"Regrets, I've had a few": The risks and opportunities with appointing advisers

Yes, there were times, I’m sure you knew
When I bit off more than I could chew
But through it all, when there was doubt
I ate it up and spit it out
— Frank Sinatra "My Way"

Making recruitment make sense

As the Banking Royal Commission has highlighted, advisers have generally enjoyed unfettered mobility between licensees; neither their compliance, conduct nor capability have provided any real obstacle to determined licensees focused on growth.

The obvious limitations of this approach are commemorated on the ASIC website and in Rep515, the Regulator’s  recognition of “inadequate background and reference-checking processes” and releases on strategic changes and cancellation of licenses.

We’ve consistently predicted that financial, regulatory, social and technological pressures will transform the financial services industry. These catalysts are already driving the fragmentation and consolidation of the industry. Unfortunately for many current participants, these trends are only likely to be exacerbated by the findings of the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry.

Although there’s a tendency to see change (and particularly regulatory change) in negative terms, these changes present clear opportunities for those Licensees primed for growth and looking to appoint additional representatives. We’d encourage Licensees to recruit and evolve, but not without taking the following steps:


1. Get your own house in order

The regulator said it began monitoring Guardian after it hired ex-representatives of AAA Financial Intelligence and AAA Shares, which collapsed after having their licences cancelled by ASIC in February 2013.
— Georgia Wilkins, Australian Financial Review, Jan 8 2015

Most licensees appreciate the risks they assume when appointing authorised representatives. Fewer Licensees appreciate that by appointing authorised representatives, they may be exposing, or exacerbating, deficiencies in their own compliance framework.

Guardian Advice provides a constructive example for other Licensees. ASIC’s surveillance of Guardian Advice followed Guardian’s decision to appoint a number of ex-representatives of a cancelled license. ASIC’s surveillance identified weaknesses in Guardian’s systems and controls that first led to additional conditions on the license and then Suncorp’s decision to “exit the financial planning business carried on by .. Guardian advice”.

Before you contemplate any large-scale recruitment, or any recruitment from an impaired, cancelled or collapsed licensee, you should therefore confirm that your own business has:

  • “robust recruitment processes”;

  • Provable capacity to assess and monitor representatives’ competence;

  • Adequate arrangements to comply with your general obligations;

  • Adequate record keeping measures;

  • Effective breach identification, management and remediation processes; and

  • Adequate human and technological resources.

ASIC’s reports and releases confirm that many licensees lack the objectivity and capability to review the effectiveness of their own compliance arrangements. Self-interest, internal conflicts and confirmatory bias undermine their capacity to critically assess their own arrangements.

TIP: Given the real risk that your recruitment activity could attract regulatory attention, an independent licensee review should be your first step.


2. Check references (properly)

proper reference checking by recruiting licensees, and the disclosure of information by former licensees, is an important means of ensuring that the community is protected from adviser misconduct.
— L McCauley, Witness Statement ASIC.0902.0005.0001, para 38

Standard on reference checking in the financial services industry since 2007. Despite the fact that the FSC, FPA, AFA and SDIA worked with ASIC and Standards Australia to develop both the Standard, and practical guidelines, few licensees seemed to implement or consistently follow them.

This is particularly disappointing because, as one of the authors of the Standard, I know we built a practical process by which licensees could better manage appointment risks without exposing themselves to actions from advisers they chose not to appoint.


Unfortunately, while the fact-based verification model was endorsed by the Associations and ASIC, it proved an inadequate obstacle to sales-focused licensees. In the land-war for distribution that preceded FOFA, managers' growth ambitions often trumped both prudence and compliance. In some cases, even ASIC’s warnings proved insufficient. Hopefully, their most recent warnings will not fall on (wilfully) deaf ears.

We note that the Australian Banking Association has implemented a “Reference Checking & Information Sharing Protocol” to address reference checking. Considering that, according to ASIC reports, ABA and FSC members routinely failed to implement the Australian Standard they helped draft, we, like ASIC, wonder whether ABA’s new protocol “will have any substantial impact on industry practice.” 

TIP: Ensure that any referees nominated by the applicant have worked with them in the last twelve (12) months AND have been in a position that required them to supervise, monitor or assess the applicant’s performance.

Use a consistent approach and limit yourself to questions of fact (particularly in situations where the referee might have a conflicting interest). Supplement these inquiries by interrogating google, facebook, Instagram and LinkedIn. Don’t forget to review the adviser’s own website or their twitter feed.


3. Assess their compliance, conduct and competency

We would expect licensees who take on representatives previously authorised under licensees that have been the subject of ASIC action to be especially prudent, recognising they may have been exposed to a less robust or non-compliant supervisory environment.
— Peter Kell, ASIC 2014

As an authorising licensee, your general obligations require you to make reasonable enquiries into the identity, skills, conduct and competency of any proposed representative.

Licensees approach to these requirements vary, but, in general, most licensees check whether the candidate is, or has been:

a)     the subject of ASIC enforcement action in the past;

b)    dismissed from any position for dishonesty or unethical conduct;

c)     subject to any claim or complaint;

d)    bankrupt or entered into arrangements;

e)    been charged or convicted of an offense with a custodial sentence;

f)      appropriately trained, educated and assessed.

