Each AFS licensee will have varying governance, risk and compliance focuses and priorities, these five are relevant to all licensees.
The Australian Government's Future of Financial Advice (FOFA) legislation commenced on 1 July 2012, and with compliance mandatory from 1 July 2013, the countdown is now well and truly on to ensuring your organisation is FOFA-compliant.
One of the many issues that an Australian Financial Services Licensee needs to address prior to comprehensive legislative changes such as FOFA is the impact of those changes on the licensee's GRC framework.
In the last of our FOFA Ready series we take a step back and consider the top five governance, risk and compliance (GRC) issues you should consider as a final health check for your organisation as it gets ready for mandatory FOFA compliance.
While each licensee may have varying GRC focuses and priorities, these are some of the key issues we think will be relevant to all licensees, based both on our experience in advising organisations with the implementation of large-scale reforms such as FOFA, and also through our recent experiences with ASIC.
- Taking a one-size-fits-all approach
Given the extent and complexity of the changes introduced by the FOFA legislation, it is understandable for organisations to adopt an off-the-shelf template FOFA policy and procedure documents as a base to work from.
While the use of template documents is neither uncommon nor prohibited under the FOFA reforms, it is now more than ever imperative that template documents are tailored to your organisation and to each client (as applicable). AFS licensees should consider, for example, whether the template documents are suitable given:
the size, nature and complexity of your organisation;
the services your organisation provides;
where the key risks lie in terms of complying with FOFA within your organisation; and
the level to which advisers can include specific, tailored information for each client which demonstrates their objectives, financial situation and needs.
ASIC will expect an organisation to be able to show that independent thought and judgment have been exercised in the development and implementation of FOFA compliance documents and their ongoing use.
- Evidencing compliance
We consider the FOFA reforms bring with them a renewed focus on ensuring that adequate records are kept of compliance measures not only at the licensee level but also the adviser level.
For example, there is no doubt that approved product lists are a useful tool for provision of financial advice and will continue to be used by industry. At a licensee level, ASIC will be looking to see evidence of:
- the reasoning behind inclusion of certain products on an approved product list; and
- of consideration of related issues such as conflicts of interest and why certain related party products are included rather than another product with similar features and costs (RG 175.381).
Under the new best interests duty, the emphasis has shifted to advisers to evidence steps taken to ensure the advice is appropriate for the particular client/s. In the context of approved product lists, this focus will require the individual advisers themselves to provide evidence of why certain products were selected and not others, or why certain types of advice such as scaled advice has been provided for a particular client/s and not more comprehensive advice.
Furthermore, advice providers may need to investigate and consider a product that is not on their AFS licensee's approved product list to show that they have acted in the best interests of the client. Suitable processes should be in place for the advisor to follow in this situation, and they must have appropriate authorisations and approvals from their licensee to provide the advice.
- Monitoring and supervision
Appropriate arrangements should be now be in place to ensure all entities are aware of their obligations under FOFA.
We consider a potentially greater challenge will be for licensees to ensure that they balance the parameters and guidelines within which financial advisers can operate with sufficient flexibility to enable advisers to demonstrate that they are tailoring their advice to each client. This may be especially challenging where there are aspects of the licensee's services which are outsourced or where financial advice is provided by subsidiaries or corporate authorised representatives.
With a greater emphasis on financial advisers demonstrating they themselves are meeting the requirements, in addition to ensuring advisers and other related entities comply with their obligations, licensees should also be considering to what extent monitoring and supervision arrangements need to be revised to ensure that quality advice is maintained under the new reforms.
- Managing conflicts:
As we've already discussed, the conflicts priority rule introduces some new challenges for managing conflicts of interest which licensees will need to consider in the context of reviewing their existing procedures for managing conflicts of interest.
Significantly, we consider in certain circumstances an advice provider cannot comply with the conflicts priority rule merely by disclosing a conflict of interest or getting a client to consent to a conflict.
- Demonstrate effective implementation of FOFA
Given that the process of implementing the FOFA reforms should now be well-progressed, consideration should now be given to what final steps need to be taken to ensure appropriate assurance is provided to the Board and senior management that your organisation is FOFA-compliant.
As many licensees have been focused on the wider impact reforms (such as conflicted remuneration and the best interests duty), it may well be the case that licensees will be undertaking some backfilling steps to finalise implementation over the next six months. We recommend that at a minimum, licensees conduct a gap analysis after 1 July to determine what further work might be required to finalise implementation of the FOFA reforms.
In our view, ASIC would expect these steps to implement the reforms are fully evidenced, including reasoning for key decisions. As with any wide-scale implementation project, there is likely to be some teething issues following implementation. We therefore recommend licensees undertake an independent review of FOFA compliance systems to review implementation effectiveness at least six to 12 months after commencement of the FOFA reforms.
Of course there are many more compliance implications which arise as a result of the FOFA reforms. The above list is just some of these implications and we have identified further implications throughout our FOFA Ready series.
Given our combined technical legal knowledge and compliance capabilities, together with our experience assisting organisations with the learnings and challenges associated with comprehensive legislative changes, our FOFA team is well placed to advise you further on the compliance implications of the FOFA reforms, including any pre- or post-commencement independent reviews.