Loss of SOA to create PI insurance uncertainty

Michelle Levy’s final report suggests that the requirement to provide SOA would be replaced with the requirement for providers of personal advice to retail clients to maintain complete records of the advice provided and to offer written advice on request by the client.

The expected protocol is for clients to be asked whether they would prefer written advice either before or at the time the advice is delivered. Moreover, clients would be required to make a written advice request before the document is issued.

However, industry insiders have suggested that the loss of SOAs could create issues for advisers looking for professional indemnity (PI) insurance. 

Specifically, if a client experiences financial loss due to following the advice outlined in the SOA, they may seek compensation from the financial planner or adviser who provided the advice. To safeguard against such claims of professional negligence or breach of duty, personal indemnity insurance offers financial protection to the planner or adviser.

GSA Insurance Brokers head of professional and financial lines, Ryan Neary, told ifa that the major concern for insurers in removing or reducing SOAs is that they contribute a significant part of the defence for insurers in the event of a claim.

Namely, SOAs play a significant role in an adviser’s defensive strategy. This is because a well-documented SOA can provide evidence that the adviser provided appropriate advice to their client and can help demonstrate that the adviser fulfilled their duty of care.

“If SOAs were removed in their entirety, insurers would lose a significant element of their defensive strategy on behalf of the adviser, which would cause them concern,” Mr Neary said.

Peter Johnston, executive director of the Association of Independently Owned Financial Professionals (AIOFP), expressed the view that the proposed reforms from the QAR necessitated a review.

The AIOFP recently supported Minister for Financial Services Stephen Jones’ decision to seek a third-party expert opinion on the QAR final report.

“Our industry has been hijacked by the legal fraternity over the past decade where advisers have been spooked into producing enormous SOAs which do not comply with the Corporation Law anyway,” he said. 

“SOAs are meant to be client ‘friendly’ and easily understood. Unfortunately, the exact opposite has occurred. ASIC has advised us in the past that SOAs should be no more than five pages with attachments. We agree with them. The cost of advice would dramatically reduce if SOA production complied with the law and common sense prevailed.”

Mr Johnston said the advice community needs ASIC and AFCA to be more interactive with advisers around the content of SOAs.

“This will give great comfort and confidence with their construction,” he said.

“The other critical benefit will be consumers getting a simplified, understandable, and more cost-effective outcome when seeking advice.”