Our Gap Year: Comprehension, Compliance and Capacity.

Gaps in Comprehension

In March 2019, ASIC released Report 614 titled “Financial advice: Mind the gap” summarising their research into consumer understanding of the differences between general and personal advice.

No responsible licensee would be surprised to learn that ASIC’s research identified “substantial gaps in consumer comprehension”.

© ASIC March 2019 | REP 614 Financial advice: Mind the gap, page 10

© ASIC March 2019 | REP 614 Financial advice: Mind the gap, page 10

Understanding and intent

In fact, we’ve noticed some advisers demonstrate similar difficulty in grasping the differences.

Nor would Licensees be surprised to learn that the disclaimers and warnings they offer do not effectively educate consumers or bridge this knowledge gap.

The report should be carefully considered by Licensees and advisers in the context of the significant changes in the regulatory environment in which they operate.

Fundamentally, ASIC’s research suggests that:

  • general and personal advice are not familiar concepts for consumers

  • general and personal advice are not clearly distinguishable concepts for consumers

  • advisers’ responsibilities when providing general and personal advice are unclear to consumers

  • Contextual, construals and environmental factors are critical for interpreting advice

  • Warnings are not necessarily effective.

TIP: It may be too early to call, but review your current business model to identify, and differentiate, your ‘advice’ activities. Consider whether you’re providing factual information, product sales or personal/tailored recommendations. Consider what best suits your model and how you can best present your services.

© ASIC March 2019 | REP 614 Financial advice: Mind the gap, p12

© ASIC March 2019 | REP 614 Financial advice: Mind the gap, p12


Gaps in Compliance Arrangements

In previous articles, we’ve urged Licensees to review their compliance arrangements in anticipation of ASIC surveillance. We’ve also warned advisers to critically assess the capabilities of their Licensee and the effectiveness of their compliance arrangements.

The value of those warnings were recently highlighted by ASIC’s decision to impose additional licence conditions on SMSF Advisers Network Pty Ltd (19-077MR).  

In this case, ASIC’s surveillance was triggered by “a significant increase in adviser numbers .. in a relatively short period of time”.

ASIC observed that the SMSF Advisers Network had inadequate supervision arrangements in place to ensure that the advice, and advisers’ conduct, complied with the law. As a consequence, ASIC imposed additional licence requirements including the independent review of their supervision mechanisms.

Unfortunately for all those involved, the rapid growth highlighted, or exacerbated, the licensee’s failure to effectively scale its arrangements. Essentially, the Licensee appears to have outgrown its effective compliance capacity and did so without any appreciation of the likely consequences.

It’s tempting to dismiss the Licensee’s failure as anomalous, but the opportunity for growth created by the vertical disintegration of the larger licensees will create similar problems for other ambitious licensees.

If you’re a licensee, remember to regularly review your capacity (and competence) to ensure it’s adequate for your current and anticipated business. Invest in compliance, either before or while you grow.

Don’t assume that, at some future point, you’ll have time to address the gaps and inadequacies of your compliance arrangements.

If you’re an adviser looking to join a new licensee, ensure that you’re not committing your business and reputation to a Licensee that lacks the capability to sustain it.

The requirement for Licensees to have “the necessary human, financial and technological resources” was also reinforced by ASIC’s decision to impose additional licence conditions on AMP Financial Planning (19-078MR).

In a decision surprisingly unrelated to either the Royal Commission or ‘Fees for No Service’, ASIC responded to AMP’s application to vary their AFSL by imposing additional conditions for adequate monitoring, supervision and training.

If you are contemplating either applying for, or varying, an AFSL it’s critical that you appreciate that ASIC ‘expects to see improvements in the standards of supervision, conduct and compliance across the financial advice industry”.

In an environment of proactive and pugnacious regulation, can you really afford ineffective compliance arrangements?