In this article, Catalyst Compliance’s Managing Director, Steve Murray, examines the impact an increasing focus on licensee compliance is having on advisers and their individual reputations…
Reputable Australian Financial Services (AFS) licensees have attempted to protect their license by avoiding the authorisation of advisers employing sub-standard practices – with varying degrees of success. It is now evident that advisers need to be equally as careful in their selection of a licensee, as they may turn out to be a threat to the advisers’ reputation and their professional future.
When representatives contemplate moving AFS licensees, they usually compare a number of prospective licensee business models against their own shopping list of attractive features. Recent industry events would suggest that advisers should also include a list of risks to avoid, or look out for, in their due diligence process.
The term ‘due diligence process’ is perhaps an overstatement of how advisers consider any change of licensees. Firstly, they don’t usually have a process, and secondly, there generally isn’t any detailed scrutiny of potential licensees that is sufficiently robust enough to warrant being labelled as ‘due diligence’. Unfortunately, an adviser’s investigation into a potential new licensee is usually very shallow and confined to two issues:
- How little will I have to pay to be authorised?
- How little will the licensee interfere with the running of my business?
A modern example
Irrespective of the fact that an adviser has a blemish-free history, an association with a troubled AFS licensee can be enough to convince a new licensee to avoid that adviser; the new dealer group cannot be sure if the adviser engaged in the ‘bad behaviour’ that led to the license troubles, and many are not willing to take the chance.
A recent example of the implications of hiring advisers from a troubled licensee can be seen in the Australian Securities and Investments Commission’s (ASIC) treatment of Guardian Advice.
In January 2015, ASIC imposed additional license conditions on Guardian, requiring it to appoint an independent consultant to review its compliance with AFS license obligations. According to the regulator, the initial ASIC surveillance of Guardian was undertaken, in part, because Guardian had recruited advisers from AAA Financial Intelligence:
‘ASIC’s surveillance followed Guardian Advice’s appointment of a number of ex-representatives of AAA Financial Intelligence Limited (AAA FI) and AAA Shares Pty Ltd (AAA Shares) after ASIC cancelled their AFS licences in February 2013 (refer: 13-019MR). ASIC was interested to ensure Guardian Advice had in place adequate monitoring and supervision processes to deal with these representatives.’
ASIC Media Release 15-003MR, 7 January 2015
AAA Financial Intelligence had its license cancelled in early 2013 for having failed to comply with the conditions of its license:
‘AAA Financial Intelligence was found to have an appalling record that put at risk the quality of advice it provided to retail clients.’
ASIC Media Release 13-019MR, 6 February 2013
It would appear that ASIC is tracking the movement of former AAA advisers, and a concentration of any number of former AAA advisers under one licensee is sufficient cause to question that licensee’s capabilities.
Signs to watch for
So what should an adviser look for to avoid a troubled licensee?
1. Low-cost business models
Advisers like low-cost license models as they leave more money in their pockets. They are also often operating with the mistaken belief that licensees don’t add much value, and therefore aren’t worth exorbitant fees. Ironically, if an adviser chooses a low-cost model, they won’t get much added value.
Low-cost does not necessarily equate to poor compliance and management, but it does mean that there is less funding available to resource the business. It usually means that the licensee is heavily reliant on one or two people to perform multiple roles.
ASIC drew attention to their focus on low-cost business models in their cancellation of AAA’s licence. ASIC observed that AAA had:
‘…adopted a business model that only allowed it to increase cash flow by increasing the number of advisers it authorised. The fee charged did not maintain sufficient financial resources to comply with its general obligations…’
ASIC Media Release 13-019MR, 6 February 2013
Low-cost is not all bad news; some of the best compliance comes from small licensees who benefit from having direct control over all aspects of their business.
Advisers should assess whether the low-cost model that they are considering will be able to meet its license obligations and will therefore be viable into the future.
2. Licensee review
Before signing on the dotted line, ask to see your prospective licensee’s most recent licensee review. Most reputable licensees have an external organisation review their policies, procedures and processes, usually every one or two years. This provides independent third party feedback on whether the licensee is meeting their regulatory and compliance obligations.
The adviser should consider whether any issues identified within the review are significant and may cause problems down the track. For example, if poor monitoring and supervision is identified as an issue, then there is an increased possibility of a rogue adviser and subsequent brand damage and attention from ASIC. Is this a licensee that you want to be associated with?
If the licensee does not review their policies, procedures and processes, the adviser should consider whether they are serious about meeting industry compliance standards.
In today’s environment, reputational risk works in both directions
3. Breaches and client complaint registers
An adviser should request to review a list of the licensee’s breaches and their client complaint register. The adviser should consider the contents and assess whether the number and/or severity of the breaches and complaints raise any concerns.
Too good to be true? If the licensee has no breaches or client complaints over an extended period, then avoid this licensee – they are not serious about compliance.
4. Representative operational procedures
Ask for a copy of procedural documents and/or compliance templates. Assess whether the licensee provides good guidance to its advisers about how they are expected to operate, and whether the procedures are compatible with how your business runs.
5. Other representatives
Talk to other advisers who already trade under the license and assess, through their eyes, how the licensee operates and whether it meets your requirements.
In today’s environment, reputational risk works in both directions. Advisers need to be proactive in assessing whether a potential new licensee will meet their obligations, or whether they are likely to be a blight on their CV – and the new ASIC Financial Adviser Register – for every future licensee to see.
Steve Murray is the Managing Director of Catalyst Compliance, a boutique consultancy providing advice and support to approximately 90 small to medium AFS licensees specialising in providing advice to retail consumers.
This document has been prepared by Catalyst Compliance Pty Ltd and represents the views we have formed based upon our understanding of the regulatory requirements. Catalyst Compliance does not provide legal advice and this should be obtained where appropriate. Catalyst Compliance, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained in this document.