“Bureaucrats will care more for routine than results”
— Walter Bagehot
The problem statement
Although it’s an uncomfortable truth, the root cause of many of our regulatory problems is our willingness to embrace simple, black and white responses to nuanced issues.
Our embrace of process over outcomes has embedded formalism, bureaucracy and risk aversion.
Our tendency to ask “Can we?” instead of “How can we?’ has, as Commissioner Hayne recognised, also delayed the emergence of a legitimate advice profession.
I know it seems a little trivial to be writing about compliance in the current environment; we’re enduring an implacable pandemic, managing an economic slowdown and struggling to reconcile increasing compliance costs with declining margins and a more active regulator.
We can see far enough down the road to anticipate what the Royal Commission will deliver.
We see the law firms and litigation funders circling the larger institutional licensees.
And every day, we’re seeing how ‘lookback’ provisions have been weaponised against advisers to spare controlling entities any embarrassment or censure.
We’re lucky enough at Assured Support to work with some incredible businesses, so we want to offer a prescription for success they routinely demonstrate; ignore any opinion that has been drafted purely from a technical perspective.
Dismiss legalistic approaches that don’t explicitly consider the principles and the environment in which those principles operate.
And sideline advice that doesn’t explicitly consider your people, your compliance arrangements and your culture.
To be clearer, you need to more critically consider the compliance advice your lawyers, compliance people and advisers provide you and make your own informed decisions based on your knowledge, your risk appetite and your understanding of the law.
Engage experts, but don’t automatically substitute their judgment for yours.
The case for your consideration
When I recommend that advisers and licensees make informed decisions and back their own judgment, I’m not dismissing the value of expertise – quite the reverse actually – but I suspect that some of the problems we’re facing now are because we’ve seen everything in black and white terms, absolutes and assumptions instead of recognising and adapting to the grey.
Engage experts, but don’t automatically substitute their judgment for yours.
There are some unambiguous requirements, but the law, and the regulatory regime, is surprisingly flexible and can accommodate a range of options.
Unfortunately, for a range of reasons, licensees and advisers seem to have little appetite to navigate the grey.
Flexibility and freedom
“Licensees may be taking a different view to what the regulator is taking.”
— ASIC Commissioner Danielle Press, Professional Planner 2020
Even in a consumer-focused world there’s considerable commerciality and flexibility available to advisers and licensees.
There’s opportunity in these areas, particularly those spaces where proscription and certainty haven’t yet replaced outcome-based rules.
This is the opportunity institutional licensees traditionally avoid.
Just to be clear, we’re not endorsing avoidance strategies, we’re not advocating client protection policies or promoting personal advice models dressed as general advice. We’re simply suggesting that, whether you’re an adviser or a licensee, you have more options available to you than embracing over-disclosure, safe harbours and regulatory conservatism.
Safe harbours provide shelter but they inhibit innovation.
If you’re going to navigate the grey and avoid the regulatory reefs, you need to have the courage to leave the harbour and the knowledge to understand the currents and swells; and that might require more from your lawyers than they can provide.
Of course, your lawyers might be neither conservative nor risk averse, they might well have the practical experience and industry insight to help you, but, in most cases, you still shouldn’t automatically substitute their judgement for yours.
It’s your business, it’s your risk and it’s your decision.
It’s your business
When I suggest that you shouldn’t necessarily let your lawyers decide for you, it’s not for any other reason than my belief that over-reliance on legal/compliance advice is a significant reason why licensees aren’t responding to the relief and encouragement ASIC provides.
I appreciate that suggesting that ASIC is anything other than obstructionist, destructive and reactionary won’t be popular, but they’re not entirely to blame for our current situation.
The financial services laws were principle or outcomes focused, but became, over time, both prescriptive and restrictive. In my view, that’s the enduring legacy of the institutional vertically-integrated advice models.
As Commissioner Hayne recognised in his final report
“Sometimes the requests for prescription and detail seek to shift responsibility from the regulated to the regulator, by urging the creation of ‘safe harbour’ provisions that leave the regulated entity with little more than a box-ticking task.”
If that’s not enough of a wake up call, appreciate the irony of ASIC observing that Licensees’ Statements of Advice “met the regulatory standard, but were not compliant enough to satisfy [their own] legal teams.”
