ASIC cracks down on financial advisers and licensees


Financial advisers and their licensees, take note!  ASIC is following up on advisers who haven’t yet completed the financial adviser exam.

For most advisers, the thought of the financial adviser exam is likely to be a distant memory.  Some advisers may even look back with rose-coloured glasses and think – it wasn’t all that bad.

But spare a thought for those advisers who haven’t yet completed the exam.  What does it mean for them and, more importantly, what do they and their licensees need to do to stay out of ASIC’s crosshairs?

Before discussing these issues, let’s first recap on the new Professional Standards.

The Professional Standards

As financial advisers are aware, 2019 saw the commencement of the new Professional Standards regime for advisers who provide personal advice to retail clients.

Advisers are now required to:

  • have an approved qualification
  • complete 40 hours of CPD each year
  • comply with the Code of Ethics
  • and, what’s presently drawing ASIC’s attention, pass the financial adviser exam.

New advisers are also required to complete a full-time supervised professional year before becoming a fully-fledged financial adviser (a bit like being on your “P’s” when getting your driver licence).

While new advisers must meet the new requirements before providing personal advice to retail clients, existing advisers (financial advisers who were operating before the new regime) were given more time to meet the requirements.

Completing the financial adviser exam was the first “milestone deadline” of the new reforms for existing advisers.  Despite Government extending the cut-off date for reasons associated with the COVID-19 pandemic, the final date existing advisers had to complete the exam was 1 January 2022, unless they can come within one of the limited exceptions.

Which advisers did not need to meet the 1 January 2022 exam deadline?

Advisers that had attempted the exam twice

In 2021, the Government granted an extension for those advisers who had unsuccessfully attempted the exam twice before 1 January 2022.  These advisers have until 1 October 2022 to pass the exam.

The Government was clear in its messaging that only those who had made a genuine attempt at the exam were eligible for the extension, meaning, if you hadn’t attempted the exam twice, no leniency was likely to be given.

Advisers on a career break

The Government also granted an extension to existing advisers that were not financial advisers as at 31 December 2021 because they were on a career break.  To be eligible for this exemption, the adviser must not have been authorised to provide personal advice to retail clients on 31 December 2021.

In short, these advisers can continue to be treated as existing advisers and can again be authorised to provide personal advice to retail clients once they have passed the exam.

What happened on 1 January 2022 if you hadn’t passed the exam?

What caught some in the industry by surprise was the blunt way the law operated for existing advisers who hadn’t passed the exam or hadn’t attempted the exam at least twice before 1 January 2022.

In short, the law operated to automatically revoke, effective from 1 January 2022, the adviser’s authorisation to provide personal advice to retail clients.  Even though the adviser may still have appeared on the Financial Advisers Register after this date, they were no longer authorised as a financial adviser.

Can these advisers still provide personal advice to retail clients?

In short – no.

Where an existing adviser has had their authorisation revoked because they didn’t pass the financial adviser exam before 1 January 2022, the road ahead is long.

They will essentially need to meet all the new Professional Standards before a licensee can re-authorise them again to provide personal advice to retail clients.

This means, not only passing the exam, but they must also meet the new degree qualification requirement as well as undertake the professional year before they can again become a financial adviser.

The only exception is financial advisers that had unsuccessfully attempted the exam on at least two occasions before 1 January 2022.  These advisers can continue to provide personal advice to retail clients.  However, if such an adviser fails to pass the exam before 1 October 2022, they must cease to provide personal advice to retail clients from 1 October 2022.

What if the adviser was also a Responsible Manager?

This is tricky.

If the adviser who didn’t pass the exam by 1 January 2022 is also a Responsible Manager (RM), not passing the exam could affect their role as an RM.

Remember, the RMs are the people nominated by a licensee to demonstrate its competence to provide the licensed financial services.  These persons must meet certain qualification and skill requirements to be RMs.

ASIC outlines these requirements in RG 105 – AFS licensing: Organisational competence.  At present, the requirement to complete the financial adviser exam is not part of the qualifications or skills ASIC requires of RMs nominated by advice licensees.

However, even though it’s not specifically specified in RG 105, it’s not hard to see ASIC questioning the competence of an advice licensee if none of its RMs have passed the financial adviser exam.

What do licensees need to do if an adviser didn’t pass the exam?

Because the law automatically revoked the authorisation of a financial adviser on 1 January 2022 if they hadn’t passed the exam or attempted it at least twice, this raises a number of issues advice licensees need to think about.

