“It .. should be understood by the regulated population .. that we should be feared and we should be taken very seriously.”
— “We should be feared’: Former bouncer turned corporate cop wants justice”, Sarah Danckert, SMH, 23 March 2019
Sound, fury and significant shifts
It would be foolish to dismiss the Royal Commission as a “tale told by an idiot, full of sound and fury, signifying nothing”, even if the “billion dollar show” delivered zero prosecutions to answer the systemic misconduct and egregious mismanagement it uncovered.
Notwithstanding this, it did, however, give a voice and a platform to the victims of institutional licensees, demanded remediation and restructuring and, briefly, threatened to turn the “watchdog no one fears” into an active and effective regulator. That ambition may have been thwarted, but, seemingly without notice, the regulatory environment still changed significantly.
Dramatically, and publicly, the Hayne Royal Commission identified structural and recurring flaws inherent in the industry’s culture and conduct, and these profound failures to self-regulate sparked calls for reform. Unsurprisingly, in the wake of the Final Report, there’s been notable regulatory shift.
In practical terms, the emergence of the Financial Services and Credit Panel (FSCP) and the introduction of measures such as annual adviser registration, suggest that liability is steadily shifting away from licensees and towards individual advisers as regulators focus more closely on personal accountability.
The FSCP
As background, it’s important to understand that the Financial Services and Credit Panel (FSCP), a complementary disciplinary panel functionally independent from ASIC, was created and empowered to act on “less serious misconduct”.
In simple terms, the purpose of the FSCP is regulatory triage; it is a narrowly-focused enforcement body empowered to make administrative decisions on matters, related to the conduct of financial advisers, that are referred to it by ASIC. ASIC will still take action in respect of matters that ASIC considers require its direct involvement, but the balance can be referred to a more responsive entity.
This is a critical limitation and core definitional element; the FSCP will not deal with those matters that ASIC consider are a material risk to consumers, markets or consumer confidence or would provide “an effective and deterrent message to industry”.
In practice, each referred matter will be considered by sitting panel comprised of an ASIC staff member and at least two members drawn from a pool of industry participants appointed by the Minister. The FSCP also has a range of powers to enable it to consider and respond to a range of misconduct, including the ability to make administrative decisions on matters referred to it including suspension and prohibition orders. (It can also hold public hearings, mandate training and supervision, ban advisers and impose civil penalties and remediation orders.
In our view, it’s the suspension and prohibition orders that should be more closely considered in the light of advisers’ annual registration. You may recall that the Financial Adviser Standards and Ethics Authority (FASEA) introduced a regime of adviser registration focused on qualifications, CPD and ethics. Although FASEA was disbanded, a yearly re-registration system remains. An adviser still needs to be authorised by an Australian Financial Services Licensee, but, every year, each advisers will need to apply to ASIC to renew their registration to provide financial advice. A failure to do so, or a failure to be registered (because, for example, an inaccurate statement or an FSCP order) means that they are excluded from practice.
Compare this with ASIC’s traditional model of regulating licensees, and you’ll start to appreciate how the FSCP, and measures such as annual registration, are making the oversight and discipline of advisers more direct and more grounded in principles of personal accountability.
Yearly re-registrations will further strengthen ASIC’s oversight. Make no mistake, there’s been no relaxation; the creation of the FSCP and annual gatekeeping of registrations provides ASIC with even more control over individual conduct.
The Panel’s performance
The FSCP supplements ASIC’s existing enforcement tools and powers by providing an intermediate option between negotiated administrative resolution and litigation. The key purpose of the FSCP is to enable more effective and efficient enforcement outcomes. It aims to do this by:
- Providing access to flexible, targeted and timely remedies;
- Allowing for the imposition of sanctions and penalties beyond ASIC’s powers;
- Increasing transparency and accountability through panel hearings.
The FSCP is designed to fill an enforcement gap, and provide an alternative pathway for cases not obviously suited to either administrative action or court proceedings. It allows for more flexible regulatory responses and the FSCP strengthens ASIC’s toolkit and increases the force of accountability measures across the sector. It also allows for a broader range of misconduct to be addressed through proportionate enforcement remedies. Overall, the FSCP strengthens ASIC’s toolkit and increases the force of accountability measures across the sector.
Although only seeming to become active recently, the FSCP has been clear and effective. They’re also remarkably transparent and the FSCP Outcomes Register page on the ASIC website provides anonymised details of outcomes from FSCP decisions. There have been four decisions published to August 2023 that are worth considering.
- May 2023, – Mr S impersonated a client during two telephone conversations with a bank and received an audit direction.
- June 2023 – Mr M gave inappropriate advice in an SOA, received a supervision direction.
- July 2023 – Mr X gave inadequate layered advice in three SOAs, received a supervision direction.
- August 2023 – Mr X gave inappropriate switching advice and was reprimanded.
Mr X was directed to have the next 10 SOAs with insurance recommendations and the next 10 SOAs with superannuation recommendations pre-vetted and audited by an independent expert. The expert will assess his advice, and advice processes, and opine about his compliance with financial services laws. You may think this is a reasonable and routine result, but do not overlook the fact that Mr X must not only provide the audit findings to ASIC but bear the costs of the expert’s engagement.
If you’re an adviser, take this in – advisers (and not their licensees) will now bear the direct financial cost (and regulatory penalty) for their own compliance failures.
