Anticipating ASIC: Get your house in order

Oh, it ain’t no fun no more
I don’t know what to say
The honeymoon is over, baby
It’s never gonna be that way again
— The Cruel Sea, "The Honeymoon is Over"

No time for enemies

There's a story, that might well be apocryphal, that when Voltaire was on his deathbed, his Confessor asked him to reject the Devil and his works.

"Monsiegneur" he replied "this is no time to be making enemies".

The financial services industry has endured a dramatic and revealing year.

The Royal Commission has exposed practices and attitudes that surprised even the most cynical observers and, in a highly regulated and highly scrutinised industry, the gap between legal obligations and tolerated conduct seems inexplicable. More troublesome than some larger licensees' laissez-faire approach to compliance is the stark absence of any consequences for their (seemingly deliberate) failures. 

Time will tell whether ASIC's historic responses to these cultural failures were the result of impotence, ignorance or regulatory capture but it does appear that we'll soon be working with a more effective, more efficient and more predictable regulator. The Australian Government has signalled their broad agreement with the need to bolster ASIC's powers.

In their April 2018 response to the ASIC Enforcement Review Taskforce Report, the Government undertook to "develop legislative amendments" to increase ASIC's powers. Although many of the Government's planned responses will be deferred to "enable it to take account of any findings out of the Royal Commission", ASIC's powers will be increased.

Those that appeared at the Royal Commission may be reassured to learn that ASIC's power to "ban a person from performing a specific function, or any function, in a financial services or credit business" has not yet been granted. For those of us who anticipate a career in financial services, or wish to maintain our businesses, it's worth taking the time to consider both their perspective and their recommendations to us.

The best place to start may be with James Shipton's speech on the Trust Deficit at the Financial Services Council Summit.  


Conflicts. Conflicts. Conflicts. 

First, there needs to be wholesale review of conflicts of interests in firms, sectors and markets to identify, manage and, if appropriate, remove every single conflict of interest.
— James Shipton, ASIC Chair

Shipton's observation "there has been reluctance, and often times, resistance to addressing conflicts, especially those embedded in remuneration", would surprise few.

While some might suggest that the Industry has simply taken ASIC's advice to avoid conflicts a little too literally, the reality is that transforming a product distribution function into an advice profession requires more than rhetoric and regulatory catalysts.

Practically, participants require either an incentive to change - particularly where there is no first mover advantage - or disincentives for not changing. In the absence of either, should any observer be surprised that conflicts have been so poorly addressed by the institutions that benefit from them?

Unfortunately for many, change is coming. Financial planners are friendless in Canberra. The Royal Commission is unlikely to recommend less regulation. So the prudent course of action might be to consider the changes which ASIC think will help, including:

  1. changing your remuneration model to reduce the risk of poor consumer outcomes;

  2. moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes; and

  3. moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition. 

You might also have noticed that the banks seem to be leaving advice with unseemly haste, either selling their businesses to less risk averse competitors or shutting up shop entirely. While Westpac seem to be an outlier in this regard, most commentators are interpreting these decisions to exit advice as early recognition that 

the big banks’ vertically integrated wealth management business is finished.
— Michael Pascoe "Banks’ vertical integration wealth management - going, going, gone", SMH 12 April 2018

We think it's premature to announce the death of vertical integration. The motivations for the Banks' sales are no more certain than the Government's final position on vertical integration. In any event, we think that non-institutional licensees need appreciate that the conflicted arrangements that were previously ignored, or even accepted, are unlikely to be tolerated in the future. 

TIP: Review your activities against Regulatory Guide 181 "Licensing: Managing conflicts of interest".

  • When you engage in this review, abandon the academic approach. Look at your activities and revenue for the last 6-12 months, and map what products and services you've recommended. Look for associations, referrals, remuneration or other arrangements that might reasonably be considered to have influenced your recommendations (or their inclusion of products on your Approved Product List). Start by:

    • Identifying the various conflicts,

    • Thinking about how well (or whether) you've managed the identified conflicts,

    • Considering whose interests were given, or are being given, priority, and

    • Remove, avoid or cancel any conflicts that are fundamental or can't, in reality, be effectively managed.

  • Managing conflicts of interest is NOT simply a matter of disclosure. Disclosure may not be enough particularly when the the arrangement or benefit compromises your fundamental duties (Best Interest and Client Priority).


