As part of its Wealth Management Project, Australian Securities and Investments Commission (ASIC) has released its report into how effectively Australia’s largest financial institutions oversee their financial advisers. The report is based on a 20-month project instigated by information received by ASIC about non-compliant advice, as well as public concerns about wider problems in large advice firms.

The full report is structured in three key phases and can be accessed here.

Phase 1: How the Financial Institutions Identified and Dealt with Non-Compliant Conduct by Advisers

ASIC found between 1 January 2009 and 30 June 2015:

  • financial institutions relied heavily on information from adviser audits and customer complaints to identify non-compliance
  • there were significant delays in reporting non-compliant conduct by advisers to ASIC. In fact, almost half of non-compliant advisers had not been notified to ASIC until AFS licensees did so as part of this project.

Phase 2: Financial Institutions’ Development and Implementation of a Review and Remediation Framework for Aggrieved Customers

Each financial institution acknowledged they faced significant challenges with identifying high-risk advisers and remediating affected customers. Therefore it was agreed to develop and implement a framework for large-scale customer review and remediation.

An essential part of these frameworks is a move from audits and customer complaints towards ‘data analytics’ to develop ‘key risk indicators’ (KRIs) for identifying high-risk advisers and affected customers. Other issues such as clearer communication with aggrieved customers were also considered.

ASIC required each institution to develop and apply guidance and policies to calculate the amount of customer loss, consistent with the compensation principles of FOS. ASIC also encouraged the financial institutions to establish a variation of the FOS terms of reference to allow customers within the scope of the remediation to lodge a claim with FOS relating to advice extending back to 1 January 2009 and up to a monetary limit of $1 million. These discussions remain ongoing.

Phase 3: AFS Licensees’ Current Processes for Monitoring and Supervising their Advisers

ASIC reviewed the way 10 AFS licensees monitor and supervise their advisers and the quality of advice provided. It was found, amongst other things:

  • AFS Licensees had inadequate background and reference-checking processes when appointing advisers which allowed the circulation of non-compliant advisers within the industry
  • the AFS Licensees’ audits aligned with ASIC’s review in only 18% of sample files (i.e. the balance of these audits were either ‘partially effective’ or ‘ineffective’).

ASIC is currently considering enforcement or other appropriate regulatory action against these licensees.

We will continue to monitor developments and the ongoing discussions referenced in the report.