Enforceable Undertakings In The Financial Services Industry
- The ACI's review reveals that there are AFSL holders who do not understand the scope of their compliance obligations and/or who have inadequate compliance structures.
Section 93AA of the Australian Securities and Investments Commission Act 2001 (the ASIC Act) gives ASIC power to accept an enforceable undertaking concerning a matter in relation to which ASIC has a function or power under the Act. If the organisation or person giving the undertaking breaches any of its terms, ASIC may apply to the Court for the enforcement of the undertaking. Section 93A of the ASIC Act contains a similar power which allows acceptance of an enforceable undertaking from the responsible entity of a registered managed investment scheme.
One of ASIC's purposes in using enforceable undertakings is to compel an individual, company or responsible entity to implement improved compliance arrangements, with the process being monitored by an independent compliance expert who reports to ASIC. So an analysis of undertakings given by financial service providers should provide insight into some of the industry's more prevalent compliance problems. In a report, Compliance Issues from Enforceable Undertakings (ASIC), the Australasian Compliance Institute Enforceable Undertakings Working Group has analysed the undertakings accepted in the period 2004 - 2006, and suggests how the problems revealed by this analysis can be prevented, detected and corrected. In this article we'll summarise some of the report's main findings, and its suggestions for preventing the problems that were detected.
Failure to meet licence conditions
Holders of an Australian Financial Services Licence (AFSL) must meet the licensee obligations set out in the AFSL, the Corporations Act 2001 and the Corporations Regulations. All enforceable undertakings accepted by ASIC during the review period involved a failure to meet AFSL licence conditions in some way. These failures resulted from poor knowledge of AFSL licence-holder compliance obligations and/or inadequate compliance structures.
To ensure licensee obligations are met it is essential to have an effective compliance program. As the report notes, some elements of such a program are:
- a compliance policy endorsed by the organisation's governing body (which is usually the board)
- ownership by business units of compliance obligations; and
- measuring whether or not the compliance program is operating efficiently.
Compliance obligations need to built into (embedded in) the organisation's business processes. In addition, training activities are important in ensuring the competence of representatives, and for communicating compliance requirements to them.
Misleading advertising and marketing
The Act and the ASIC Act prohibit engaging in misleading or deceptive conduct. Misleading advertising was the single biggest reason for the giving of enforceable undertakings during the review period. Approximately 25 percent of undertakings were given for this reason. Misleading advertising and marketing occurred because of poor vetting of material prior to distribution, inadequate compliance processes to ensure materials were properly produced and lack of knowledge of, or disregard for, regulatory requirements.
Some steps that can be taken to prevent the issuing of misleading advertising and marketing material include:
- A formal sign-off process - the process should set out the steps to be taken prior to issuing any advertising or marketing material and require sign-off as the steps are completed.
- An advertising standard - an organisation should have an advertising standard setting out the organisation's policy on matters such as font size, the use of disclaimers and statements of opinion or statements regarding past performance, and the standard should incorporate any guidance or information issued by ASIC.
Offer documents and disclosure
Many of the undertakings given during the review period resulted from failing to provide an offer or disclosure document, or from providing an inadequate document. The causes of these problems included poor vetting of documents prior to distribution and/or lack of knowledge of, or disregard for, the regulatory requirements.
As Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) explains (at 168.25), offer and disclosure documents must not only include the information required by the Act, but also disclose that information in a clear, concise and effective manner. Action that can be taken to prevent the compliance failures identified in the report includes:
- Appropriate staff training - this could include training for sales and marketing staff regarding promotional material, training in clear expression and legal requirements for those who are responsible for preparing offer and disclosure documentation and training for members of any due diligence committee appointed to sign off documentation.
- The use of templates - use of templates (wherever possible) that include the organisation's standard requirements ensures consistency across products, and ensures that mandatory disclosures (such as dollar fee disclosures, commissions and external dispute resolution) are included in the document.
- A documented and robust due diligence policy and due diligence/sign-off process - the policy should be approved by the organisation's governing body and there should be a due diligence/sign off process for offer and disclosure documents.
- A due diligence committee for new products - if a new product is to be offered, it is recommended that a due diligence committee be established to oversee the process of bringing the product to market.
Under section 945A of the Act, there must be reasonable basis for personal advice provided to a retail client. The main causes of inappropriate advice were:
- inadequate monitoring of whether there was a reasonable basis for advice;
- licensee requirements not followed due to inadequate or ineffective training of advisers; and
- licensee interpretation of legislation or policy which differed from regulatory expectations.
These issues could be prevented by:
- Putting in place a formal process for picking up changes to legislation, statutory instruments and regulatory guidance issued by ASIC and APRA - such a process will ensure an organisation has up to date information about its obligations.
- Implementing a range of measures designed to ensure adviser compliance with legislative and licensee requirements - such measures can include the provision of tools and templates to advisers, the development of an approved product list and training for advisers and the use of financial planning software.
Compliance program sustainability and organisational culture change
The report points out that while addressing the specific issues dealt with by an enforceable undertaking may be effective in the short term, the underlying problems that gave rise to the undertaking will not be corrected unless there is support by the governing body and senior management for the compliance program and for cultural change within the organisation.
The steps the board needs to take to provide this support are set out in Principles 1, 2 and 4 of Australian Standard AS 3806-2006: Compliance Programs. Broadly, what is required is commitment by the governing body and senior management to a compliance program that is a part of the organisation's business processes. This commitment is demonstrated by the endorsement of the organisation's compliance policy by the governing body, ongoing communication by management of the need for, and benefits of, compliance, by not tolerating behaviour that compromises compliance, and by rewarding ethical behaviour.
Organisational culture change is driven by the governing body and senior management and requires change in attitude to compliance by the whole organisation. The report observes that cultural standards need to be clearly articulated and communicated to employees so they understand the standards of behaviour that are expected. Methods of effecting culture change include the use of emotional (or internal) drivers such as pride in a job well done, celebrating customer satisfaction and upholding role models to achieve the desired tone and culture.
This article is a brief overview of only some key sections of the report. Other sections deal with providing financial services while unlicensed, periodic statements and unit pricing errors. The report is also helpful in that it discusses not only how to prevent the identified problems from occurring, but if they have already occurred, how to detect and correct them.
In each year since 2005, there has been a decline in the number of enforceable undertakings accepted by ASIC. Whether this indicates improving compliance standards in the industry in general is unclear, but the ACI's review of enforceable undertakings does reveal that ASIC is still finding there are AFSL holders who do not understand the scope of their compliance obligations and/or who have inadequate compliance structures.
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.