1. Update ASIC’s Registers

If you haven’t already done so, you will need to update the Financial Adviser Register to reflect the fact that the financial adviser’s registration ceased on 1 January 2022.

If the financial adviser is also an Authorised Representative, ASIC’s Authorised Representatives Register will need to be updated to reflect the adviser’s correct authorisation.

The licensee will need to consider what services, other than personal advice to retail clients, the adviser will provide (e.g. general advice only or personal advice to wholesale clients).

Whatever role the adviser continues to have in the business, the licensee will need to ensure that the new authorisations reflect the adviser’s new duties and responsibilities.

Also, the licensee should ensure its monitoring and supervision procedures are checking that these advisers don’t provide personal advice to retail clients.

2. Assess whether the adviser provided personal advice on or after 1 January 2022

If personal advice was provided to retail clients after 1 January 2022, this is likely to be a breach of the financial services laws as the adviser would not have been authorised to provide these services.

Consider the breach reporting requirements and whether any client remediation is required.

3. Consider who will continue to service clients

For advice licensees, retail clients will still need to be provided personal advice.

If there are other advisers in the practice that have completed the exam, transfer the clients of the ceased adviser to a new adviser.  Remember, if the client has an ongoing fee arrangement (OFA) in place, the client will be entitled to an annual review.  Make sure this occurs in time so as not to risk the issue turning into a fee for no advice issue.

Also, any changes to an existing client’s financial adviser may impact on who the provider of the advice is and what advice document they will need to be given when the client next obtains personal advice (e.g. a Statement of Advice or a Record of Advice).

If you are in the difficult situation that no advisers in the practice have completed the exam, you need to act fast to avoid causing harm to clients.

Appointing a financial adviser is a priority.  But don’t overlook the new ASIC Reference Checking and Information-sharing Protocol.  In the interim, make sure you have a contingency plan to refer clients that need (or are entitled to) personal advice to another advice practice.  If clients are already entitled to an annual review as part of their OFA, it may mean the advice practice will have to pay for the advice.  Alternatively, the OFA may need to be terminated and ongoing fees refunded.

Not acting quickly to ensure retail clients are able to be serviced is likely to come under scrutiny by ASIC.  If nothing else, the licensee may be seen as not acting efficiently, honestly and fairly.

Finally, you may be considering changing your business to a general advice model only or to only servicing wholesale clients.  While this is technically possible, you should think carefully about changing your model as there are many things that can go wrong.  Best to get advice about this option as it could make the situation worse.

4. Consider whether you need to appoint a new RM

If the adviser is also an RM, and no other RMs under the licence have passed the exam, it may be worth nominating someone that has passed the exam.  This will help avoid questions about the licensee’s competence to operate an advice practice.

5. Assess whether you need to notify ASIC

If an adviser of a licensee has been affected by this issue, their licensee will need to consider if a reportable situation has occurred.

This might arise if ASIC’s registers weren’t updated in time or if the adviser gave personal advice when they weren’t authorised to do so.

Licensees will need to consider not only the financial services laws the adviser breached if they didn’t complete the exam before 1 January 2022 but if there are any financial services laws the licensee breached.

6. Can ASIC grant relief?

Finally, it’s not widely known that ASIC has the power to grant relief in this situation.  This means ASIC can modify the law to allow an existing adviser to continue to provide personal advice if they didn’t pass the exam by 1 January 2022 and none of the limited exceptions apply.

But just because ASIC can give relief doesn’t mean it will.  It’s likely only to be in exceptional circumstances that ASIC will grant relief.  These reforms have been known for a long time, so it’s hard to see ASIC having much sympathy for advisers who haven’t passed the exam and don’t come within the limited exceptions.

Final word

There are significant consequences for financial advisers and their licensees for not complying with the Financial Adviser Exam requirement by 1 January 2022.  If none of the limited exceptions apply, advisers and their licensees should act quickly to address the resulting issues and, most importantly, avoid causing harm to their clients.

Finally, if you’re holding out hope that the new Government will provide relief for those advisers that haven’t passed the exam, we suggest you don’t.  While the Government indicated, in opposition, that it would look at the new qualification requirements for advisers with 10 years or more blemish-free experience, it made clear that the Financial Adviser Exam requirement was non-negotiable.

If any of the above raise issues for your practice or you have any further questions, feel free to contact our team.

Authors: Josh Wigney (Lawyer) and Jesse Vermiglio (Partner)

This article was first published in the Independent Financial Adviser.