“Data, data everywhere,
and not a chance to think”

— Samuel Taylor Coleridge, “The Rime of the Ancient Analyst”

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Revenge of the nerds

We’re compliance nerds.

We’re not the regulator but we understand what compliance really is, and the significant advantages that come from getting it right.

Our mission is to help our clients feel safe and to help them see more. We’re also very active, we try things and we’re very data driven. 

We see more, so when we’re addressing industry topics we’re doing it from an informed position – we’ve worked with over 100 licensees of various types and, since 2012, we’ve reviewed almost 8,000 client files. 

We frolic in the grey, we immerse ourselves in our clients’ business, their reality, their risk framework and appetite.

That equips us to see more and offer a broader view of the industry in which you operate. 

We thought that now is the best time to share what we’ve noticed over the last year.

Licensee issues

“Compliance with the law is not a matter of choice”

— Commissioner Kenneth Hayne, Final Report, page 484

Compliance may not be a matter of choice, but we’ve noticed that prioritisation certainly is and this is reflected in a widening chasm between the best (generally newer licensees) and the rest. We’ve also noticed a new openness amongst older and larger licensees, that seem to be addressing their historical arrangements with a renewed vigour (driven by an expectation of imminent regulatory engagement).

There are Licensees that seem to have embedded legacy and lethargy in their compliance arrangements. But, despite the warnings offered by established licensees, the newer licensees (particularly those institutional-advice refugees) appear better equipped to manage regulatory requirements and ASIC’s expectations. Interestingly, we’ve also observed a law of diminishing ROI with respect to compliance; beyond a certain investment in compliance staff, a licensee’s arrangements become less effective, less transparent and more bureaucratic.

As REP515 suggested, having more people is a poor alternative to having the right people.

So what are the five most common licensee failures of 2019-2020?

They are:

1. Compliance Framework is broken, incomplete or outdated.
2. Documents are inconsistent, inappropriate or redundant.
3. Internal Governance is ineffective.
4. No consequence management.
5. Ineffective Templates.

In many respects, these failures are how ‘poor legal advice’ manifests itself in some of the licensees. And, when I talk about ‘legal advice’ we’re including all the compliance and risk management people that support advisers and licensees.

We’ve previously observed that it’s not uncommon to find that Licensees relying on boilerplate compliance manuals and processes (all well disclaimed) that don’t accord with the structure, nature, scale or complexity of their business.

We routinely observe small businesses struggling to comply with risk management plans ‘borrowed’ from institutional licensees.

We often see internal meetings, formally held and minuted, that don’t identify obvious themes or follow up actions. And, far too often, we see Licensees publishing templates – FSG, SOA and Service Agreements – that are dull, disengaging or ineffective.

Adviser issues

“Doing what’s right isn’t the problem. It’s knowing what’s right.”

— Lyndon B Johnson

According to the reg-tech platform OpenAFSL, in 2019-2020, 25.73% of advisers failed to meet minimum legal requirements – but it’s not entirely fair to blame the advisers who, in many cases, are simply following the directions of their licensees.

In fact, many of the common failures are the direct result of poor training and unclear requirements.

To be clear, the most common observations for 2019-2020 were:

1. Minor aspects of the Advice (or Advice Process) require attention to better accord with the Licensee’s requirements.
2. A methodical and considered process for product selection was not followed.
3. The file indicates a flaw or failure in the adviser’s process.
4. Relevant associations, interests and benefits were not properly disclosed.
5. The explanation of how the recommendation will satisfy the client’s needs and objectives was insufficient or unclear.

Items four and five are particularly relevant given the commencement of the FASEA Code. Others relate to a failure to move beyond formal compliance.

We’ve previously observed that, in a significant number of cases, formal disclosure of the Best Interest Duty concealed the advisers’ failures to act in a manner materially consistent with their obligations. We observed, for example, recommendations that:

• Immediately reduced superannuation balances by over 40%, 
• Pushed the client into more expensive products, 
• Justified the replacement of products on the basis of obtaining additional benefits already present in the existing products,
• Charged fees that were so significant that the client will take almost four years to return to their pre-advice position,
• Rationalised ‘cookie-cutter’ advice on the basis of efficiencies (that benefited the adviser more than the client),
• Delivered SMSF and LRBA recommendations to clients without adequate income or ‘real’ capacity to service the debt, and
• Used fanciful projections of possible savings being preferred over the demonstrated inability to save, reduce debt or eliminate regular reliance on short-term credit. 

In 2019-20 we generally saw significant improvement in most respects.

Certainly fewer contraventions of this fundamental duty were detected (despite increased vigilance). At the risk of over-simplification, the root causes of those contraventions that were identified were, in most cases, failures to:

• adequately document clients’ relevant circumstances (including non-financial issues and broader concerns)
• identify, prioritise and reconcile clients’ needs and objectives
• address fundamental conflicts (or conflicts caused by associations); and
• objectively, and thoroughly, consider their clients’ needs and the real consequences of their recommendations.

The Ethical Overlay

From 1 January 2020, we’ve been assessing advisers’ compliance with the FASEA Code of Ethics.

In most respects, and excepting Standard 3, most advisers are making more than reasonable efforts to accommodate their ethical obligations.

In most cases, they are remarkably successful in doing so.

Looking at the issues overall, our data shows the following breakdown

There are a few points to call out:

1. Where failures to comply with the Code occur, they are often multiple and concurrent failures.
2. Addressing conflicts (Standard 3) is problematic and advisers are confused by FASEA’s pragmatic position. The most common solution appears to concentrate on, and entirely avoid, any situation that would pit the adviser’s interests against their client’s.
3. Most advisers are focused on ‘Free, prior and informed consent’ (Standard 7) but struggling to systematically address the requirement without relying on disclosure mechanisms.
4. Unsurprisingly, given our previous observations, Standard 8’s expectation that records are kept in a form that is “complete and accurate” is proving incredibly challenging for some advisers.
5. Advisers are, in an increasing number of cases, implementing their own processes and controls to manage their compliance with the FASEA Code.
6. Licensees are struggling to reconcile the differences between the law’s compliance focus and the Code’s aspirational focus.

During the course of our workshops on how to practically implement the Code, we’ve observed advisers’ genuine determination to move beyond compliance and build professional practices.

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