Getting to the right place: Research and Approved Product Lists

 
Would you tell me, please, which way I ought to go from here?’
’That depends a good deal on where you want to get to,’ said the Cat.
— Lewis Carroll, Alice in Wonderland
 

Recently, a user read our PJC article and asked us to provide “APL detail please”.

It’s unclear whether they sought information on how or why an APL is created and managed, or wanted an APL template that they could use in their business.

Presuming they sought information, we thought we’d re-address the core concepts.

For most Licensees, their Approved Product List (“APL”) is the single, definitive list of the financial products (including platforms) with which their Representatives are authorised to advise and deal.

It’s difficult to be entirely exclusive, and most Licensees support their APL with processes that detail when, how, and in what conditions, a Representative may obtain a special approval to recommend a non-APL product.


What DOES an APL DO?

An Approved Product List is simply a governance tool and risk management device for a Licensee.

Essentially, it provides a curated list of researched and verified financial products which advisers can consult before providing financial product recommendations.

The APL is not intended to prevent or restrict an adviser from acting in their clients’ best interests. Neither is it designed to dissuade advisers from recommending non-APL products that are better suited to their clients’ objectives.


Why is an APL needed?

There are those that might argue that the APL is a control function designed to promote in-house product sales.

Some Licensees may prove the truth of that cynical definition, but the reality is that few or any advisers have the knowledge, skill competency or time to research and consider every financial product that might satisfy a client’s needs and objectives.

The APL reduces the burden on advisers by offering a list of a range of financial products that have been researched, assessed and confirmed. Better yet, the list is regularly updated to reflect, amongst other things, economic circumstances, product changes and prudential issues.


The maintenance of an APL, which is essentially a curated list of researched and verified products, delivers efficiencies to the adviser, and their clients, by excluding products and providers that are unsustainable or unsuitable. In practice, however, the APL has been used as an excuse for inappropriate and conflicted recommendations, a tool for maximising group-product sales and a substitute for considered and un-conflicted advice. More perniciously, some licensees have used their APL for revenue generation, charging product issuers substantial fees for inclusion on the APL.
— Sean Graham, April 3, 2018

An APL is not a straight-jacket but a resource that assists competent advisers to provide appropriate recommendations in the best interests of their clients. We’d also suggest that the APL is only one part of a competent Licensee’s research function.

In fact, any effective compliance, governance and risk management system should incorporate research policies, processes and procedures that:

  • prioritise the interests of clients;

  • ensure that the product recommendations provided to them are in their best interests;

  • assists advisers to provide appropriate and suitable advice to clients from a diverse and considered range of financial products;

  • confirms how the Licensee manages financial product research and analysis;

  • demonstrates that the Licensee has implemented arrangements to

    • ensure their financial services are provided efficiently, honestly and fairly” (s912A(1)(a)) AND

    • evidence “adequate arrangements for managing conflicts of interest that may arise .. in [their] financial services business (s912A(1)(aa));

  • shows a robust, critical and functionally-independent approach to assessing third party research; and

  • Provides clarity for advisers on the treatment of products on the approved product list (particularly with respect to s961B(2)(e) of the Corporations Act).


Can non-APL products be recommended?

The APL should not prohibit the provision of appropriate advice nor restrict advisers’ recommendations to financial products issued by their Licensee or associated entities.

An APL doesn’t have to be exhaustive, or include every financial product available in your market, but it should provide a broad enough selection to facilitate the provision of suitable and appropriate advice.

A small APL may be entirely adequate in many cases. A large APL may still have gaps and lack solutions to specific needs or strategies.

This is why prudent Licensees support their APL with processes and procedures that explain when, and under what circumstances, advisers can recommend non-APL products. These processes will often also address how products can be recommended for inclusion on the APL.

In general terms, in order to obtain individual approval to recommend a non-APL product, an adviser should be required to:

  • Identify and adequately the non-APL product or the relevant platform;

  • Explain the reasons why approval is needed, and, if applicable, explain why a similar product already on the APL is not suitable; and

  • provide the Licensee with a list of those clients which their analysis suggests will be materially and adversely affected by the product’s exclusion from the APL.

 


Our recommendations

In anticipation of the final report for the Banking Royal Commission, we’ll repeat the recommendation we made after reading the PJC Report.

Your fundamental obligation as a Licensee is to act “efficiently, honestly and fairly”. Consistently poor product recommendations, misrepresentation of products and returns, and high sales of in-house products are all suggestive of failures of your compliance arrangements (and breaches of the law and your license conditions).

Consider whether the APL itself is manageable. If you have minimal or no restrictions on your APL, and little or no internal resources, can you effectively research and verify each product on your APL? Can you also keep track of product changes and adequately consider performance and market issues?

Even if you don’t see any issues in your business, take this opportunity to review your APL and the research methodology that underpins it. In addition, take two specific actions immediately:

  1. Formally consider whether your APL adequately balances consumer and commercial needs; and

  2. Review your remuneration arrangements and your 'best interest' training and policies.