“plus ça change, plus c’est la même chose”

— Jean-Baptiste Alphonse Karr

We’ve previously written about REP 515 and the inherent conflicts and limitations of internal compliance functions. In our view, the solutions to the problems identified by ASIC are for independent Licensees to:

• use independent, external compliance services;
• redefine ‘compliance’ as broad governance discipline;
• embrace strategic implementation of end-to-end monitoring systems;
• adopt a consistent and predictable consequence management framework;
• implement an interrogable, and auditable, compliance platform;
• reframe ‘compliance’ as an enabler; and
• invest in developing the courage, competence and capability of their governance team.

In my view, and notwithstanding that trying to reframe compliance or reconcile it with risk management is more ambitious than committing to win a ‘land war in Asia’, these practical solutions can be easily implemented in any licensee not encumbered with an enterprise risk framework.

It simply requires a willingness to lead change.

I would argue that, ASIC’s 1 August 2019 media release – “ASIC update on compensation by institutions for poor financial advice” – proves the need for these changes.

A summary of the reporting

ASIC note that “Australia’s five largest banking and financial institutions have paid a total of $119.7 million in compensation” to customers that received advice from their representatives.

I’m not entirely convinced that the reported data in their update is either accurate or complete (CBA exclude other remediation programs and their Open Advice Review Program and NAB exclude $14,061,373 paid to remediate the conduct of one adviser) but it’s still fascinating and alarming.

ASIC reported the following information without any editorialising, but I lack their restraint.

Take-aways, misleading averages and asides.

“There are three kinds of lies: lies, damned lies, and statistics.”

— Benjamin Disraeli

Clearly, remediating conduct failures is expensive, time-consuming and resource intensive. While I’m not for a moment suggesting the following analysis is entirely reliable, a casual reading identifies some interesting points that Licensees, particularly smaller to medium Licensees, should note.

• If you divide the total compensation paid by the advisers identified you’ll see that ANZ advisers, on average, caused more loss/damage than their peers ($785,657.85). AMP follow closely behind on $776,698.84 but they’re both significantly ahead of the CBA advisers ($441,381.19) and the NAB advisers ($400,396.68). Perhaps the reporting made to ASIC (and the exclusions allowed) misrepresents the true situation.

In any event, Licensees recruiting advisers (even those from non-institutional licensees) might wish to consider their risk appetite and undertake a more complete risk/benefit analysis. They should also consider whether, and to what extent, they would afford a similar smaller-scale remediation program in their own group.

• If you divide the total remediation paid by the customers identified, you’ll notice that NAB are the most generous, paying each customer, on average, $31,426.49 against the $10,866.36 offered by CBA. ANZ and Westpac seem to be aligned on quantum while AMP is closer to CBA.

Let’s assume that every client received a full and complete settlement rather than a reduced settlement in lieu of further delays. The average compensation payment is $18,955.66 ($119,761,844/6318). An independent Licensee (particularly one that’s implemented the solutions I proposed above) is unlikely to require a remediation program equivalent to the ‘Big Five’, but is your existing Professional Indemnity Cover adequate? Review the deductibles and consult an expert if you’re worried it’s (woefully) inadequate.

• If you divide the ‘compliance’ FTE by the number of advisers identified, you’ll notice that NAB have 7.07 remediation staff for every adviser. AMP have 4.5 but Westpac and ANZ are similarly resourced (2.1 FTE and 2.6 FTE respectively). CBA, in contrast, only need 0.7 FTE for each adviser either as a result of their significant experience in large-scale remediation or because they’ve excluded other projects from this disclosure.
• If you divide the clients identified by the ‘compliance’ FTE, you’ll be startled by CBA’s productivity and NAB’s apparent inefficiency. NAB has 1.8 FTE for every affected client while each FTE at CBA is responsible for 586 clients. The other Licensees show similar levels of activity, at AMP each FTE is responsible for 13.3 clients, at ANZ it is 15.2 and Westpac disclose 12.47.

Let’s focus less on the number of resources required to ‘make good’ conduct failures, and not be distracted with concerns about the capability, experience and skill of this large number of advice compliance experts.

Instead, think about the compliance resources that a Licensee might require in order to avoid having to implement a remediation program. Are you adequately resourced now, to identify issues and ensure that your representatives act ‘efficiently, honestly and fairly’ and comply with the financial services laws?

While you’re pondering the adequacy of your compliance arrangements, consider what additional controls or preventative measures you should implement. Assess whether your approach to monitoring and supervision is effective, risk-based and conduct focused.

In some respects, the cost of, and need for, remediation is an indication of a Licensee’s underinvestment in compliance (although, admittedly culture and capability are important considerations).

Underinvestment in compliance is like capitalising interest on a margin loan, it’s seldom a good long term strategy and never the only strategy to consider.

In an environment characterised by decreasing margins and increasing costs, it’s critical for Licensee management to consider the costs of operating a sustainable business. Although you might reasonably refrain from making significant decisions on the basis of incomplete reporting and misleading averages, a competent Licensee should at least consider the real cost of remediation programs and implement strategies to minimise the likelihood that they’ll be needed.

Be prudent. Don’t panic.

The business of providing advice requires more resources (financial, human and technological) than it ever did before. For some, it may signal their retreat from retail advice and aligned distribution.

In a highly regulated, closely scrutinised and frequently changing industry, both Licensees and advice professionals need to pay close attention to their competence, capability and ethics.

It’s time for Licensees and advice professionals to lead the advice profession beyond industrialised advice and its product-sales foundation.

There will be a greater need for efficiency, effectiveness and transparency, but the tools, techniques and resources you need are all available to you.

Get up and lead the change our industry requires.

If we can help, let us know.