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Statements of Advice must be clear, concise and effective

 

The Corporations Act 2001 generally requires financial services providers (FSPs) to give a Statement of Advice (SOA) to retail clients who receive personal financial advice.1 This requirement is designed to ensure retail clients are given enough information for them to understand the personal advice given to them and decide whether or not to rely on it.2 The statements and information in an SOA must be worded and presented in a 'clear, concise and effective' manner.3

We handle many financial advice disputes in which a retail client says they did not understand the advice they received from the FSP. In these disputes, the quality and clarity of the information in the SOA is a critical issue.

The issue of informed consent

The question of whether a retail client has given their informed consent to take up the FSP's advice is a critical issue in the majority of financial advice disputes handled by FOS.

Where this issue is raised, we will look at all of the disclosures made by the FSP to the client. A key document in this regard is the SOA.

If the information in the SOA is not 'clear, concise and effective', then FOS might find that the client did not understand the advice and the FSP had failed to secure the client’s informed consent to take up the advice.

What does 'clear, concise and effective' mean?

The phrase 'clear, concise and effective' is not defined in the Corporations Act. This means the words must be given their natural meaning.

According to the Macquarie Concise Dictionary:4

  • 'clear' means 'free from obscurity … confusion, uncertainty or doubt' and 'in plain language'
  • 'concise' means 'brief and comprehensive; succinct; terse'
  • 'effective' means 'producing the intended or expected result'.

When looking at whether information in an SOA is clear, concise and effective, we will consider whether the information:

  • is expressed in plain language
  • is brief yet comprehensive
  • promotes understanding of the adviser’s recommendations.

This approach is consistent with:

  • ASIC’s guidance in Regulatory Guide 175: Financial Product Advisers – Conduct and Disclosure5
  • the Financial Planning Association’s Code of Professional Practice.6

What factors does FOS consider?

When we consider whether or not an FSP secured a client's informed consent to take up advice, we will examine the SOA provided to the client and consider the following questions:

1. Did the FSP consider the client’s experience, language skills, literacy and numeracy?

FSPs that do not make a reasonable assessment of a client's experience, language skills, literacy and numeracy are much more likely to prepare an SOA that the client will not understand and more likely to be found to have breached their duty to secure the client’s informed consent to take up the advice.

Remember, each client is unique.

2. Did the SOA use language the client was likely to understand?

An SOA which does not use language the client is likely to understand cannot be effective.

It is important to note that the question is an objective one. In other words, we do not consider whether the client subjectively understood the information in the SOA. We only need to be satisfied that the client was likely to understand the language used in the SOA, assessed objectively, having regard to their experience, language skills, literacy and numeracy.

See the case study below for an example of how FOS objectively assesses a client’s understanding of an SOA.

3. Did the SOA use legal, industry or technical language?

This question is closely related to question 2.

SOAs that use legal, industry or technical language are less likely to be 'clear, concise and effective' if the client is unfamiliar with these types of language. If the use of legal, industry or technical language in an SOA is unavoidable, the concepts must also be accurately explained in plain English.

4. Was the information in the SOA in a logical sequence?

SOAs which are not logically set out are not clear or effective as they tend to confuse clients.

In broad terms, SOAs must have:

  • a beginning – the client’s objectives, available assets, timeframe and risk tolerance
  • a middle – an analysis of strategies and/or products that are likely to meet the client’s objectives given their available assets, timeframe and risk tolerance

  • an end – an explanation of a recommended strategy and/or products that are likely to achieve the client’s objectives given their available assets, timeframe and risk tolerance.

5. Did the SOA identify the client’s objectives in quantitative terms and explain how the advice would achieve those objectives?

An SOA that identifies the client’s objectives in quantitative terms (eg 'to retire at age 60 with sufficient savings to generate a retirement income of $40,000 a year') is much more likely to be effective than an SOA that does not identify the client’s objectives with such attention to detail (eg 'to retire at age 60').

The latter type of SOA is very unlikely to contain any meaningful analysis of, or conclusions about, the strategies and/or products that will achieve the client's objectives.

6. Did the SOA contain irrelevant information?

Clients are likely to be confused by SOAs that contain irrelevant information.

For example, if a client has only sought advice about investment products, and does not wish to borrow to fund the proposed investment, the SOA need not include information about margin loans and insurance products. If the SOA includes this information, it is less likely to be clear, concise and effective.

7. Is the SOA a template document?

In our experience, a template SOA is more likely to include:

  • language the client will not understand (see question 2)
  • legal, industry or technical language (see question 3)
  • irrelevant information (see question 6).

Template documents can be helpful, but the FSP must take care to tailor the language used in the template to the client and delete irrelevant information.

CASE STUDY: Unclear and inappropriate financial advice

Esme was a very elderly war widow; she had exceeded the life expectancy of an Australian female. Her financial situation was uncomplicated. She received more than enough income from her pension and from a small annuity to meet her needs.

Esme received a significant legacy from her sister's estate. This was the first time she had received a large sum of money. She had previously obtained financial advice about her annuity from a financial adviser, but she was otherwise inexperienced in financial matters.

Esme sought financial advice from her regular adviser. She told the adviser that she wanted to top up her annuity with $100,000 and sought her advice about how to invest the balance of the inheritance.

During her discussions with her adviser, Esme said she wanted to invest a small amount in her granddaughter's name, but later she changed her mind because she was concerned about how other family members would view the investment when she passed away and they were dealing with her estate.

The adviser recommended that Esme invest the balance of the inheritance in a managed growth fund. The SOA prepared by the adviser stated the investment in the managed growth fund was 'not capital guaranteed', 'the balance may fluctuate daily due to changes in unit prices' and there was a risk of capital loss if Esme withdrew from the investment early.

Esme accepted the advice and made the recommended investment. The investment performed badly and suffered significant losses. Esme lodged a dispute with FOS, claiming she did not understand the advice provided to her and the managed growth fund was not an appropriate investment in her circumstances.

We noted that an SOA is a disclosure document that is intended to help a retail client understand advice and decide whether to rely on it. Client understanding of the advice is a critical part of the advice process.

After investigating the case, we drew the following conclusions:

  • Esme was inexperienced in financial matters and had very limited knowledge of financial markets and products (as shown by her uncomplicated financial arrangements prior to receiving the inheritance).

  • Esme's primary objective was to leave a legacy for her sons and grandchildren and therefore she wanted to place the money into a secure, capital-protected investment (as shown by her concern about how a proposed investment in a granddaughter's name would be perceived).

  • The information in the SOA about capital volatility associated with the managed growth fund was generic in nature and was not likely to alert Esme to the potential for capital loss. It would have been prudent to put these warnings in language Esme was likely to understand.

We found that if the SOA had been expressed in language Esme was likely to understand, she would not have made the investment. We ordered the adviser to pay compensation to her.

Notes

1.      Section 946A of the Corporations Act

2.      ASIC Regulatory Guide 175 at RG 175.153.

3.      Subsections 947B(6) and 947C(6) of the Corporations Act.

4.      3rd edition (2004), Macquarie Press.

5.      Published April 2011. See paragraphs RG175.188 to RG175.192 (inclusive).

6.      See Rules 4.11 and 4.12.

 

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