“Fire all of your guns at once and, explode into space”
— “Born to Be Wild” , Steppenwolf CFP
Of all the decision trees that advisers face, the decision on whether to provide time-critical financial advice to a client is one of the most important to get right. Even more important is how the advice is provided and subsequently implemented. This article explores tips and traps about time critical advice; what you need to know to understand your options; and what to do if you have got it wrong.
WHAT IS AT STAKE?
Let’s not beat about the bush: the stakes for getting time critical advice right are high.
Firstly, there’s the Corporations Act, and its watchdog ASIC. When providing personal financial advice to a retail client:
- s952C of the Corporations Act states that failure to give a disclosure document or statement “by the time they are required to do so” is an offence.
- Failure to provide a client with a Statement of Advice is a contravention of s946A and is a “civil penalty” provision, meaning that potential fines are material… with maximums (for corporate entities) in the millions of dollars.
ASIC approaches compliance monitoring thoughtfully and has a variety of methods via which it can enforce the law, and these have been becoming progressively stronger. We have covered these developments in various articles, such as this analysis of the impact of the Treasury Laws Amendment Bill 2018.
ASIC can also suspend, cancel and vary a AFS license, make banning orders (RG 98), or draw on resources of the Financial Services and Credit Panel.
Next, there’s AFCA and/or civil action by a client:
- AFCA “can decide that a financial firm must compensate a consumer for direct financial loss, indirect financial loss, or non-financial loss”.
- A failure of the advice process means it is potentially much harder to defend a claim via AFCA.
- AFCA does reference time-critical advice in its findings – for example Case determination 692529.
WHAT IS TIME CRITICAL ADVICE?
Let’s backtrack a bit and define time critical advice and consider what is appropriate compliance monitoring.
Section 946C(1) of the Corporations Act states that when providing personal advice, a Statement of Advice (SoA) must be provided to the client “when, or as soon as practicable after, the advice is provided…” and that this must be before “any further financial service that arises out or is connected with that advice” is provided. This means that you can provide advice to acquire a financial product – but to implement the advice, you need to provide an SoA first.
One exception to this is allowed under the time critical rules – s946C(3)(c) allows a providing entity 5 business days to provide the SoA where “it is not reasonably practicable to give the SoA to the client before that further service is provided as instructed.”
But what is time critical advice versus simply an issue with advice workflow management resulting in unmanageable deadlines?
- There are cases where the circumstances are clearly and genuinely time critical, such as a client meeting an adviser for the first time just a few business days before a major change to the type of products available on the market (for example changes to new income protection insurance mandated by APRA as part of IDII sustainability measures with effect from 01 Oct 2021).
- There are cases where – with better workflow management – the time critical event would never have been time critical. An example would be where a meeting that should have been held in May was in fact held in June due to adviser workflow issues – leaving insufficient time for contributions strategy advice.
- Then there are the grey areas resulting from the competing pressures on an advice business: the client was not available for a timely review or did not provide key information; the client’s accountant did not provide financial information in a timely manner; the paraplanner was sick or away from work just before EOFY; and so on.
- The key with time critical advice is the adviser needs to document why the advice is time critical and should not rely on time critical provisions as standard practice.
TIME CRITICAL ADVICE
Consider the following scenario where time critical advice was provided and think about what should have been done (in theory) and what you would have done (in practice).
- Sonia provided superannuation switching advice to her ongoing advice clients, Mr & Mrs Smith, on 08 June 2023. The advice was provided on a time critical basis to enable the set-up of a transition to retirement strategy for Mrs Smith before 30 Jun 2023 (This allowed a substantial personal income tax deduction for Mrs Smith that would not be available again in 2024 or thereafter).
- A product switch was required because the strategy could not be enacted in Mrs Smith’s existing product; the switch was enacted on 12 Jun 2023 at the client’s verbal instruction (application paperwork was also signed by the client).
- Staffing issues meant a clear, concise and effective SoA was not available within 5 business days, but an SoA (which the adviser viewed as not being clear, concise and effective) was ready by 03 Jul 2023. Unfortunately, the clients were not available for a meeting about the SoA in early July 2023.
- An updated and improved version SoA was provided to the clients on 26 July – providing comprehensive advice about many aspects of the clients’ financial lives – but it did not include recommendations relating to the June 2023 “superannuation switching” advice for Mrs Smith; the advice was based on the clients’ new (updated) relevant circumstances as of July 2023.
- The overall quality of the client file (over several years) was high, with the obvious exception of time critical advice process above.
Before you get too far into the weeds, I’d offer you a few observations to consider:
- Sonia went out of her way to assist the client and maximise the tax deduction available to Mrs Smith. By doing so, she put herself at regulatory risk – and started the clock on the time bomb of time critical advice.
- Business process issues impacted on the provision of the time critical SoA. The adviser’s view that it was “not fit to present to the client” prevented her from providing it in a timely manner.
- Client availability meant that when further advice was provided, it was updated to reflect existing relevant circumstances and did not retrospectively address the gap in SoA disclosure (switching advice) from June 2023.