This is where we are now, but I’m optimistic that we can reverse this trend.
Change will require “intellectual drive, honesty and rigour” but, more importantly, it will require leadership, self-discipline and self-regulation.
The real problem statement
“A lot of my peers are living in fear of the implications of these lookbacks, particularly those from larger licensees.”
— Jason Cook, Presidio Group, Professional Planner 2020
This is the real problem but, honestly, is it any wonder that advisers are scared and apprehensive?
Quite apart from the weaponization of the lookback provisions, there are a number of ‘adviser failures’ (bad apples) that I think are directly attributable to their Licensee’s conservatism and abdication of responsibility.
In fact, licensees’ risk aversion has led to dense and often incomprehensible advice documents, requirements that fail to differentiate internal policies from legal requirements and ‘lookbacks’ often undertaken by unqualified and inexperienced persons with little or no practical knowledge.
It’s a scary environment to operate in, but less as a result of the law and regulation than licensees’ inability, or unwillingness, to understand their opportunity.
There are, to my mind, three reasons why advisers and licensees are afraid NOT to embrace risk:
- Complexity
- Consequences
- Comprehension
Complexity
“So many wires are strung between the fence posts that they inevitably overlap, intersect and leave gaps.”
— Commissioner Kenneth Hayne. Final Report, page 496
It’s pointless to pretend that financial services isn’t complex, complicated and open to interpretation and reinterpretation.
It is.
It’s a confused mess of principles and prescriptions that reflects legislative over-reaction to an industry struggling towards professionalism.
Commissioner Hayne observed that “Legislative schemes have commenced with principles at the fore only to have the full suite of prescriptions .. grafted on over time” and that’s our reality.
While simplification may not be possible in the short term, we can choose to better navigate complexity rather than simply surrendering to it.
Depending on how you deal with complexity has a flow on to consequence.
Consequences
“Their “compliance arrangements were ‘fundamentally flawed’ and appeared to be ‘designed to minimise regulatory risk rather than guide activities of the business’”
— Australian Securities and Investments Commission v Financial Circle Pty Ltd [2018] FCA 1644
Let me be clear. When I’m referring to ‘consequences’ as a barrier to professionalism, I’m not just focused on the sometimes disproportionate penalties for non-compliance.
As important, is our tendency to over-estimate the likelihood of regulatory and legal risks, and this contributes to pushing us from prudence to paralysis.
It also leads to more cynical and less honest approaches.
In some cases, Licensees embrace the form of a well-governed businesses but without the substance. They also consume legal advice as insurance and, you might argue, to shift liability. They buy (and rely on) policies and manuals licensees that are often generic, misleading and ill-suited to their businesses. In many cases, they’re worse than having nothing at all.
It’s not uncommon to find that Licensees are relying on boilerplate compliance manuals and processes (all well disclaimed) that don’t accord with the structure, nature, scale or complexity of the business relying on them.
But your compliance arrangements – your measures, processes and procedures – need to suit your business and must not simply reflect your lawyers’ general understanding of the laws.
As overwhelming as this challenge may appear, fixing your vanilla, generic compliance arrangement starts with understanding your obligations.
Comprehension
“.. Their Statements of Advice met the regulatory standard, but were not compliant enough to satisfy legal teams.”
— ASIC Commissioner Danielle Press, Professional Planner 2020
If, for a moment, we consider how formalism, complexity and conservatism impacts clients this is the best example.
It’s a common theme and one certainly more widespread than we might be comfortable admitting.
The outlier cases like NSG and Financial Circle aside, we are seeing good advisers failing to act (or show that they’ve acted) in their clients’ best interests, because of the Licensee’s requirements.
Their poor compliance arrangements are shackling their advisers to sub-optimal outcomes.
Some Licensees have embraced the principles of their duties but also shackled their advisers to audit-designed checklists.
We routinely see small businesses struggling to comply with risk management plans ‘borrowed’ from institutional licensees.
We see internal meetings, formally held and minuted, that don’t identify obvious themes or follow up actions.
We see templated documents – FSG, SOA and Service Agreements – that appear to be written by a technical committee and approved by the Politbureau’s least-imaginative lawyers; documents that miss the opportunity to engage clients and improve the client experience.
