“While many firms continue to see ensuring compliance as a legal exercise, it is really much more a behavioural science.”  Chen, Hui, and Eugene Soltes. “Why Compliance Programs Fail: And How to Fix Them.” Harvard Business Review 96, no. 2 (March–April 2018): 116–125.

Compliance is supposed to be the shield that protects your business. Whether you’re employed in a financial services business or responsible for an AFS Licensee, you need to know that your systems will deal with any regulatory problems before they cause too much trouble. But too often, they don’t. Why?

There are a few reasons AFSL compliance arrangements fail, and most of them boil down to the same thing: people don’t understand what compliance is or what it is supposed to do. They treat it as a box-ticking exercise, something that looks good on paper but doesn’t change anything in the real world. And when the real world doesn’t match up with the paper, things go wrong.

One common mistake is thinking financial services compliance is just about following the rules. It’s not. Compliance is about managing behaviour. The rules are just a tool. If you focus too much on the rules, you miss the point. The rules can’t cover everything. They can’t predict every possible risk. And when something unexpected happens, just following the rules won’t be enough.

Compliance arrangements also fail because people think of compliance as something separate from the rest of the business. It’s not. Compliance should be woven into everything you do. It’s not a department; it’s a way of thinking. If you have a separate compliance team that works in isolation, detached, and excluded from the business, you’re asking for trouble. They’ll miss things because they don’t see the whole picture, which consists of information and risks associated with those things. They won’t understand how the business works, so they won’t be able to identify, avoid, and prevent the real risks to your business.

Perhaps the real reason compliance arrangements fail is because of the licensee’s culture. If the people at the top, like directors and senior managers, don’t take compliance seriously, no one else will. If they treat it as a necessary evil, something to be dealt with and forgotten about, that attitude will spread throughout the organisation. And when people don’t take compliance seriously, they cut corners. They don’t report problems because they don’t want to deal with the consequences. And that’s when things start to go wrong.

However, there may be an even more troubling reason compliance arrangements fail: some businesses never intend for them to succeed. Whether through negligence or deliberate intent, these businesses put on the appearance of compliance without any real commitment. They create a façade of policies and procedures, but there’s no substance behind them. These businesses see compliance as a barrier to profit, something to be circumvented rather than embraced.

“Financial Circle’s contraventions are a particularly egregious example of the kind of conduct that the statutory provisions are designed not merely to prevent, but to dissuade and sanction in the strongest terms.” Australian Securities and Investments Commission v Financial Circle Pty Ltd [2018] FCA 1644 at 165

In such cases, compliance arrangements are designed to fail. They are set up in a way that makes them ineffective from the start. The leadership may deliberately underfund compliance initiatives, assign unqualified staff, or ignore recommendations from compliance professionals. They might even actively encourage risky behaviour that violates regulations because short-term gains are more important than long-term stability.

ASIC bans United Global Capital (in Administration) director for ten years and cancels licence

Understanding Financial Services Compliance in Australia

Compliance is often misunderstood as a mere box-ticking exercise, minimalist legal compliance or a set of rules to follow. In reality, it’s a nuanced behavioural discipline that requires a deep understanding of human psychology and organisational dynamics. Effective compliance programs go beyond simply adhering to regulations; they shape the culture and behaviour of an entire organisation.

Overview of the Regulatory Framework in Australia

Australia’s regulatory framework is meticulously designed to ensure the stability and integrity of its financial system while safeguarding consumer interests and promoting fair and transparent markets. At the heart of this framework is the Australian Securities and Investments Commission (ASIC), the primary financial services authority responsible for regulating the financial services industry in Australia. ASIC’s mandate is to ensure that financial services providers operate efficiently, honestly, and fairly, thereby protecting consumers from unfair or deceptive practices.

The framework is not just about enforcing rules; it’s about creating an environment where financial services can thrive responsibly. By overseeing the conduct of companies, financial markets, and financial services providers, ASIC plays a pivotal role in maintaining the trust and confidence that underpin the financial system. This regulatory oversight is crucial for fostering a stable financial environment where both businesses and consumers can prosper.