THE CRITICAL DECISION POINTS
If you consider this with a compliance monitoring mindset, you’ll notice Sonia had several critical decision tree points along the way:
- 08 June 2023: whether to provide time-critical advice.
- 12 Jun 2023: having received instruction from client to switch her superannuation, whether to then act on this instruction.
- 19 Jun 2023: whether to generate an SoA herself and provide it to the clients (as the paraplanner had not been able to do so by this date). If not: whether to notify the Licensee of the issue.
- 03 Jul 2023: whether to provide a “sub-standard” SoA to the clients.
- 26 Jul 2023: whether to amend the SoA to incorporate the switching advice from June 2023; or to provide an additional SoA to address the gap in disclosure.
- 15 Aug 2023: a review by an external auditor or regulator. It was too late for any viable non-fraudulent decisions at this point.
STAGES ON THE DECISION TREE
Below, we look at each stage in more detail. We are not advocating that advisers get into such situations in the first place. But in the real world, it can happen.
Advice in general is a process of risk assessments. With time critical advice and the scenario above, there is a continuous level of risk assessment required.
08 JUNE 2023: PRIMING THE FUSE
On this date the adviser had to decide whether to provide the time critical advice. This was not actually the most critical date in the decision tree – albeit that it initiated the chain of events.
PROS to providing time critical advice
- The right thing to do for the client (to assist with obtaining a tax deduction).
- Reputational benefit (happy client).
- The Terms of Engagement may stipulate assisting the client to build wealth tax-effectively: potential risk of AFCA complaint or civil action for breach of contract leading to loss of potential benefit, allowing to avoid breaches and breach reporting.
CONS to providing time critical advice
- Providing time critical advice requires careful file management to evidence the adviser met obligations under paragraphs 947B(2) (d) and (e), or S947C(2) (e)and (f), and by section 947D.
Risk assessment comment:
- Realistically, the risk of NOT providing advice is often lower than the risk of providing inappropriate advice, particularly where (as in this example) the client is losing a potential benefit rather than suffering an actual loss.
- That said, there is risk when advisers fail to act in the best interests of their clients or prioritise their clients’ interests above their own.
- AFCA does certainly examine the Terms of Engagement to check advisers are conforming with them. That said, there may be “mitigating circumstances” for the adviser if the client has had a role in the Terms not being met.
12 JUNE 2023: LIGHTING THE FUSE
The client instructed the adviser to acquire the financial product: this was a critical moment in the decision tree.
PROS to executing the advice
The client is onboard with the strategy and wants to proceed.
CONS to executing the advice
The adviser needs to be sure that an SoA can be provided within 5 business days of implementing the advice
19 JUNE 2023: FUSE BURNING BRIGHT
The para-planner had been unable to provide the SoA by 19 June 2023.
At this stage, Sonia could have prepared an SoA for the client (preferably on 18 Jun 2023 or before, to allow time).
PROS to providing an SoA late
Meeting legal requirements under Section 946C
CONS to providing an SoA late
The risk of the SoA being a “defective disclosure document”
Risk assessment comment:
- Statements of Advice do not have to be as complex as advisers and Licensees sometimes think. Ultimately there are a limited number of key ingredients, as outlined in ASIC RG 90.
- There is an art to the SoA and providing a defective document is also a civil penalty provision. However, if the key requirements are met, and there are no misleading or deceptive statements, an imperfect SoA is better than no SoA.
- The adviser could always update and reissue the SoA later and also update the file and supporting research and file notes.
- This is a lot less risky than failing to provide the document in the required timeframe, for which there are no grey areas – it’s a “yes” or “no” outcome.
03 JULY 2023 and 26 JULY 2023: ABOUT TO BLOW
By this stage the 5-day requirement of the breach reporting process has already been contravened. Also, Sonia had breached her obligation to notify the Licensee of any potentially reportable breaches as soon as practicable.
That said, ASIC is likely to view providing a required disclosure document late relatively less unfavourably than not providing the document at all. In fact, ASIC RG 98 outlines how “giving a compliance disclosure documents, but not within the required time” could result in a ban (of an authorised representative) of less than 3 years; but “failing to comply with disclosure requirements” could result in a longer ban.
Risk assessment comment:
- Report to your Licensee as soon as you know you have breached the law (or preferably before)
- The Licensee will have resources to assist you and minimise the impact of the breach (or potential breach)
- Mistakes do get made – self-disclosure is the best approach albeit one that may not be instinctive, particularly in the face of business pressures and stress.
15 AUG 2023: BOOM!
The failure to provide a Statement of Advice relating to the super switching advice was identified via a third-party reviewer or regulator:
- Self-reporting of breaches is viewed more favourably than a breach that is found via an external audit or review.
- In this case, the breach was not self-reported.
- Hence, the ticking time bomb of the time-critical advice had now exploded – resulting in a potentially poor outcome for the adviser – and possibly for the Licensee and clients.
Mistakes happen but disasters can often be avoided by knowing the rules and getting advice when things first go wrong.
If you think you need help, coaching or guidance reach out to us.
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