You’re right, “Compliance” is the problem.


This year, I’ve had the opportunity to visit a number of practices, meet a great many highly skilled advisers and talk to them about their businesses, their clients and their processes.

In most respects I’ve been impressed by the advisers’ professionalism and the skills they’ve brought to improve the quality of their clients’ lives.

In other respects, I’ve been horrified.

  • In one practice, I read a singularly excellent piece of aged care advice that was clear, concise, accessible and impeccably tailored to the clients’ needs. The advice had been reviewed by the Licensee’s compliance auditor and failed.

  • In another practice, an adviser explained that he was told his advice would have been rated more highly by Compliance if he had explained how the more expensive group platform (which he did not recommend) was better for the client than the client’s existing industry fund (which he recommended be retained).

  • In another business, the SoA appeared to address every legal requirement and satisfy the clients’ objectives; notwithstanding that the reasoning was as robust as a tissue and the recommendation, ultimately, placed the client in a markedly worse position.

  • In yet another licensee, external compliance “experts” allegedly criticised the internal compliance manager for focusing on materiality, remediation and consumer impact, rather than identifying and documenting every single incident of “non-compliance” regardless of its consequence.

One of the great ironies of the current coverage of financial planning, is that the debate about accountability for advice failures seldom extends beyond the advisers to consider those groups that facilitated, encouraged or enabled these scandals and failures to occur.

At the risk of emboldening recalcitrant advisers, perpetuating adviser paranoia and undermining my hard-working colleagues, “compliance”, or the way that most licensees have approached compliance is, in fact, a contributing factor to many of these recent “advice” failures.

Let me be specific, the failures referenced by Adele Ferguson and a growing list of mainstream journalists should not be laid at the feet of the Compliance Managers - who are, as a general rule, conscientious, competent and highly ethical professionals – nor should it excuse the moral and professional failures of advisers and Licensees.

But I think that we, as an industry, need to acknowledge that our inability or unwillingness to focus on behavior, values and outcomes - above abstracted  measures and technical rules -created the fertile ground for these failures. It’s time for us to acknowledge that “Rules-based compliance” is a fundamentally limited approach to managing risks in a complex ecosystem.

While it may not be immediately obvious, our embrace of “rules-based compliance” and our obsession with meeting (but often failing to meet) the letter of the law, has also shackled an emerging advice profession to incentives, legacies and values that have restricted its maturation.

At its core, “Rules-based” compliance is blind to fairness, value and outcomes and so often allows unsuitable advice to hide within compliant documents. Worse still, it trains advisers to focus more on form completion than context and consideration. Far too often (and often for technical and bureaucratic reasons), exceptional advice that doesn’t “tick the licensee’s boxes” is often failed despite the significant benefit it would deliver to the client. The preponderance of misaligned incentive schemes, inchoate competency requirements and material conflicts in financial advice have endured precisely because we, as an industry, have settled for “compliance with rules” rather than insisting on the structural prioritisation of ethics and consumer interests.

Accepting this reality does not invalidate the need for a vibrant and effective risk and compliance function, but simply recognises that focusing on technical compliance rather than on ethical values, professional obligations and social responsibilities is a profoundly limited approach.

The commercial and historic reasons for focusing on disclosure rather than conduct may have once been compelling, but recent events have shown that our reliance on “rules-based compliance” regimes has failed advisers, clients and stakeholders. Worse still, focusing on the form and process of advice has distracted us from the substantive issues of outcomes, behavior, costs and value. Process is important, but the behavior of advisers and licensees – their conduct – should have been given far greater attention.

This is the real failure of “compliance”; the inability or unwillingness of Licensees to look beyond rules and formal policies and focus instead on the real conduct of the licensees and advisers and their success in substantively promoting consumer interests above their own self-interest. It’s certainly easier to criticize adviser’s documents than adviser’s choices, but the easy option has been so spectacularly unsuccessful in facilitating the evolution of the advice industry.

This has to change.

Thankfully, albeit with glacial speed, this is happening. Some progressive licensees and innovative service providers have already embraced substance over form and embedded conduct risk frameworks as a clear alternative to more legalistic solutions.

Make no mistake, moving to “conduct focused compliance” – focusing on client outcomes, advice quality, value and adviser behavior - is a significant cultural and commercial shift. There are few immediate commercial benefits and, realistically, changing priorities may hurt these licensees (and their advisers) in the short term. Pivoting certainly requires them to make a significant investment in training, education and systems.

The Licensees that are doing so recognise that adopting a conduct-based compliance regime, and embedding an appropriate risk management focus throughout their business, is a better strategic and commercial move. It’s a cultural pivot that will, over the longer term, lead to better client outcomes, increased consumer confidence and provide the pivoting Licensees with significant and compelling competitive advantages.

The more profound, but less immediately obvious, benefit of this shift is the potentially transformative effect it will have on advisers and the advice profession. By eliminating disclosure and documentation as a shield against misconduct, misfeasance and mischief, advisers focused on outcomes, values and fairness can be increasingly confident about the advice industry, its sustainability and its capacity to substantively prioritise clients’ interests before its own. 


(c) 2015 . Sean Graham . Assured Support Pty Ltd

(c) 2015 . Sean Graham . Assured Support Pty Ltd