“Better put a strong fence round the top of the cliff.
Than an ambulance down in the valley!”

— Joseph Malins, “The Ambulance down in the valley” (1895)

A shift in focus

It’s reasonable for APRA and ASIC to leverage the Royal Commission’s findings to focus on Licensees’ capability, culture and management of non-financial risks. To be fair, these elements all contributed to the mismanagement and misconduct publicly and dramatically exposed in Commissioner Hayne’s Théâtre Régulateur.

With all due respect to the proud and ancient tradition of compliancing, I wonder whether Licensees’ failure to act “efficiently, honestly and fairly” is less an inevitable consequence of seeing clients as abstractions rather than people than the result of treating consequences rather than causes.

Even more than our vulnerability to the (f)law of small numbers, compliance arrangements are often backward-looking and focused on identifying and remediating past misconduct. Imagine, for a moment, how these arrangements might be designed differently if Licensees (and regulators) were focused instead on prevention.

It’s not reasonable to suggest that there is not some focus on prevention. Amongst other things, Licensees need to ensure that anyone they appoint as a representative is ‘appropriately trained and competent’ and likely ‘to comply with the financial services laws’. But it’s not unreasonable to suggest that many licensees see compliance as a passive, defensive and reactive function rather than as a strategic and critical one. For many licensees, the compliance framework is a ‘regulatory requirement’ that can mitigate, or obviate, legal penalties.

In a ‘why not litigate’ environment, I wonder whether Licensees might be better advised to reframe their backwards-looking ‘licensing condition’ as a positive duty to prevent misconduct and non-compliance.

Arguably, this position is not inconsistent with FASEA’s own perspective and, although it may seem unrealistic, it’s not without precedent.

In fact, to “encourage corporations to adopt adequate compliance measures” recent legislation proposed to introduce a ‘failure to prevent’ offence similar to that of other international jurisdictions.

An approach that, some argue, should be applied to all corporate offences. The election put an untimely end to the proposed Bill but it’s likely to be reintroduced.

Even if it is, it’s unlikely to be extended to financial services in the short-term, but how different would your compliance arrangements look if this positive obligation applied now?

“The proposed new offence of failing to prevent foreign bribery is similar to an offence introduced in the United Kingdom in 2010 as part of an overhaul of its domestic and foreign bribery laws. Under section 7 of the Bribery Act 2010 (UK), a commercial organisation is guilty of an offence if a person associated with the organisation bribes another person intending to obtain or retain business, or an advantage in the conduct of business, for the organisation. It is a defence if the organisation can prove that it had adequate procedures in place to prevent persons associated with the organisation from engaging in bribery. As required under section 9 of the Bribery Act, the relevant minister has published guidance on procedures that commercial organisations can put in place to prevent bribery.”

— Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2017

Reflect, re-evaluate and reform

The increasing scrutiny of Licensees and their governance arrangements, increasingly active and appropriately motivated regulators and a growing appetite for both law reform and funded litigation create the perfect conditions for change.

I appreciate that intransigence and inaction may be the nature of financial services but now is the best time to address enforcement-risk by adopting a more progressive, more inclusive and more proactive approach to your compliance arrangements.

We’ve spent considerable time thinking about what these arrangements might look like (and how they can be operationalised) so if you’re interested in a more ethical, effective and efficient approach to compliance talk with us.