Assessing Licensee risk: "Clowns to the left of me, Jokers to the right"

Compliant Licensees are all alike; every non-compliant licensee is non-compliant in its own way
— Leo Tolstoy, Anna Karenina

We're fortunate enough to have the opportunity to meet lots of advice professionals, visit advice practices, review hundreds of client files, resolve complaints and help with remediation. We also undertake independent reviews of licensees - either at their request or another's direction - so I'm confident we've got a solid, practical and evidence-based view of the financial services industry. 

Perhaps this is why my perspective of the financial services industry differs so starkly from those of other commentators.

In his otherwise excellent article "Choose your next licensee carefully", Matthew Smith used the collapse of Dover Financial Advisers Pty Ltd ("Dover") and external data to assert that "adviser mobility and education standards are two important factors" in assessing the risk that a Licensee might attract regulatory attention.

I appreciate that his article echoes an external editorial, but the 'ranking' methodology on which both rely is of questionable utility; it relies on lag indicators, unconfirmed data and simple correlation. Worse, it lacks any qualitative overlay or interrogative rigour.

Hubris & folly

Hoven ... admitted the rankings were imperfect because they relied on data that might not be entirely up to date; however, he stood firmly behind the correlation borne out in the data between licensee risk and education levels/adviser mobility.
— Matthew Smith, Professional Planner

I understand the challenge of providing consistent and defensible rankings; rigorous benchmarking is, after all, a key element of our reg-tech solution. I also appreciate the appeal of association and, in defence of the author, I'll acknowledge that correlation doesn't necessarily indicate causation (but it can). 

Unfortunately, neither qualifications nor adviser mobility are the best indicators of 'Licensee risk'. They are not even reliable predictors. In reality, the underlying causes of licensee risk can't be accurately divined from publicly available data, or at least not without considerable time, energy and application. 

Extracted from M White "Choose your next licensee carefully", Professional Planner June 2018

Extracted from M White "Choose your next licensee carefully", Professional Planner June 2018

The real indicators

In my view, the most-relevant factor in assessing Licensee risk is the Licensee's leadership team.

If we consider Dover specifically, I'd suggest that what caused their inevitable downfall was not the number of their advisers or their "avg licensee per adviser" but the fact that Mr McMaster was the sole director and key person for a business that "at 1 June 2018, had appointed 390 authorised representatives".

In my experience, organisations (particularly large and complex ones) that do not have a diverse management team with the courage, experience and imagination to challenge each other, or question their own decisions, is too big a risk to countenance. 

I suspect ASIC had a similar view.

If you've read the Enforceable Undertaking you'll have noticed ASIC's concerns with "Mr McMaster, in his individual capacity and in his capacity as a responsible officer". The EU makes no mention of breach management, monitoring and supervision or adviser competence.

The reason our Licensee reviews run over multiple days is because it's practically impossible to accurately assess the nature, scale and complexity of the business without interviewing key people, carefully reviewing their documents and testing both in the context of the advice produced under their supervision. I don't believe you can understand a Licensee without questioning their views, challenging their assertions and testing how their policies really work.

There is no silver bullet or single metric.

In my experience, the best way to determine what a Licensee is likely to do in the future is to learn what they've done in the past. A somewhat more practical step is to examine the capability, competence and reputation of the Leadership Team. I've found that, in the course of a relatively short interview, the Management Team can inadvertently reveal 'licensee risks' that would otherwise take significant effort to identify.

Whether a Licensee formally, or substantively, complies with their legal obligations isn't revealed by what they say (policies), but in what they do (conduct).

The quality, competence and capability of a Licensee's "leadership team" is even more important than the formal governance structure implemented by the Licensee. A Leadership team that is a 'Boys Clubs', a Personality Cult for the Founder, or a sounding board for the owner is neither healthy nor effective. They are instead, as recent Regulatory actions have highlighted, significant compliance risks.

TIP: Review the Organisation Chart, shareholdings and charters. Review minutes to assess uniformity of decision making. Google the leadership team. Match their CV (or public record) against their LinkedIn record. Look for overlap in the companies in which they've worked. Investigate who awards bonuses and how they are calculated). 

Growth, risk and regulatory action

The apparent strong-arming of Dover to shut down without a formal warning could be the advent of a new era of ASIC surveillance and enforcement. This coincides with an extraordinary period of massive adviser losses from the industry combined with accelerating adviser switches between licensees, putting further strain on advice processes and compliance systems that are struggling to maintain the status quo.
— Editorial, Adviser Ratings

A Licensee's turnover, and their rate of growth, are as Adviser Ratings note, useful indicators of stress. They are only useful indicators of risk when the Licensee lacks the capacity, processes and systems to cope with the increases. 

Clowns to the left of me,
Jokers to the right, here I am,
Stuck in the middle with you
— Stealers Wheel, "Stuck in the middle with you"

We've consistently warned advisers that their Licensee can be their greatest risk, and highlighted the almost-Faustian bargain between advisers and their Licensees, but we also recognise that there are some extraordinary licensees working with their representatives to provide advice that their clients need and value. 

It's useful to benchmark - we do it - but it's dangerous to assess risk on the basis of associated factors unless you've got the right ones. I don't intend to outline them all, but if I were an adviser considering a new Licensee, I'd want to consider: 

  1. The reputation, competence and capability of the Leadership Team and Responsible Managers;

  2. The reputation, competence and capability of Head of Compliance;

  3. Monitoring and supervision data (distribution of results);

  4. The liability clauses in the Authorised Representative Agreement/Employment Agreement;

  5. Claims, complaints and action data;

  6. Financial data (profit and reinvestment);

  7. The Licensee's APL (content and construction);

  8. Their internal Bonus/Incentive schemes;

  9. Turnover of staff/advisers;

  10. Ratio of compliance staff to advisers.

Clearly, there are other matters we'd recommend you consider to appropriately assess the risk your prospective licensee poses, but these ten are a good place to start. It's an easy list to apply. Work through the matters in sequence and, if at any time you're not satisfied with the information you receive, stop and consider another licensee.

Choose well and, if you need help, contact us.

Are there other factors you think indicate that a Licensee is "high risk"? Share your thoughts and start a conversation. 


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