ASIC continues review of financial advisors

ASIC will shortly contact 30 Australian financial services licensees as part of the next phase of its review of financial advice industry practice.

ASIC commissioner Peter Kell said:

‘One of ASIC’s priorities is ensuring investors and financial consumers are confident and informed. The three elements to achieving this are educating investors, holding gatekeepers to account and understanding consumer behaviour. This review provides ASIC with important input into all these elements so that it can deliver positive outcomes for consumers.

‘The review will also inform the financial advisory sector about current industry trends and ASIC’s compliance expectations. Many of the top 20 advisory firms that participated in the first phase of the review reported finding the exercise beneficial and helpful for improving their practices,’ said Commissioner Kell.

The review will take the form of a questionnaire that will include specific questions on areas like licensee business models, training of representatives, and product and strategic advice.

Specifically, ASIC will use the information from this review to examine financial advice compliance systems and to inform our analysis of the risks facing gatekeepers in the financial advice industry.

Robust compliance systems help licensees mitigate risks to their businesses, which maximises delivery of quality financial advice to consumers and increases confidence in advice and financial advisers. The information received also informs ASIC about trends in the financial advice industry and helps us tailor consumer messages and devote resources to important areas.

Licensees have three months from the year end to respond to ASIC’s questionnaire, which will be sent to licensees over the next week. All information gathered will be confidential.

This review is part of ASIC’s proactive risk-based approach to surveillance in the financial advice industry. Our approach involves identifying, analysing and evaluating the risks in our regulated population and focusing surveillance on areas we consider to be the highest risk. This risk-based program sits alongside our reactive surveillance work, which comes from complaints or breach reports.

Commissioner Kell said: ‘Risk-based surveillance is an important part of ASIC’s approach to improving standards in the financial advice industry and holding gatekeepers to account.

‘The information gathered in the first phase, which covered the largest 20 AFS licensees, was an essential input to ASIC’s Risk-Based Surveillance Program enabling ASIC to identify what industry risks to prioritise.’

Phase two: what it means

In Phase two, ASIC will ask the 30 next largest AFS licensees to complete a smaller questionnaire than that used in the first phase.

ASIC will not use its information gathering powers to seek this information, unless requested to do so by the licensee.

The questionnaire will cover:

•     Licensee business model;
•     Training of representatives;
•     Monitoring & supervision of representatives;
•     Product & strategic advice; and
•     Complaints handling and compensation arrangements

The questionnaire will include specific questions on the areas listed above and three data schedules that cover consumer and product information, licensee remuneration and experience of representatives. All information will be captured electronically.

ASIC intends to meet with all licensees in 2012 to discuss responses and, if necessary, to clarify information gaps. Individual feedback will be provided to licensees involved and ASIC will issue a public report at the review’s conclusion.

At the phase two completion ASIC will have been in contact with the 50 largest licensees providing financial advice to retail clients in Australia. A public report will be issued by ASIC at the conclusion of the review.

Commissioner Kell said: ‘The review’s first phase created an opportunity for ASIC to engage with the largest financial advice licensees and provide them with individual feedback. We expect those licensees in the second phase to also take a positive approach in engaging with ASIC and take the opportunity to shape the regulatory approach to the financial advice industry for the greater good of consumers across Australia.’

Background

In September 2011 ASIC released Report 251 Review of financial advice industry practice (REP 251) that described its approach to requesting information to help it monitor financial advice gatekeepers and improve industry standards. The information was requested from the 20 largest AFS licensees that provide financial product advice to retail clients.

REP 251 highlighted issues across five key categories:

• Licensee business models – management of conflicts of interest remains the critical risk that requires more attention from licensees. Licensees must ensure they effectively manage (and where applicable avoid) conflicts of interest in their business models. Disclosure alone will not always satisfy a licensees obligations and this needs constant oversight.
• Training of advisers – licensees should continue to give training a high priority as this lessens the risk of poor advice being provided.
• Monitoring and supervision of advisers – all licensees conducted audits of the advice provided to clients by their advisers. However, licensees need to make sure client files selected for review are not notified to the adviser in advance and ASIC encourages licensees to include a random selection of files as part of their overall audit approach. Many licensees are not checking references for new advisers with their previous licensee. This practice allows ‘bad apples’ to continue in the industry. New adviser recruitment remains a critical gatekeeper role of licensees. Identifying and recording breaches is a very important mechanism for licensees in assessing emerging issues around the activities of advisers. We expect licensees to be active in reporting breaches and clearly demonstrate to ASIC that they have an adequate remediation plan. Many licensees do not retain copies of client records separately from advisers. ASIC reminds licensees that they must retain access to client records so that they can respond to client complaints or disputes and can review adviser conduct whenever they need to do so.
• Product and strategic advice – conflicts of interest within the approved products need to be actively managed. If advisers are recommending high levels of a few products then the reasons need to be explored and justified. When considering what strategies to recommend to clients, it is important to educate clients about risk and return so that their expectations are more realistic.
• Complaints handling and compensation – we expect licensees to invest significant time and resources, including senior management support, in ensuring their organisation handles complaints well and licensees need to ensure that they have the financial capacity to do so. Some licensees are finding that new or renewed professional indemnity insurance policies have significant exclusions for more risky products and services. We expect licensees to consider carefully the terms of their policy, including any exclusions, and ensure they can demonstrate they can compensate clients for potential losses that may occur anywhere in their business operations.