needs and how the advice will meet those objectives, financial situation and needs (see s947B(2)(b) and 947C(2)(b));
- A statement setting out the name and contact details of the advisor (see s947B(2)(c) and 947C(2)(c)–(d));
- Information about remuneration, including commissions or other benefits, that the advisor, a related body corporate, a director or employee of the advisor or any related body corporate or associate will receive that might reasonably be expected to be or have been capable of influencing the advisor in providing the advice (see s947B(2)(d) and 947C(2)(e));
- Information about any other interests, whether pecuniary or not and whether direct or indirect, of the advisor including any associate, that might reasonably be expected to be or have been capable of influencing the advisor in providing the advice (see s947B(2)(e) and 947C(2)(f));
- A statement setting out any warnings required to be given to the client in relation to the advice pursuant to section 961H; and
- All other information required to be provided under the regulations. Regulation 7.7.11 provides that a statement of advice given by a financial services licensee must include information about all remuneration, including commission and other benefits, that a person has received or is to receive from referring another person to the licensee.
Disclosures on fees and commissions
The obligations relating to the disclosure of information on commissions, fees, benefits or other advantages provided to an advisor or an advisor’s associate aim to help consumers identify any potential influences on the advice provided and to identify any potential conflicts of interests.
In terms of how a disclosure may be made, preference is given to an advisor stating a dollar amount received, otherwise a percentage amount or a written description must be provided, and the benefits disclosed must include all commissions, soft dollar remuneration, sales quota and volume bonuses. A financial services provider would generally not need to disclose holdings of shares in a company whose shares are recommended to an investor unless the advice provided is likely to result in a significant volume of trading in those particular shares. If there is some form of collateral benefit, i.e. an advisor or associate is a lender to the corporation in which securities are recommended, disclosure is likely to be required.
An advisor must include a reasonable level of detail in their recommendations and also in relation to the disclosure of interests that may affect the advice given.
Recommending one product to replace another
Where an advisor recommends that a client disposes of a particular product to replace it with another, additional obligations apply.
Section 947D(1) requires that a statement of advice include information as to the charges a client will or may incur with respect to that disposal, reduction, acquisition or increase, along with any pecuniary or other benefits that the client will or may lose as a result of acting on the recommendation, to the extent that the information is known or could reasonably found out by the advisor.