The Australian Securities and Investments Commission (ASIC) has released details on the areas of compliance they will be targeting in 2011. Of particular focus this year will be:
- aggregator licensees;
- quality of advice;
- advice relating to complex products such as capital guaranteed products; and
- the use of managed discretionary accounts.
Due to a rapid rise in the acquisition of other financial advice businesses, ASIC has raised concerns about licensee requirements not being properly resourced and funded and possibly, not being met.
In 2011, ASIC is going to look closely at licensees who may be running such business models, with business visits to scrutinise both compliance with licence conditions and the advice provided to clients.
ASIC has flagged the following as being indicators of an approach lacking compliance:
- One-size-fits-all business models: Advisers need to ensure they are providing individualised advice, and not just the same type of advice to all clients
- Inadequate or poor quality compliance resources: A key indicator here will be a low ratio of compliance staff to advisers. Firms need to ensure they make a proper investment in compliance and ensure quality advice is given to clients. Desirable factors are:
- a strong compliance culture with senior management setting the example;
- compliance staff not providing advice to clients, but rather remaining independent of the day-to-day advice process;
- proper time and mandate being allocated to conducting file audits and critically assessing whether appropriate advice has been provided; and
- compliance staff requiring individual adviser follow-ups where inappropriate advice has been given or non-compliance issues identified. This should include additional file reviews and, if applicable, disciplinary action.
- Inadequate dispute resolution processes: Licensees need to ensure they manage complaints by dealing with them quickly, having training gaps fixed and if applicable, terminating inappropriate employees. ASIC will use a rise in complaints against a licensee as a sign that problems require attention and supervision.
- Non retention of client records: Advisers must retain client files for seven years even when advisers leave the business. Records can be kept electronically or in hard copy. Failing to retain client files is a breach of licence condition but also leaves an adviser exposed in defending possible allegations from clients.
Where "lite touch" business models are seen, ASIC will take strong regulatory action, including imposing license cancellations or suspensions, additional licence conditions and banning individual advisers and/or directors.
Quality of advice
Where ASIC is concerned that advisers are not properly considering the circumstances and needs of their clients, ASIC may review client advice files or have advisers undergo external audits.
Examination of files will assess whether:
- the advice addresses the client's identified needs, objectives and financial situation;
- the adviser understands and has considered financial, tax, legal and any other consequences of their advice for their client;
- the advice addresses the advantages and disadvantages for the client;
- at the time of giving the advice, the client's financial needs and objectives were likely to be advanced by pursuing the advice;
- having received the advice, the client is able to make an informed decision in their best interests; and
- the client has not been inappropriately switched into another product in the adviser's pursuit of fees.
Where inappropriate advice has been given, advisers need to ensure they inform clients of their options for dispute resolution and promptly assess and pay any applicable compensation. ASIC may also take licensing action, including banning individual advisers where a licensee fails to properly supervise and monitor advisers.
Complex products such as capital guaranteed products
ASIC will be paying particular attention to capital guaranteed products. It is important that an adviser fully understands how these products work and carefully considers whether they are appropriate to the client's circumstances and investment goals.
The adviser must explain the risks and potential losses of the product to the client to make sure the client is fully informed.
ASIC will be conducting 'Health Checks' on structured capital protected and guaranteed products, particularly where they require the client to borrow up to 100 per cent of the investment amount via a non-recourse loan.
Managed Discretionary Accounts
ASIC will be focusing on examining Managed Discretionary Accounts (MDAs) and in particular, the use of higher risk strategies, such as gearing and clients being placed into conflicted products.
ASIC will look at whether:
- the licensee is properly licensed to offer MDA services;
- there is an MDA contract on file;
- the investment program has been reviewed every 12 months and includes a statement of advice confirming the ongoing suitability of the MDA for the client;
- there is evidence the client's MDA portfolio assets are held as discrete assets;
- instructions have been followed where the client has provided special or specific instructions;
- the client has undertaken margin lending to invest in the MDA service and if so, is the margin lending appropriate;
- the client is not invested in any unregistered schemes;
- there is evidence the client is receiving quarterly reports from the MDA service provider, which include a portfolio valuation, transactions during the relevant period and details of income and expenses; and
- clients are receiving adequate disclosure.
ASIC appear to have taken on a sizeable task in focusing on these compliance areas and it is to be commended. Ultimately, the success of these initiatives will be measured by ASIC's ability to engage with licensees and meaningfully assess their compliance in respect of these areas of practice.