In this cases, the licensee was not held to account or required to subsidise the remediation costs, nor does the adviser’s engagement of an external compliance expert provide any guarantee of his ongoing authorisation. Although he did not receive the minimum three year ban usually associated with best interest failures (RG98), the adviser may still be subsequently suspended or prohibited unless he allocates his own time and financial resources to improving his compliance.
The FSCP’s focus on personal accountability was also evident in the Instrument issued in respect of Mr M in June 2023. He was also directed to have the next 10 SOAs pre-vetted by an independent expert. Again, Mr M must provide the audit findings to ASIC and cover costs.
So, in both cases, although best interest failures were identified (or inferred) neither adviser was banned. Compare this with ASIC’s historic practices of a minimum three year exclusion for any failure. Neither adviser was prohibited but only directed to obtain independent pre-vetting and auditing of their SOA advice for a period of time, to ensure compliance with regulations.
Going soft?
“There’s no more hand-holding. Advisers can’t hide behind their licensee any more.”
— J, Licensee Managing Director
One financial services lawyer recently opined that ASIC is going soft and trying to avoid any further reduction of adviser numbers. Although there does appear to be a tendency for the FSCP to favour remediation and retraining, mentoring and compliance improvement programs as an alternative to outright bans or punitive action, it’s a better approach.
I appreciate that some might consider this a significantly weaker enforcement option but there are three aspects to consider.
First, advisers are still being banned by ASIC where the banning is justified by additional considerations. In MR23-152 adviser Stephen Garry Vick from providing financial services, performing any function involved in the carrying on of a financial services business, and controlling an entity that carries on a financial services business, for five years. In MR22-061, adviser Stephen Walter Young was banned for 10 years with 9 best interests duty failures identified. In MR21-204, adviser Alan Hick was banned for 4 years with 10 best interests duty failures identified. In MR20-327, adviser Simon Mandelsohn was banned for 8 years with 15 best interests duty failures identified. In MR19-308, adviser Wayne Gannaway was banned for 4 years with 5 best interests duty failures identified.
Second, the orders may more accurately reflect the materiality of the failures and the advisers’ lack of intention particularly for borderline cases or first-time issues; and
Third, the orders are interims step and an exclusion order may follow if the advisers’ conduct and compliance does not improve.
This could suggest that for borderline cases or first-time issues, the FSCP aims to correct and educate advisers rather than exclude them entirely from the industry with bans.
However, for clear cut or repeated misconduct the FSCP still readily imposes lengthy bans of 5+ years. And they note bans remain on the table for advisers who do not sufficiently comply with remediation orders.
It’s a profound correction, because unlike ASIC’s traditional approach to enforcement, the FSCP does seem comfortable exploring rehabilitative remedies for advisers open to correction and education. But don’t interpret this as a retreat from active and effective enforcement, ASIC has not softened its stance on intentional, harmful or recidivist behaviour by advisers and bans are used in the more egregious cases.
Adviser registration
Don’t forget that from 2024 advisers will personally need to reconfirm their own details and status with ASIC, annually, in order to retain registration. This mandatory reconfirmation process will require advisers to:
- Verify their ongoing competency and compliance through continuing professional development.
- Declare any changes relating to fitness and propriety criteria, such as breaches or complaints.
- Pay renewal fees to remain registered for the next year.
This annual reconfirmation will allow ASIC to regularly reassess an adviser’s suitability to practice based on latest conduct and capability information. If issues arise, ASIC can refuse renewal of registration. In addition, ASIC retains standalone powers to suspend, cancel, or impose conditions on adviser registrations where misconduct concerns arise outside of the yearly reconfirmation cycle.
So through annual renewal checks and ongoing disciplinary actions, ASIC appears to have consolidated oversight and expanded its control capabilities. Don’t ignore the fact that yearly reconfirmation will provide an important touchpoint for ASIC to maintain professional standards among registered practitioners.
The combined effect
The Financial Services and Credit Panel’s increased use of remediation, and ASIC’s expanded registration powers over advisers, signal the inexorable shift in accountability and liability from licensees towards individual advisers. This has profound implications for both parties and both need to adapt their practices and mindsets.
In practice, Licensees need to
- Strengthen adviser screening, auditing and oversight measures as licensees retain responsibility for the advice provided under their license.
- Review and update compliance training programs regularly in line with emerging misconduct trends.
- Maintain open communication channels with advisers on ethical practices and regulatory expectations.
- Closely track adviser registration status, complaints and breach reporting.
- Refine adviser performance management and consequence models to align with regulator approaches.
Advisers need to:
- Place greater emphasis on maintaining personal registration status through continuing development.
- Clearly understand and embed codes of ethics into all advice processes.
- Maintain meticulous advice documentation to demonstrate compliant customer-first approaches.
- Proactively address any complaints through open communication and appropriate remediation.
- Seek guidance from regulators, licensees and professional associations on meeting conduct standards.
Overall, both licensees and advisers need to recognise the reality of heightened individual accountability and work collaboratively to implement advice models, training and governance more focused on effective compliance, ethical practices and better client outcomes. Obviously, its also requires a shared commitment to higher professional standards in an evolving regulatory environment.
A New Era of Responsibility
The bottom line is that the new regulatory environment in which we operate is now defined by heightened individual accountability and a regulator that demands higher professional standards.
Increased FSCP powers, adviser registration regimes and expanding ASIC oversight unquestionably moves liability for financial advice away from just licensees and towards individual advisers.
While self-regulation or co-regulation might still be some way down the road, these shifts nudge advisers and licensees in the right direction.
