What must an SoA disclose when replacing or switching a product?

What the law says

Section 947D applies when the advice is or includes a recommendation that the client dispose of, or reduce their interest in, all or part of a financial product and instead acquire, or increase their interest in, another one (s 947D(1)(a)). It also covers moving from a MySuper product to another MySuper product or a choice product offered by the fund (s 947D(1)(b)). ASIC adds that this includes advice where the existing holding is money in a bank account (RG 175.256).

When it applies, s 947D(2) adds this information to the SoA:

The charges and lost benefits are required "to the extent that the information is known to, or could reasonably be found out by, the providing entity" (s 947D(2)(a)). Where the adviser knows, or is reckless as to whether, there will or may be such charges, losses or consequences but cannot reasonably find out what they are, s 947D(3) requires the SoA to include a statement to that effect.

A percentage, or a description of how the amount is calculated, can replace the dollar amount only where ASIC has made a written determination for a compelling reason under reg 7.7.13A or reg 7.7.13B, for example that a dollar amount is not possible or would impose an unreasonable burden. Even then the SoA includes worked dollar examples unless that is inappropriate.

ASIC's view of the same requirement is in RG 175.99 and RG 175.100. The SoA should state that the client's existing product has been considered. In a note, ASIC lists what to cover: exit fees, the loss of rights such as insurance cover or other opportunities attached to the existing product, and the entry and ongoing fees of the replacement. ASIC also expects the SoA to include a concise summary of the costs and benefits of the switch, including a switch between investment options within one product (RG 175.105(b)).

The disclosure is not the whole duty. When giving switching advice, ASIC considers that s 961B(2)(e) requires the adviser to consider and investigate the existing product, the products the client could move to, and the product recommended (RG 175.257). Section 947D and s 961B(2)(e) overlap, but the best interests duty asks for things s 947D does not, such as finding out about products beyond the existing and recommended ones (RG 175.260).

What it looks like in an SoA

An example of a switching section, with brackets for what each SoA fills in. The wording is illustrative, not a prescribed form.

Replacing your [existing fund] with [recommended fund]

We considered keeping your [existing fund]. We recommend moving [amount or portion] to [recommended fund] because [reason tied to the client's circumstances].

What it costs to leave: [exit or withdrawal fee in dollars], [buy and sell costs in dollars].

What it costs to join: [establishment or contribution fee in dollars], and ongoing fees of [amount in dollars] a year.

What you may lose: [the insurance cover held in the existing fund, with the sum insured and whether it can be replaced], [any other benefit or discount attached to the existing fund].

Other consequences: [for example, the tax consequences of selling, or a gap between cover ending and new cover starting].

What we could not find out: [any charge or benefit the adviser knows may apply but could not confirm, said plainly].

Common mistakes

• Percentages with no dollars. "Exit fee of [a percentage] of your balance" without the dollar amount does not meet s 947D(2)(d), unless an ASIC determination applies (reg 7.7.13A).
• Insurance cover left out of the lost benefits. Cover held inside the existing super fund can end when the balance is rolled over. It belongs under s 947D(2)(a)(iii), and ASIC names the loss of insurance cover specifically (RG 175.100).
• Only the new product's fees. Section 947D(2)(a) asks for the charges on both sides: leaving the existing product and acquiring the new one.
• Silence where a cost is unknown. If the adviser knows a charge or loss may arise but cannot find out what it is, s 947D(3) requires a statement saying so. Leaving it out reads as there being none.
• The switching information outside the SoA. It cannot be incorporated by reference to another document (RG 175.103).
• No sign the existing product was considered. ASIC expects the SoA to state that it was (RG 175.100), and the best interests duty requires the investigation behind that statement (RG 175.257).