Common Pitfalls in Compliance Programs

• • Context Blindness
    Many firms make the mistake of viewing compliance solely through the lens of regulatory requirements. While understanding and satisfying regulatory requirements is essential, this approach fails to address the underlying behaviours and decision-making processes that lead to compliance issues. Regulatory compliance is a feature, not a product. 
  • Isolation from the Business
    Treating risk management and compliance as separate functions, disconnected from day-to-day business activities, is a recipe for failure. Compliance should be integrated into every aspect of the organisation, from strategic planning to operational processes.
  • Lack of Leadership Commitment
    When senior management doesn’t prioritise compliance, it sends a clear message throughout the organisation. This can lead to a culture where the compliance framework is seen as an obstacle rather than a fundamental aspect of business operations.
  • Inadequate Resources and Training
    Many compliance programs fail due to insufficient funding, understaffing, or lack of proper training, all of which contribute to burnout and high staff turnover. Without adequate resources, even the best-designed compliance frameworks can falter.
  • Failure to Adapt to Change
    The regulatory landscape in Australia is constantly and relentlessly evolving. Compliance programs (and staff) that don’t keep pace with these changes quickly become obsolete and ineffective.
  • Ineffective Communication
    Poor communication of compliance policies and procedures can lead to misunderstandings and inconsistent application across the organisation.
  • Lack of Accountability
    Commissioner Hayne highlighted that executives and employees often don’t take compliance seriously without clear accountability measures. The absence of predictable and consistently enforced consequence management is a significant indicator of the inadequacies of a Licensee’s overall compliance framework.
  • Negligence or deliberate intent

There’s little doubt that some Licensees, like United Global Capital, Financial Circle and Wealth and Risk Management, never implement (or fail to maintain) effective compliance arrangements to meet their AFSL obligations. As these cases demonstrate, negligence, neglect, or deliberate intent to ignore compliance is particularly dangerous. It increases the risk of regulatory breaches and the significance of their consequence and damages the integrity of the entire financial system. When financial services businesses choose profit over compliance, they put their clients, their employees, and the whole industry at risk.

Building a Culture of Compliance

The solution isn’t to choose compliance over profit but to reframe compliance. To create effective compliance programs, Australian financial services licensees should:

1. Lead by example, not by media releases: Senior management must be seen as engaged, visibly champion compliance initiatives, and lead by example.
2. Integrate Compliance with your Business Strategy: Align compliance objectives with overall business goals to ensure they’re seen as a strategic priority. ASIC’s admission that “a culture that facilitates good conduct, builds trust and confidence in the firm and its products” acknowledges the limitations of regulatory compliance and the importance of maintaining market integrity.
3. Take a Risk-Based Approach: Develop compliance programs that focus on the organisation’s most significant risks, including “regular and targeted risk-based monitoring and supervision.”
4. Demand Continuous Improvement: Regularly review and update compliance programs to address emerging risks and regulatory changes.
5. Provide Practical Training and Clear Communication: Invest in comprehensive training programs and clear communication channels to ensure all employees understand their compliance responsibilities.
6. Leverage Technology: Utilise regtech solutions to enhance compliance monitoring, reporting, and risk management capabilities.
7. Foster a Speak-Up Culture: Encourage employees to report potential compliance issues without fear of retaliation.

Successful compliance programs are exemplified by AFS Licensees like Oreana Financial Services, which integrates compliance into its core strategy and daily operations. Oreana proves that when leadership prioritises compliance, it becomes a catalyst for innovation and sustainable growth.

ASIC’s acknowledgment that “a culture that facilitates good conduct, builds trust and confidence in the firm and its products” goes beyond regulatory compliance; it’s a game changer. It not only recognises the limitations of a tick-box approach to compliance but also provides a clear signal that the regulator is raising the bar for advice professionals and financial services licensees.

To obtain an objective view of your compliance culture, complete this survey. 

The Role of External Expertise

Many Australian financial services firms find value in partnering with external compliance consultants. These experts, including financial advisers, play a crucial role within the regulatory framework of the Australian financial system by ensuring compliance with regulations, maintaining investor protection, and managing risks. They can provide:

• Objective assessments of current compliance programs
• Insights into industry best practices
• Assistance in developing and implementing robust compliance frameworks
• Support in navigating complex regulatory requirements

Conclusion

Building an effective Sustralian financial services compliance program is challenging but essential for Australian financial services Licensees. However challenging it is, by understanding the common pitfalls and focusing on creating a culture of compliance, organisations can turn their compliance obligations into competitive advantages.

Remember, compliance is not just about avoiding penalties; it’s about building trust, protecting your reputation, and ensuring the long-term sustainability of your financial services business. The Financial Ombudsman Service plays a crucial role in this framework as an independent dispute resolution service that assists consumers and small businesses with complaints against financial service providers.

For comprehensive assistance in developing robust compliance frameworks, consider partnering with Assured Support. Our team offers tailored compliance consultancy services to ensure your business meets its regulatory obligations and thrives in a competitive market.

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This modified version of this article was published by Money Management.