Incorrect details?
Fiducian Portfolio Services Limited has welcomed two new modifications to the Corporations Act have been initiated and will change the way Advisers can do business. The first change is a welcome exclusion for providing a Statement of Advice (SOA) document for advice relating to smaller investments. The other welcome change allows strategic advice to be provided without the requirement to produce a SOA.
These changes have come about due to the work of industry and government and have culminated in The Simpler Regulatory System Bill, which received Royal Assent on the 28th of June 2007.
These changes are beneficial for the financial planning community as they encourage the provision of advice and facilitate access for more clients.
Record of Small Investment Advice (ROSIA)
The Corporations Act already contains a division that sets out the requirement for a Statement of Advice to be given as a means by which advice is provided or as a record of the advice that has been provided. The new Simpler Regulatory System Bill introduces a new section headed -Small Investments – Statement of Advice not required.
A statement of advice will not be required if advice has been provided, and a few key rules are met.
Rule 1: The total of all investments for which the advice relates is under the threshold (currently $15,000)
If advice relates to the acquisition of investment, then the threshold is the total sum of the acquisitions. Likewise if the advice relates to a disposal, the threshold relates to the total disposal. If Advice relates to both acquisitions and disposals, the threshold is the total acquisition value, unless the total disposals exceed the total acquisition. In this case the total disposal value is used.
The $15,000 threshold is still a little ambiguous, as regulations to clarify some of the issues are not expected till November. For example, how will the $15,000 be indexed? Also, how will a sunset clause be introduced to ensure that advice on regular contributions or drawdowns are included in the rules relating to the $15,000. The explanatory memorandum discuses a 12-month sunset clause so that the initial investment and the future amounts anticipated to be reached over the next 12 months would be included in the threshold. In addition, this clause is intended to help against anti avoidance whereby larger parcels could be broken up into smaller $15,000 parcels.
Interestingly, the explanatory memorandum explains that the $15,000 threshold was arrived by way of calculating a cost recovery amount for producing the statement of advice. Based on an assumption that a SOA costs about $260 to produce, a 1% fee would require a $26,000 investment to recover costs, a 2% fee would require a $13,000 investment. $15,000 was agreed as a suitable figure as no SOA would be needed. Note that industry bodies such as the FPA have lobbied to increase the threshold.
Rule 2: The advice does not relate to risk insurance (unless advice about superannuation products relates to life insurance)
Where advice relating to superannuation is under $15,000 and also includes a risk insurance element within the funds, the new exemption rules will still apply. This ensures that all features of the super fund can be considered. It is important to note that the advice still be appropriate for the client and the requirements under section 947D (replacement product) still apply.
Existing arrangements in relation to general insurance and derivatives will not be changed and will be excluded from the ROSIA rules.
Rule 3: The advice does not relate to a superannuation product unless the client already has an interest in the product.
New business into superannuation has been excluded from the SOA exemptions for smaller investments. However if the client already holds an interest in a super fund that you are recommending for a contribution or rollover, then the rules could still apply. This allows advice relating to consolidation or additional contributions to be advised for smaller investments.
What is provided to the client?
The Record of Small Investment Advice (ROSIA) should contain information on remuneration, conflicts, and replacement product if applicable.
It should be provided as soon as practicable after the advice is provided (generally 5 business days) and in any event prior to any further service relating to the advice is provided.
A ROSIA should be kept on file. In addition a copy should be provided to the client. This is a different requirement then the recently legislated -Record of Advice (ROA) rules in which advice presented to an existing client (without significant changes to personal circumstances) needs only to be provided to the client upon request.
Also, the ROSIA applies for new clients, whereas the ROA applies only to existing clients. The ROA will still exist for existing clients. However, by definition the ROSIA may also apply to existing clients also. The dilemma for advisers is how the two will interact.
For example, an existing client that only has received advice on an investment portfolio may wish to consolidate some smaller superannuation funds. Under the ROA rules, this may be a significant change, as the previous advice had not dealt with superannuation. However under the SOA exemption rules a ROSIA could provided to the client as the super funds fall under the $15,000 threshold.
On the other hand, if that existing client wanted advice on adding an extra $5,000 to their existing investment portfolio. The ROA may be a possible option, even though the acquisition amount is under $15,000. The advantage is that a ROA may be kept on file, not glossed up for the client, thereby saving costs.
Strategic Advice
The other noticeable change for exemptions to providing SOAs is a strategic advice exemption.
One flaw in the existing rules is that personal advice is deemed to be provided when an adviser has considered (or whether a reasonable person might expect the adviser to have considered) clients personal information when providing advice. In this circumstance, a SOA should be provided. Existing clients may receive a Statement of Additional advice (SOAA) or even a ROA.
This has caused many complications as advisers often provide strategic advice outlining general planning concepts before product is discussed with a client. Advisers have had to put all this detail in a SOA. For example an adviser wishing to advise a client to look at accumulation strategies such as gearing, salary sacrifice, savings plans and so on would generally have had to prepare all the detail in writing and provide it to the client in the form of a SOA.
However this will change, as section 946B in the Corporations Act outlining situations when a statement of advice is not required will be extended to include where advice does not recommend the purchase or sale of products.
An adviser will not have to provide a SOA to a client when:
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