ASIC Report 639: Why not…review and remediate?

In brief 4 min read

ASIC Report 639 Financial advice by superannuation funds was published on 3 December. It examines the ways in which superannuation funds provide financial advice to members and the overall quality of personal financial advice obtained through funds. While the accompanying press report noted that 'personal advice reviewed was generally appropriate', the Report itself paints a different picture.

Survey and key findings

To understand the ways in which financial advice is provided to superannuation fund members, ASIC surveyed a mix of 25 corporate, industry, public sector and retail funds, together making up 39% of the market by member accounts. The funds were asked a number of questions relating to the financial advice services offered by the fund, as well as the oversight of that advice.

Key findings published in the Report highlighted that:

• the most popular advice topics sought by members were member investment choice, contributions and retirement planning;
• the most common means of providing advice ('delivery channels') were in-house call centres (37%) and advisers employed by a related party (26%);
• the key identified conflicts of interest were vertical integration, relationships with third-party advice providers and bonuses paid to advisers (and here we thought conflicted remuneration was banned); and
• 61% of funds intend to increase their use of member self-directed digital advice tools that can generate Statements of Advice.

Personal advice review – process and findings

In preparing the Report, ASIC required the production of 233 personal advice files from 21 of the surveyed funds (four funds stated they did not provide personal advice). These were then reviewed by independent experts and ASIC staff for compliance with two obligations:

1. the 'best interests' duty and related obligations (to provide appropriate advice and prioritise the member's interests) in Division 2 of Part 7.7A of the Corporations Act 2001; and
2. where applicable, the 'switching advice' requirements in section 947D of the Corporations Act (applying where an advice provider recommends that a member replace one financial product with another).

This is where the Report gets interesting. Fewer than half (49%) of the advice files reviewed were 'in full compliance' with the best interests duty and related obligations. Of the remaining 51%:

• 15% showed non-compliance, indicating that the member was at risk of detriment if they followed the advice, and
• 36%, while not technically complying, did not indicate that the member was at risk of detriment if the advice was followed.

ASIC's response? To provide examples of good practice and some 'practical tips' to improve the quality of advice provided to members. And as for those advice licensees who provided potentially detrimental advice, a promise from ASIC to contact and remind them of ASIC's expectation that they review the advice and, where required, remediate. The licensee will then be asked to confirm to ASIC that they have undertaken appropriate steps and to detail the outcome. In doing so, they may want to take care to avoid reminding ASIC of its will publicised approach to enforcement – 'why not litigate?'...

The 'practical tips'

'Practical tips' for trustees, advice licensees and advisers are set out in Part C of the Report and are helpful. These can be broadly summarised as follows:

• Outsourcing: when outsourcing the provision of advice, exercise sufficient skill, care and diligence in choosing service providers, monitor their performance and appropriately manage any breaches by the service provider. Also, don't forget APRA Prudential Standard SPS 231 Outsourcing.
• Conflicts: identify them, assess them and, where appropriate, manage them. If you are asked by ASIC how you manage them, refer to your conflicts management framework. (Despite APRA Prudential Standard SPS 231 Conflicts of Interest requiring superannuation funds to have a conflicts management framework in place, only 29% of the funds referred to their conflicts management framework in their response.)
• Scoping: for advice providers, when scoping advice, explain your scope and ensure it is consistent with the member's relevant circumstances and the subject matter of the advice they are seeking. When you cannot act in the best interests of the member in scoping the advice due to an advice model limitation, you should decline to give the advice and refer the member elsewhere. 
• Intra-fund advice: do not directly or indirectly pass on to members the costs of advice in breach of section 99F of the SIS Act. Trustees should provide clear guidance to advice providers on the steps they should take when they identify that the member's advice needs cannot be addressed by the provision of intra-fund advice.
• Fees: identify the services for which fees are charged and ensure those services are provided! Don't deduct fees where the member is dead. Dying is expensive enough, without the added advice fees.
• Records: keep appropriate records to demonstrate compliance with your obligations. Many of the advice files where the advice was assessed as non-compliant also involved record-keeping issues.

Comment

Despite finding more cases of non-compliance (to be clear, that is a breach of the law in ASIC's view) than compliance with the advice obligations, ASIC's response appears to be very modest. Apparently, it is only where advice puts a member 'at risk of detriment' that ASIC will be taking further action, and even then it is notably restrained - an 'expectation' of review and remediation. Despite ASIC's much publicised 'why not litigate?' approach to enforcement, superannuation funds and their associated advice licensees (in this instance, at least) will likely be breathing a sigh of relief. For those currently based in Sydney, please don't breathe too deeply!