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Westpac case and the digital fix for SOA mess

It's Hotel California time for institutionally-owned advice businesses.

Having invested billions in buying and building advice businesses over the past 25 years, banks are only now realising that they can’t run them both compliantly and profitably. But post-Hayne, divestment plans are in disarray due to impaired values.

While disgorging advice businesses might feel like a welcome short-term solution, banks are still left with legions of customers with unserved financial needs. With their wealth of consumer data, banks are in pole position to identify those needs, devise solutions and connect with customers at appropriate lifecycle points.

Confusion between 'personal' advice and 'general' advice

If as is claimed, the cost of human-delivered advice is prohibitive, automated advice technologies are clearly the solution for lower balance customers. So it is curious that banks appear to be delaying their introduction.

This is currently manifesting in calls for more clarity around the dividing line between 'personal' and 'general' advice, being one of the reasons for Westpac’s appeal against Gleeson J’s December 2018 decision in ASIC v Westpac (see AFR article by James Eyers and Elouise Fowler Future of Advice: boutiques for some, robo-plans for the rest, 20 March 2019). It’s an odd rationale for the appeal, given that the court found that all the information Westpac provided to customers during its super consolidation campaign was either factual information or general advice.

I would have called that a win for Westpac on the general advice front.

Still, Westpac is not alone in its concern about 'general advice'. The Productivity Commission considers it a misleading term, requiring consumers to intuitively understand that general advice is like marketing. It takes a hard line, recommending that ‘advice’ only be used in association with ‘personal advice’, i.e. advice that takes personal circumstances into consideration, and that only professional advisers should deliver it.

ASIC agrees that 'no advice' and 'general advice' models are problematic, particularly if product complexity makes personal advice more appropriate, or other factors in the sales process may negatively affect consumer decision making (see ASIC’s submission to the Productivity Commission, para 47). The new design and distribution obligations may assist to ensure that products are only distributed to people for whom they are appropriate; but will not provide a complete answer.

Is this really about disclosure obligations?

The debate may be more about semantics if you take the view, first, that the function of the 'no' 'general' and 'personal' advice labels are to enable allocation of disclosure obligations, rather than identify the standard of advice required. (Only ‘personal advice’ attracts the stringent fiduciary duty to prioritise clients’ interests and provide appropriate advice.)

And, second, regardless of the advice model employed, financial services providers have an all-encompassing obligation to provide their services honestly, efficiently and fairly and cannot engage in misleading or deceptive conduct or make misleading or false representations.

What happened at BT and Westpac?

In ASIC v Westpac, BT’s call centre staff were drilled in recommending BT’s rollover service without explaining that a prudent customer consolidating their superannuation would consider issues such as termination fees, loss of insurance benefits and the feasibility of employer contributions before making a decision.

Instead, Westpac liberally employed ‘social proofing’, where staff were trained to tell customers that people like them believed that it was better to have their superannuation all in one place to ‘potentially’ save on fees. Because this was not a sound basis for deciding to rollover superannuation, Gleeson J found that its use by Westpac to provide assurance to customers about the rollover service was not honest, efficient or fair.

The case puts to rest any view that 'caveat emptor' (buyer beware) applies to 'no' and 'general' advice service models, even though those models do not attract a best interests duty. Businesses employing these models will need to profoundly reconsider their sales strategy and techniques.

You may ask why businesses use these models, when the duty of care is so high? Simply, because they don’t have to prepare statements of advice which have historically been perceived as too expensive for simple advice.

Digital technologies will change advice

This is all set to change. Digital technologies can now readily collect and analyse customer information, produce suitable strategic and product recommendations and auto-generate a compliant statement of advice (SoA) in a matter of seconds. While the algorithms to undertake complex holistic advice are a little way off, for the relatively simple scaled advice that is generally provided in ‘no’ or ‘general’ advice scenarios, current technologies are more than adequate.

Indeed, they arguably provide greater protection due to their compliant-by-design approach which meet the following requirements from the outset:

  • Identify information as factual, general or personal advice
  • Appropriately label and provide appropriate warnings for factual information and general advice
  • Clearly scope personal advice and collect sufficient information to form a reliable basis for it
  • Record and explain why strategy and product recommendations are suitable for the client.

Longer term these technologies are likely to see a shift to personal advice, making the no / general /personal advice semantics largely irrelevant. In the meantime, financial services providers who adopt them can be more confident of meeting the central obligations of honesty, efficiency and fairness post-Royal Commission, at low incremental cost and minimal reputation risk.