They are ‘compliant’, if ‘compliant’ is a euphemism for dull, disengaging or bureaucratic.
Again, I accept that advisers have agency, but I also understand the cost of an authority; most advisers are not well-equipped to push back on their Licensees, but they ultimately bear the brunt of their Licensees’ choices.
Thankfully, many of the new licensees that are emerging from the rubble of the institutional models understand this cost and are actively challenging (or at least exploring) the assumptions and misconceptions they’ve inherited from their predecessors.
The Solutions: Five steps to freedom
While the problems and their causes are clear, the solutions are equally obvious.
- Return to first principles
“instead of entities meeting the intent of the law, they meet the terms in which it is expressed.”
— Commissioner Kenneth Hayne. Final Report, page 496
The first step you need to take is to step back from formalism – from simple black and white propositions solutions – to focus on the principles that guide your activity.
Remember, both FASEA and Commissioner Hayne have urged you to step away from box ticking and embrace principles over proscription. For the commissioner, a professional adviser should simply
- obey the law.
- not mislead or deceive.
- act fairly.
- provide services ‘fit for purpose’.
- exercise ‘reasonable care and skill’.
- act in the interests of THEIR client.
Commissioner Hayne observed that “one necessary aspect of a desirable culture is adherence to the basic norms of behaviour.”
Perhaps it’s time to relax your compliance arrangements a little.
It may be an unpopular position to advocate to licensees, but as Anna Bernasek concluded in “The Economics of Integrity”, “A system that tries to eliminate wrongdoing tends to restrict activity. But rules that set people free to do the right thing, rather than holding people back, encourages more activity and create wealth.”
2. Focus on the environment
“the characterisation of … [misconduct] requires regard to context and circumstance”
— Abichandani and Australian Securities and Investments Commission [2016] AATA 879 (8 November 2016)
The ‘bad apples’ technique is a popular one for licensees averse to accountability, but it’s important to understand that personal preferences are the smallest and most insignificant component of misconduct and non-compliance; the environment in which your advisers operate, your culture and your compliance arrangements are the critical elements.
3. Choose better people
“The standard defence of Licensees, is to utilise Lawyers and Compliance drones who do not understand or care about the stress they cause and …make their living from complexity.”
— Jeremy wright, Professional Planner 2020
Engage the right people.
These should be lawyers (or legally qualified) but they “will need breadth of capability and insight. They will need to bring a legal view .. But also bring insight into regulatory matters, corporate governance, compliance and risk management.”
Understand that lawyers are also risk-averse (particularly in relation to their reputations) and will often use technical expertise to disguise a lack of practical understanding or their dearth of experience.
Be careful, because your lawyers will often answer the question you ask rather than the underlying one, and they’ll often answer without pushing back on appropriateness and without stepping into an executive role.
Find the people that know, understand and separate ‘can’ from ‘should’.
Encourage dissent.
Hire people that can, and will, step into the “broadest, traditionally ‘non-legal” areas of conduct and culture to ensure that their advice and insights are valuable and relevant.”
4. Elevate Compliance
Moving beyond simple, black and white propositions requires more than a willingness to do so.
If you have recruited the right people – people with capability and insight to support your business – empower them to do so.
Don’t relegate them to a back-office function but utilise them effectively to grow and protect your business and your culture.
5. Choose to be brave
“licensees and their compliance divisions [are] playing it too safe .. to the detriment of advisers and their clients.”
— ASIC Commissioner Danielle Press, Professional Planner, 2020
When the regulator chides you for your conservatism and risk aversion, it’s a reliable indicator that you have tremendous opportunities ahead of you.
You just need to decide how you want to interpret the law and how comfortable you are doing so.
Quick wins
- Review your Risk Appetite.
- Audit your SoA template. Before assessing the customer experience, differentiate between law, regulatory policy, licensee policy and habit.
- If you’re not a vertically integrated banking group, review your framework for clarity and engagement.
- Reframe your Compliance Manual. Explain don’t restate.
- Engage people that are willing to understand your business, compliance arrangements and risk appetite.
Remember that while managing your own regulatory risk is a dangerous suggestion in many ways, an advice profession is unlikely to emerge from a trade comprised of people scared or ignorant of the laws that surround them or unwilling to exercise their own professional judgement.