These checks often involve the Licensee’s consideration of the applicant’s certified qualifications, their resume and the references they supply. These are good steps, but they still fail to satisfy the Australian Standard. Criminal history checks, bankruptcy checks and searches of the relevant ASIC registers are minimum requirements.

We’d also advise licensees to place little, if any, reliance on the adviser’s previous compliance reports. Even without considering the deficiencies highlighted by ASIC’s REP 515, the value of the compliance reports depends on the capability and competence of those performing the reviews. Unless you are satisfied by their methodology and diligence, it’s dangerous to draw conclusions or inferences from those reports. In our opinion, a Licensee should consider, but not rely on, historic compliance reports.

We’ve seen too many examples of Licensees, or reviewers, limiting the scope of the compliance review so significantly that the issued report is useless or misleading.

TIP: Have your own compliance team (or an external provider) review at least eight (8) client files before appointing any adviser from another licensee.

Remember to check the ASIC Registers including the

  • Banned & disqualified persons
  • Professional Register
  • Financial Adviser Register

Carefully assess their qualifications and experience against FASEA’s proposed requirements. Exercise caution before appointing any adviser that doesn’t currently meet the requirements or isn’t likely to meet them without significant effort.


4. Tailoring your monitoring and supervision arrangements

Licensees need to assess the competency of representatives at the time of appointing them and put in place rigorous checks to ensure financial services provided by them are of the expected standard.
— Peter Kell, ASIC 2014

One of the purposes of reference checking is to identify whether the advisers you propose to recruit need additional supervision or remedial support. It’s important to appreciate that identifying the adviser’s specific needs is only half the solution, you also need to design and deliver the additional support they need.

Your approach will be determined as much by the nature, scale and complexity of your business as the specific needs identified. In our view, all advice produced by new advisers should be pre-vetted by the licensee unless, or until, the adviser demonstrates their capacity to meet, or exceed, the licensee’s expectations for quality advice.

We understand that some licensees eschew quality in favour of compliance but, in our opinion, setting higher standards from appointment is a more prudent and sustainable approach.

In addition to articulating and enforcing your internal standards, you should determine (prior to appointment) some key elements of your pre-vetting arrangements such as:

  1. How many times can an SoA be re-submitted for pre-vetting before an ‘incident’ is noted and escalated;
  2. How many SoA’s must be approved (without correction or resubmission) before the adviser graduates from pre-vetting; and
  3. How long can an adviser remain on pre-vetting before an ‘incident’ is noted and escalated.

TIP: In any event, we recommend that a new adviser is reviewed within twelve (12) months of authorisation or appointment.


5. Consider an application fee

It’s not about the money, money, money
We don’t need your money, money, money
We just wanna make the world dance
— Jessie J "Price Tag"

Traditionally, advisers were the key to the sustainability and growth of the Licensee. Advisers often determined the terms and conditions of their appointment as Licensees competed to recruit or retain them. However, recent events have demonstrated that advisers are also the biggest threat to the sustainability and growth of the Licensee.

It’s reasonable to anticipate additional compliance obligations as a result of the misconduct and maladministration identified by the Royal Commission. Add in the increased regulatory focus on grandfathered arrangements, asset-based fees and ongoing-fee arrangements, and you’ll reasonably conclude that the financial pressure on licensees is only likely to increase.

While most participants hope that this financial pressure increases more slowly than the additional compliance obligations, the Licensee’s balance sheet will inevitably suffer. Over the long term, we believe that a Licensee’s investment in compliance will deliver financial benefits and be a source on competitive advantage, but in the short-term compliance obligations (including the measures recommended above) will have an immediate cost. We’d suggest you mitigate that impact by requiring that prospective advisers pay an application fee.

I appreciate it’s a counter-intuitive suggestion for an industry too often focused on the size of their distribution team rather than their quality. However, an up-front application fee provides the Licensee with the resources to undertake an effective due-diligence process to determine whether the prospective recruit has the character, competency and capability to justify their appointment. Even if the up-front ‘application fee’ is deferred, waived or recovered in instalments from successful applicants, it automatically filters out those advisers likely to increase your costs or risks. Accordingly, it provides reassurance to the Licensee’s current advisers that neither the Licensee’s standards nor their risk-profile will change as a result of imprudent recruitment decisions. It should also reassure potential recruits that the Licensee they’re seeking to join takes compliance seriously.


non, je ne regrette rien
— Edith Piaf

A Licensee’s ‘robust recruitment processes’ have to be tailored to the nature, scale and complexity of their business, but there are minimum requirements that should be incorporated. In addition to the matters addressed above, we’d suggest that a prudent Licensee should hesitate and defer any decision to appoint an adviser that:

  • Submits an incomplete or obviously inaccurate application form;
  • Identifies material conflicts (such as directorships or shareholdings) that cannot be managed;
  • Is bankrupt or a discharged bankrupt;
  • Has not satisfied their CPD requirements;
  • Is not qualified;
  • Is, or within the last year was, subject to ASIC action (investigation, surveillance or media release);
  • Cannot provide previous compliance reports;
  • Cannot provide a complete copy of all client records;
  • Is subject to investigation by their professional association;
  • Has served a custodial sentence for any offence; and
  • Insists that you’re lucky to be approached by an adviser of their experience and quality.

If you have questions, or would like help refining your recruitment and due diligence processes, please contact us at assuredsupport.com.au