ASIC's timid response to fixing SOA mess

With all this promise, it is unfortunate that structural impediments persist. The financial advice legal framework was conceived well before 2002 and has barely been updated to accommodate technology developments, let alone, consumer preferences. ASIC’s timid guidance on electronic delivery of financial services falls short and its insistence that the laws are technologically neutral don’t stand up under scrutiny.

Two examples of sorely needed change include flexibility in the provision of Financial Services Guide content and permitting consumers to elect when they require a downloadable confirmation of advice during an online advice session. Currently, a separate SoA is required each time a consumer changes their data. Imagine the confusion for a consumer testing a range of scenarios before arriving at a desired outcome!

The Productivity Commission’s welcome and long overdue call for increased competition in Australia’s Financial System identified regulators as a key component (see page 37). According to them, core regulatory competencies must include the ability to anticipate that financial product design and delivery will change with technology and consumer preferences, and willingness and ability to change regulation accordingly.

One thing is clear. With human advisers reportedly unwilling or unable to cost-effectively service clients with balances lower than c$500,000, increased trust, collaboration and creativity between regulators, technology companies, advice providers and consumer groups will be required to close the increasing advice gap.

 

Claire Wivell Plater is Chairman of boutique financial services legal advisory firm The Fold Legal and principal of Wivell Plater Consulting. She is a member of the Australian Government’s Fintech Advisory Group and sits on five fintech advisory boards including digital technology company, Ignition Wealth. Claire has provided legal and strategic advice to financial services businesses for over 35 years.

 

3 Comments
Michael Langtry
June 17, 2019

I welcome Robo Advice - it will be a great help to financial planners for the provision of simple scoped advice. But it will not take the place of personal advice.
My clients tell me the main reason they engage with me is because they trust I will do the best that I can for them.
Trust.
Whether low or high means, well educated or not, my clients start from trust. If they don't trust me, then they won't get advice from me.
Trust is required because my clients are placing their wealth and security in my hands - to do a job for them that they are unable to do for themselves because of the complexity and severe consequences if they get it wrong.
I remember when SIS was introduced - the Government touted its benefits - better and more understandable advice for more Australians at lower cost.
What a joke - beware the man who says "I am from the Government and I am here to help you".
Because we all know the outcome - advice is still not understandable by the consumer, it costs a lot more, fewer Australians can get advice because of the high cost and now there are a lot fewer Advisers.
In short - the current legal structure of financial advice excludes the people who need it most - the elderly, the young, the disadvantaged, families on a limited budget, the self employed creating a new business. It is Catch 22 for most people - if they need financial advice from a trustworthy person they can't afford to get it.

Daryl La' Brooy
June 13, 2019

Sean, I have asked my clients in similar situations to complain to ASIC and their local Federal member of Parliament about how insane these laws are. They have complained and have received bureaucratic responses from them. Surely its time for some common sense! In the UK the number of advisers have fallen from 300,000 on 1 January 2013 to 22,000 now and the average person can't afford to pay for advice. So the UK government has now placed a levy on the remaining advisers to fund National Retirement Information Centres for people who can't afford to pay for advice. People going to these centres get general information and then they have to go off and implement it themselves. If the politicians made things simple for people they may be able to do it themselves but we have a very complex superannuation system, complex Social Security system, complex tax system and then people have to navigate investment markets.

Sean
June 13, 2019

A huge part of the problem for planners is the cost and time involved in producing an SoA which needs to be done for even the most basic advice in order to satisfy ASIC.

As an example I have a couple of clients who have small balances from old jobs in industry or retail super funds, no insurance in the funds. They have asked to roll these funds to their much larger wrap or SMSFs.

However when checking with compliance on what documents we need to produce for this they insist on a full SoA being prepared which requires sending off a client authority so an assistant can do the super research, takes several hours of my time to do an SoA reqeust, more time for a paraplanner, checking the SoA when it comes back by both myself and compliance, and therefore ends up costing quite a considerable amount of time and money. All so that we can carry out a rollover as requested by the client for what is often a very small amount of money.

Then when I produce an 80 page SoA for the client with all the appendices and disclaimers etc and tell them that's what we need to talk about to rollover their $700 in super they look at me as though I'm mad, and understandably so.

Unfortunately it feels very much as though the default answer from compliance is that everything now requires a full SoA being prepared no matter how big or small the issue is.

Technology may make it easier to prepare these documents but costs quite a bit, and quite frankly much of it could be dealt with better by ASIC providing much more sensible guidance on what does and does not require a full SoA vs a short form SoA or an RoA.


 

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