As I have said to the new boss [chair James Shipton], you’ve got to act quickly, you’ve got to be severe, you’ve got to be feared. If you’re not a feared regulator, people are going to continue to abuse the system, do the wrong thing without fear of the punishment.
— Senator John Williams (NAT), "The Conversation" April 23, 2018


Intention, insight and interest 

Second ... there must be greater senior management attention to conduct issues that lead to poor consumer outcomes.

Few of the Executives that appeared before the Royal Commission restored public confidence or left "trailing clouds of glory".

Interminable delays in breach reporting, Management's embrace of "strict and complete legalism" instead of fairness and reason and Licensees' relaxed approach to monitoring and supervision, reinforced the popular perception that the financial services industry is largely unregulated, ineffectively policed and often incompetently managed.

Commissioner Hayne's final report will confirm his view of the industry but, in our experience, most non-institutionally owned Licensees take an active interest in their compliance arrangements.  

ASIC, reasonably enough, expect all Licensees to take an active interest in their compliance arrangements. But we anticipate that they'll no longer tolerate Licensees that do no more than appearing to take an active interest in their compliance arrangements.

In our view, ASIC will increasingly look to the substance of your compliance arrangements and not just their form. 

there is an urgent need for investment in systems, procedures and policies that better and more quickly identify emerging conduct and systemic issues so that they can not only be reported to us more quickly, but so that can be resolved more quickly.
— James Shipton, ASIC Chair

Remember, the law requires a Licensee to comply with the financial services laws and act "efficiently, honestly and fairly". Despite this core obligation, the Royal Commission exposed how poorly some Licensees satisfied these requirements.  ASIC has been quick to respond.

Dover is unlikely to be the only casualty of the Regulator's renewed focus.

Thankfully, most well-run Licensees have already increased their investment in compliance and they've secured a significant competitive advantage over their peers. 

We're already seeing an increased interest in innovative compliance platforms.  

The refreshing aspect in light of Mr Shipton's comments is that these Licensees didn't wait for ASIC to suggest that "There needs to be more investment in management systems and processes to capture, diagnose and remediate conduct issues earlier, quicker and more efficiently. This includes the adoption of emerging regtech solutions". They recognised the critical need for compliance technology and acted. 

TIP: Take the time to understand the problems you're trying to solve and look for platforms that provide:

  • A conduct-focussed monitoring and supervision framework;

  • An effective risk management framework;

  • Granular reporting and benchmarking;

  • Integrated remediation and consequence management;

  • Embedded advice metrics and trend analysis; and

  • Consistent and fully auditable management of complaints, incidents and breaches.

Surviving "Stockholm syndrome"

The third initiative that I think industry leaders can pursue is to refresh – or if necessary, create – their strategy for dealing with regulators.
— James Shipton, ASIC Chair

Ironically, Mr Shipton's criticism of the Financial Services Industry could be applied, equally validly, to ASIC itself. 

To their credit, ASIC leaders have not been afraid to admit their errors and missteps. Publicly, they're acting in a manner that may, if it translates into consistent action, disabuse those commentators who suggest ASIC too frequently acts in the interests of the businesses it's meant to regulate.

It's more convenient to suggest regulatory capture than admit that ASIC may not have the resources, powers and political support necessary to effect real change, but the accuracy of this assertion will be soon tested. 

ASIC's powers are likely to be increased and the momentum provided by the Royal Commission should empower them to take a more active regulatory role.  

In our view, all Licensees should be advocating for a consistent, predictable and effective regulator. But instead of simply advocating for this outcome, Licensees should assume an active role in regulating themselves and the industry.

We appreciate that this suggestion may be interpreted as Stockholm Syndrome - a victim's feelings of alignment, trust or affection for their captor - but it's simply a matter where principle and pragmatism combine. 

There is a trust deficit. Licensees, and advisers, understand this. They also understand that, unless and until, the industry becomes a real profession it will suffer as a result. The traditional passivity embraced by most Licensees is, in our view, a poor strategy for an industry on the threshold of transformation. The better approach for medium to large Licensees is to participate, lead and collaborate.

Institutional licensees often have resources dedicated to regulatory engagement, association representation and industry advocacy. The influence of institutional interests on regulation, policy development and advocacy is undeniable. As the institutions retreat from advice, it creates an opportunity (and an obligation) on the non-institutional Licensees to act to shape the future of advice. 

TIP: Review your Regulatory Engagement policy.

  • Consider whether you can allocate resources to either direct regulatory engagement or indirect engagement through your preferred Association.

  • Consider whether you're aware of misconduct that should be reported.

  • Review your strategies for escalating and reporting issues.