Ineffective compliance: 'best interests' and supervision


Since 2012, Licensees struggled first to understand, and then to operationalise and embed, the 'best interest' duty.

While the majority of Licensees eventually embraced this fundamental new duty, some participants failed spectacularly. Unfortunately, their failures don't occur in a vacuum.

Recently, the Australian Securities and Investments Commission pursued two high profile matters based, to a large degree, on the Licensees' failures to ensure that their representatives complied with the law and complied with their 'best interest' duties.

CORPORATIONS LAW – financial advice – obligation to act in the best interests of the client – obligation only to provide advice to the client if it would be reasonable to conclude that the advice is appropriate to the client – where representatives failed to comply with ss 961B and 961G of the Corporations Act 2001 (Cth) in relation to personal advice provided to retail clients – where defendant failed to take reasonable steps to ensure that representatives complied with ss 961B and 961G

The National Sterling Group was first, but Wealth and Risk Management quickly followed.

It's unclear how many other matters ASIC is pursuing, but Licensees should note their unequivocal success to date. 

The NSG case has been addressed in the industry press and spectacularly well by a range of law firms including Allens and iMac Legal.  The law firms have not, we understand, yet addressed Wealth and Risk Management. We suspect that when they do they will find similar themes and causes. 

We’ve addressed advisers' ‘best interest’ duties in previous articles and we observe that advisers' obligations to act in the best interests of their clients remains a key regulatory focus. However, we also observe that ASIC are equally focussed on  Licensees’ obligations to adequately supervise their representatives and to promote, and ensure, compliance with the law.  

It may not be a philosophical change, but it appears that the comforting corporate fiction of the 'bad apple' has been abandoned in favour of a renewed regulatory focus on those responsible for packing the apples

The 'general failures'

Before we begin, please understand that, in our opinion, neither NSG nor WRM are representative of most licensees. Nor were their practices reflective of general industry standards or professional practices.

However, their example should not be dismissed as being entirely irrelevant. Similar compliance failures can be, and have been, found in other licensees (although seldom to the same degree). 

At the heart of both contraventions, was a critical failure to understand and operationalise their legal and professional obligations. (Although their common failure to act on external compliance advice was also important.)

Licensees are required, amongst other things, to act 'efficiently, honestly and fairly' and to ensure compliance with the financial services laws. In response to industry confusion about the extent these obligations, ASIC published Guides, releases and directions to provide current, and prospective, licensees with the information they needed to be able to comply with the law.

Regulatory Guides 104, 105 and 175, in particular, clearly outline ASIC's minimum expectations of an Australian Financial Services Licensee. So consider the significance of the recent observation that: 

WRM’s compliance arrangements could not ensure that its representatives were appropriately trained and competent to provide appropriate advice; and .. [the Expert] has not seen any evidence that representatives are appropriately monitored and supervised.
— Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd (No 2) [2018] FCA 59 at 53

Lessons for Licensees

We appreciate that it's tempting to dismiss these cases as largely irrelevant to most advice businesses.

However, Licensees should not ignore these examples but learn from them.

They should take this opportunity to critically review, and significantly improve, their compliance and governance frameworks. 

They may, if they do so, that their current arrangements are neither adequate nor effective

Our recommendation

Instead of ignoring them, we'd recommend that Licensees take this opportunity for some honest self-reflection. While your existing arrangements may appear adequate, these cases (and other ASIC activity) suggest that even some slight refinement of your compliance frameworks may be prudent. 

The extent of the required changes will depend on the effectiveness of your current arrangements and the type of activities in which you engage. Remember that the 'reasonable steps' you should take to ensure effective compliance, depends on the nature, scale and complexity of your business.  

However, it is important to appreciate that if you are an AFS Licensee, you are required to establish and maintain sufficient compliance measures to ensure (“as far as reasonably practicable”) your compliance with financial services laws.

In our view, this requires Licensees to:

  • Document their measures, processes and procedures, focusing on risks that would adversely affect consumers and the provision of efficient, honest and fair financial services;

  • Regularly monitor and review representatives to ensure their continuing compliance with their legal obligations; and

  • Implement a compliance framework that:

    • is directed to ensuring compliance with the licence obligations (including licence conditions) and any other requirements of the financial services laws that apply to their business;

    • takes into account the specific compliance risks of their business, especially those that may materially affect consumers and the provision of efficient, honest and fair financial services; and

    • equips them to determine how, and to what extent, their representatives understand their compliance obligations.

Clearly, to prove your operational effectiveness as a Licensee, you need to monitor your compliance with your obligations, licence conditions and any other requirements of the financial services laws that apply to you.

You also need to ensure you effectively identify, address and escalate any compliance breaches. 

So where to start?

We'll address that question in a subsequent article (but if you can't wait, email and ask for the "Key questions for Licensees".)