Royal Commission Review
Importantly, we learned that the large majority of misconduct flowed from only a few sources, including failure to manage conflicts of interest and failure of basic standards of honesty. Now, a little over a year on, it is more important than ever to ensure your compliance measures effectively prevent these issues.
Where Was the Misconduct Coming From?
First, the Commissioner pointed out that there had not been proper enforcement of the law up until that point. That has changed dramatically with the ongoing implementation of ASIC’s “why not litigate?” policy. In March, 2019, following the recommendations of the ASIC Enforcement Taskforce, the general obligations were made civil penalty provisions. This means ASIC is no longer limited to administrative actions, like license suspensions, but can seek civil penalties in court. Additionally, the cap for civil penalties for corporations increased from $1 million to $525 million. Ultimately, ASIC is now armed with a far larger, far more effective stick and it’s more willing to use it. Even the largest institutions would be deterred by the possibility of a $525 million ‘thwack’.
Secondly, entities acted this way because they could. If compliance measures do not prevent unethical profit-seeking behaviours, then it’s almost inevitable that some advisors will engage in them. Due to the confusing tax and regulatory regimes, there is an extreme power imbalance between advisors and clients. Clients rely on their advisors’ recommendations and this power imbalance may tempt some advisors to breach their general obligations. These kinds of conflicts of interest are particularly acute where the financial advice business is vertically integrated.
Vertical Integration: Greed is Good… But so is S912A Compliance
Vertical integration in the financial services industry comes with an obvious and immediate conflict of interest. How can we be sure that advisors are putting the interests of their client above their own when such a large percentage of their clients are recommended in-house products? This is exacerbated by the legislation not providing for sales conversations; everything is couched as advice.
The Commission did stop short of dismantling vertical integration, likely for economic reasons. It’s a commercially efficient way of providing advice to clients and getting rid of it would likely increase the cost of advice.
Advocates for vertical integration will argue that if you go to a Ford dealership, you can expect to be sold a Ford. What is the issue with advisors recommending in-house products? To hear my answer, you can listen to the recording of the webinar – see the end of this article for more information.
Too Hard or Too Soft? How to Keep Compliance Policy in the Goldilocks Zone
Policy documents and SOAs have a way of expanding over time. With new judgments handed down and new ASIC report releases, the diligent compliance officer or solicitor will add a paragraph here and a paragraph there. However, an overabundance of policy can lead to a procedural paradigm which is too stifling for authorised representatives or an SOA which is incomprehensible to clients. This has even prompted a recent movement of authorised representatives seeking their own licence. Managing compliance is far easier for small organisations and can still be profitable.
A great way to maintain policies that balance comprehensiveness with usefulness is to review any areas where you actually go beyond what is required by law. The obligations only require licensees to take reasonable steps. Though it is true that tighter controls will be required for larger licensees, there may still be areas where you are going beyond what is reasonable.
Unwieldy policy regimes also take the focus off behaviour. Policy exists to ensure that behaviour is compliant with law. You can ensure that you’re getting a good ROI with your policies if they are accompanied by a culture of compliance.
Key Action Steps
- Review s 912A of the Corporations Act 2001.
This contains the general obligations of financial services advisors and are the 10+ commandments for the industry. Knowledge of these obligations is essential to compliance.
- Review the compliance and governance structure of your business.
Make sure you have records of meeting agendas and minutes as documentary evidence of compliance efforts. The APRA review into CBA is a great source of practical governance tips and is a useful benchmark for standard industry practices.
- Review your management of conflicts of interests.
Take a look at your approved product list and the percentage of advice which recommends in-house products. Are your advisors placing their duty to their clients above their personal interests? (Because they should be).
This review is taken from our On Demand Webinar series from April 2019 . For a more in-depth discussion about the changes to the industry, please email [email protected] to purchase the recording of the webinar for $132 (inclusive of GST).