Australia: Part I: Lessons learned from ASIC Report 515: Taking Reasonable steps to ensure your representatives comply with the financial services laws.

This is the first part of a two-part blog series on the outcome and the lessons learned from ASIC's Report 515.

Does your firm:

  1. act professionally, avoid conflicts of interest and treat customers fairly?
  2. deliver strategic financial advice that is aligned with customers needs and preferences; and
  3. ensure that customers are fully compensated when loss or detriment results from poor conduct?

These are the elements that ASIC deems necessary to promote investor and consumer trust and confidence and market integrity in the financial advice industry. Perhaps your firm does all of the above. However, ASIC's review of five of Australia's largest banking and financial institutions between 1 January 2009 and 30 June 2015 showed many instances of the above elements not being met. The review resulted in serious compliance concerns of about 185 advisers and ultimately, a total of $30 million in compensation to approximately 1,347 customers.

In July 2015, ASIC commenced a project to review how effectively these large financial services institutions were overseeing their financial advisers. In March 2017, ASIC released Report 515 which outlines its observations and findings from the project. The Report sets out ASIC's expectations around compliance in areas such as breach reporting, adviser file audits, supervision and monitoring through data analytics, background checks, remediation and culture in financial advice business. It is ASIC's aim that the report will assist the financial advice industry as a whole to raise its standards and reduce the risk of current customers receiving non-compliant advice in the future.

So, if you have any doubts that your firm is not doing all of the above or if you simply want to strive to achieve even higher standards, read on. There are always lessons to be learned.

Lesson 1 – Check who you are on-boarding:

The Corporations Act requires advice licensees to implement adequate monitoring and supervision processes to provide financial services efficiently, honestly and fairly, and to ensure their representatives provide financial services that comply with the financial services laws. One of the elements that ASIC considers to be integral to an effective monitoring and supervision framework is a firm's background and reference-checking process.

As part of the project, ASIC used its compulsory notice powers to direct licensees to provide information about their background and reference-checking processes. ASIC observed that, most often the deficiencies related to the extent to which the former licensees followed the guidance in Standards Australia's handbook on the provision of information to a recruiting licensee.

In particular, ASIC found that there was widespread failure by former licensees to respond adequately to requests for information about an adviser's compliance history and previous audit reports. This was often due to concerns about e.g. (potential breaches of the privacy legislation, perceptions that a defamation action may be pursued by the adviser and procedural fairness in circumstances where the adviser had resigned before investigations into their conduct had been completed). ASIC also observed instances of recruiting licensees failing to make appropriate further inquiries where information was provided and concerns were raised.

What you can do:

When recruiting advisers, ensure that you obtain the adviser's compliance history from an appropriately qualified and authorised person within the former licensee.1 You should also review Appendix 2 of the Report which contains a checklist of issues for advice licensees to consider when conducting background checks on advisers. ASIC also encourages licensees to subscribe to the Australian Bankers' Association's protocol on reference checking.

Lesson 2 – Develop Key Risk Indicators (KRI's):

ASIC observed that the institutions have been developing increasingly sophisticated KRIs using data analytics to identify high-risk advisers as part of their monitoring and supervision processes. ASIC considers this method to be a useful and efficient method to improve the identification of high risk advisers and non-compliant advice2 and expects that KRI's developed using data analytics will be subject to continuous review and improvement as new industry and product risks emerge.3

What you can do:

Review Appendix 4 of the Report which provides a list of possible KRI's for advice licensees to consider when developing and implementing their review and monitoring programs. Appendix 4 also provides a list of issues that licensees should consider before adopting KRI's. For example, in developing KRI's, a licensee should consider the nature, scale and complexity of the particular advice business.

Lesson 3 – Maintain proper records:

As part of the review, ASIC asked the institutions whether they retained a full copy of the customer file at the time it was audited (point-in-time copy). ASIC considers retaining a point-in-time copy of the customer file to be an important part of an advice licensee's audit process because the file forms the source documentation for any subsequent audit of the licensee's control testing environment. If a point-in-time copy of the customer file is not retained, ASIC considers that the licensee's ability to test the effectiveness of the adviser audit process itself is likely to be impeded.4 ASIC also expects all relevant information to be contained in the file and expects to see positive evidence that the adviser has discharged its obligations. ASIC considers the practice of amending a customer file to make it compliant is undesirable because it is inconsistent with the obligation for the adviser to maintain records to demonstrate they have complied with the best interests duty and related obligations.5

What you can do:

Make file notes at the same time as the events that they record. If you do amend a customer's file, consult with the customer first and keep a point-in-time copy of the file at the time of an audit.


1 Para 231, ASIC Report 515.
2 Para 287, ASIC Report 515.
3 Para 292, ASIC Report 515.
4 Para 280, ASIC Report 515.
5 Para 276, ASIC Report 515.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Laura Sullivan (formerly with Holley Nethercote)
Grant Holley
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