Is your Licensee your greatest risk?


Advisers join Licensees for a variety of reasons - price, convenience, shared values and history - but underlying all these is the presumption that the advantages of joining a Licensee outweigh the disadvantages.

What if that presumption is wrong?

What if your Licensee's conduct is a far greater source of compliance risk to you then your own conduct?

Compliance and control

If that's too abstract, just take a moment to consider whether, and to what extent, your Licensee's choices, acts or omissions are the root cause of the 'compliance' issues affecting you and your peers.

I'm not for one moment discounting advisers' agency, or the effect of the choices they make, but recent events suggest that a Licensee's choices, capability and competency have a far more profound impact on 'adviser misconduct' than is currently credited.

Let me be clear; advisers often complain that their Licensee makes it hard for them to run their businesses and serve their clients. I've been told repeatedly that pre-vetting is a pain, that reviews are inconvenient and inconsistent and that Practice Development Managers are useless, 'failed advisers'. In reality, professional advisers understand the importance of sustainability and the critical need for an effective governance framework. As a consequence, they embrace all these inconveniences (except Practice Development Managers), and dutifully stay within the parameters set by their Licensees.

That is an entirely logical response. Most advisers are appointed pursuant to an Authorised Representative Agreement (ARA) or a contract of Employment that requires them to:

comply with the rules and procedures published by the Licensee, and in particular, such rules and procedures specified in the Compliance Manual and comply with any other reasonable direction or instructions issued by the Licensee from time to time.

The contradiction of compliance

Advisers generally comply with these requirements appreciating that contravention of their ARA can lead to their suspension, termination, legal action or referral to ASIC. Most Authorised Representatives also understand that one of the few defences available to them in the event of a claim for loss or damage for 'misconduct' is their reasonable reliance on the Licensee's instructions, rules and procedures.

The real question for advisers is whether, and to what extent, their Licensee's measures, processes and procedures ensure compliance with the law or (inadvertently) contravene the laws to which they refer. Are there inherent conflicts that fundamentally compromise an adviser's compliance with the law? How can an adviser ever properly identify conflicts of interests and obligations? The even more difficult issue for an Authorised Representative to consider is how they can adequately manage any identified conflicts between the law, their Licensee's requirements and their contractual and statutory obligations.

The Regulator might consider that this is a simple issue for advisers to manage - advisers are required to comply with the law.

Compliance and conflicts

It becomes less simple when you appreciate that advisers are not lawyers, that conflicts are often hidden and that advisers rely on their Licensees to comply with the law, and to implement compliance arrangements, to ensure they continue to do so. What happens when Licensees can't, or don't, implement effective compliance arrangements?

If you are an adviser, think for a moment about how your Licensee has interpreted the obligation to act in the client's best interest. How have they addressed conflicting interests? What assumptions have they made? Are their guidelines too prescriptive to allow you the freedom to act in your client's best interests or too vague to provide you with the certainty that you are?

While the adviser is an easy target, it's important to remember that it is the Licensee's obligation to take reasonable steps to ensure their representatives comply with the law. So, is it reasonable to presume that an adviser will ever refuse to comply with their 'reasonable' Licensee's requirements? Is it fair to assume resistance, particularly where the adviser has no reason to doubt the reasonableness of the Licensee's position, opinion or requirement?

This conflict is not a theoretical issue. 2014's "Commonwealth Financial Planning v Couper: An Insider’s view" reported that the Licensee's 'measures, processes and procedures' had an inordinate influence on the outcome and noted that

advisers have less discretion than they actually need to humanise the application of the Licensee’s processes

Organisational capacity and culture

It would be reassuring to believe that all Licensees are competent, capable and compliant but I've reviewed 'current' compliance manuals that are significantly outdated on material issues. I've seen Licensees publish and promote processes that materially contravene the letter and intent of the financial services laws. I've spoken to Compliance Staff who don't understand the laws they're responsible for enforcing. I've presented to Licensees who are supremely confident that pre-vetting 100% of the advice voluntarily submitted to them by their representatives excuses them from adopting a more robust monitoring and supervision regime.

Licensees make 'mistakes'. Licensees also make, embed and enforce 'mistakes'.

I've been focused on risk, conduct and culture for a long time. In my view, while 'conduct risk' is now the topic du jour for industry opinion pieces, commentators' approaches are often weakened by their obsessive focus on 'adviser conduct' rather than the more problematic, and more pernicious, issue of 'organisational conduct'.

This was highlighted for me in a recent IFA article in which a Licensee representative stated that:

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Of course it doesn't make any sense for a 'dealer group' to act in this way. No competent Licensee would. It's certainly not standard operating procedure. It may only be a 'straw man' argument used to deflect attention but I wonder how many advisers have properly thought about their own Licensee's approach to compliance (and the consequences and implications of their approach to the adviser and the adviser's business).

If ASIC consider that, ultimately, the responsibility for compliance rests with the adviser, doesn’t that require advisers to take a much more active role in shaping the compliance framework with which they are forced to comply?

The Licensee's obligations

It's important to appreciate that a Licensee, however well resourced and well managed, has its own obligations, its own liabilities and its own interests. ASIC's REP515 exposed the limitations and biases of some licensees' arrangements and highlighted that their review processes were only 'effective' 18% of the time. I've seen advisers bear the brunt of their Licensee's assumptions and flawed understanding of the law. Advisers have also shared with me their own experiences including:

  • An adviser abandoned by his Licensee and left to defend himself against claims his advice was inappropriate and unsuitable (without the Licensee acknowledging that they pre-vetted, amended and approved the 'defective' advice);

  • An adviser excluded from his Licensee's professional development events while 'matters' were investigated, and then terminated for failing to attend the events from which he had been excluded;

  • An adviser's compliance review performed by a person with an acknowledged personal conflict. The adviser 'failed' the review, notwithstanding that none of the identified compliance issues could be found, or demonstrated, in the files reviewed;

  • A Licensee who wrote out to an adviser's clients (without the adviser's knowledge or consent) to express their concern about "potentially inappropriate advice". They also called the clients and repeatedly insisted the clients consult a bank adviser to have their situation reviewed. (The adviser's anger was not mollified by the Licensee's eventual confirmation that "no issues were identified").

I appreciate that it's imprudent to rely too heavily on anecdotal evidence, but stories like these are expose the risks and conflicts that are inherent in the Licensee-Authorised Representative model. Conflicts of interests and obligations may be problematic and difficult to identify, but they are not impossible to identify and manage.

Cautious compliance

If you are an adviser, you must appreciate that you, and not your Licensee, are ultimately responsible for your own choices, acts or omissions. Embrace that accountability. Actively engage with their governance team. Subject your Licensee to ongoing due diligence. Insist that your Licensee certifies, on an annual basis, that their measures, processes and procedures comply with the laws. Scrutinise their compliance arrangements with the same vigour their compliance reviewers scrutinise your advice. Propose that external parties conduct the compliance reviews. Contract your own, external, compliance support. Consider getting your own AFSL.

Self-licensing is not for everyone and there are compelling reasons to join, or remain with, an established Licensee. In fact, there are some exceptional licensees with whom you can partner.

Choose well, but whoever you choose, don't ignore the potential risks any Licensee poses to you, your reputation and the sustainability of your business.