“Our thoughts shape our language, but our language also shapes our thoughts. The zeroth step in creating humane workplaces is to start talking about the people not resources.”
— Esther Derby
If you’re self-licensed, or starting down that path, you’ve no doubt read and absorbed Regulatory Guide 104 “Licensing: Meeting the general obligations”. This regulatory guide addresses compliance and risk management, monitoring and supervision, training and the technological and other resources needed to demonstrate compliance with your general obligations.
In our experience, it’s the ‘people’ element that seldom attracts the attention it deserves. Even those Licensees that invest in, and closely manage their finances and technology, often fail to adequately to consider their people or the measures, processes and procedures that support their recruitment, development and ongoing management.
Large licensees, particularly institutional licensees, have formal procedures in place to address regulatory expectations and optimise productivity. Some even address staff well-being and professional development. However, as the Royal Commission identified, these formal procedures are neither consistently applied nor consistently effective.
Small to medium licensees, despite being more directly impacted by employees’ contributions, attitudes and values, seldom approach recruitment, retention and development is a structured and consistent manner. ASIC might not require licensees to support recruitment and promotion decisions on psychometric testing and personality profiles, they recognise the compelling commercial and professional reasons for ‘people strategies’ that align a licensee’s obligations to their capacity, purpose and overarching business goals.
The good news for small to medium licensees is that ASIC acknowledge the relevance of ‘nature, scale and complexity’ and allow Licensees to scale their arrangements in proportion to their scope and activity. More practically, smaller licensees are often more flexible and more responsive to change. In the wake of frequent and significant regulatory changes, the ability to quickly ‘course correct’ may be the key adaptive advantage of self-licensed businesses.
ASIC, adequacy and management metrics
ASIC hasn’t prescribed minimum staffing levels but expects you to regularly review your staff numbers (and assess their competency) by considering:
- the number of your active clients;
- your client review frequency;
- the number of your representatives;
- the roles and functions of your representatives;
- your succession planning for staff absences;
- the number of transactions into which you are likely to enter;
- the likely size of the transactions;
- the nature of the products with which the licensee is involved;
- the types of financial services offered by the licensee;
- the level of the IT system used, if used.
Although some Licensees (and some consultants) may assert that there are metrics and ratios that Regulators use to assess the adequacy of your ‘human resources’, ASIC’s approach is far more nuanced and realistic.
In reality, the human resources needed by a Licensee to comply with its general obligations will vary enormously between licensees based on:
- the Licensee’s Standards and Guidelines;
- the maturity of the underlying advice businesses;
- the Licensee’s focus (retail v wholesale AND personal v general advice);
- the Licensee’s automation and systems;
- the Licensee’s oversight capability; and
- the number, frequency and value of the financial transactions.
People and Culture
Even in robo-advice businesses, people are a licensee’s most important asset.
Ironically, neither people nor culture scale without care and consideration.
How you hire, educate, motivate and fire your employees significantly affects your business and culture.
Here are four elements that a prudent Licensee will effectively address in its compliance framework.
One: Recruitment and succession planning
Given the war for talent, Licensees often have to commit considerable time, money and energy to finding capable and competent staff on order to thrive. Logically, any errors made in the recruitment process may have far reaching implications to their business.
Quite apart from the direct financial costs and business disruption, poor succession planning, particularly where the Licensee is relying on a ‘key person’, can be highly problematic if not catastrophic.
Hiring mistakes are costly and timely. Ensure your hiring practice include a robust process to help identify, vet, test and qualify the candidate.
Often a candidate may present well during an interview, but lack the competencies to perform the role. In other times, the candidates misalignment to your culture is not obvious. Your intuition and interview skills may be impressive, but an interview (or even a succession of interviews) can be biased by misleading behavioural and situational observations.
It’s important to have structured processes and competency testing at the heart of your recruitment process. More importantly, every Licensee should ensure they have robust reference checking processes in place.
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Given these risks, it may be prudent to supplement your interview process with pre-employment testing. There are a variety of diagnostic tools and tests available to determine a candidate’s capability in relation to critical reasoning, numeracy, behavioural preferences and cognitive abilities.
We’d also recommend administering a competency test (or capability assessment) to measure their current technical competencies against the competencies required for the role.
Two: Inducting and training new staff
“The only thing worse than training your employees and having them leave is not training them and having them stay.”
— Henry Ford
If your sustainability is premised on your success embedding ethics and values it in the DNA of your business, then the behaviour and attitude of the people working in it is a critical component of your ongoing success.
Successful induction extends beyond hiring and providing your employee with a detailed job description. It’s about aligning expectations and norms of conduct and confirming your expectations, policies, culture and value.
Ongoing training, regulated through the general licensing obligations, requires regularly scheduled training that is well planned and executed. Don’t dismiss ongoing training as another compliance impost. Research has consistently shown that an investment in training delivers:
- A competitive advantage for attracting, recruiting and retaining talent;
- Increased employee engagement and loyalty;
- Decreased attrition (and decreased re-employment costs); and
- A more capable, resilient and flexible workforce.
If you need an additional reason to focus on staff development, remember that the Courts have been unsympathetic to Licensees that failed to invest in the training and development of their teams.
In light of the Royal Commission’s findings, it may be more useful to see ‘induction’ as an ongoing commitment rather than a point in time process. Although a Licensee’s monitoring and supervision framework should identify and reorientate outliers, it’s the Licensee’s performance management processes that do the same for non-advice staff.
Three: Performance Management
“remuneration and incentives, especially variable remuneration programs tell staff what the entity rewards. Hence, remuneration and incentives tell staff what the entity values. Remuneration both affects and reflects culture. As the Commission’s work has shown, and is now not disputed, poor remuneration and incentive programs can lead, and have led, to poor customer outcomes.”
— Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p335
In any sustainable and successful business, trained and well-managed staff are more invested in their jobs and the company’s success.
Many Licensees have proven successful in aligning the interests of their staff with the Licensee’s interests, but have often done so at their clients’ expense. The moral imperative was articulated by Commissioner Hayne and reflected in a variety of forums.
Simply put, performance management must not be limited to assessing employee performance against financial metrics, but must measure against, and align to, legal and ethical obligations and community expectations.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry identified that sales-focused cultures exacerbate conflicts, which, in turn, negatively affect advice quality and consumer outcomes. The Commissioner observed that remuneration models, and the measures, processes and procedures implemented to manage and incentivise staff have created a fundamental divergence between clients’ interests and the interests and duties of the clients’ advisers.
The professionalisation of the financial planning industry requires, in the view of Commissioner Hayne, significant changes to management, structure, systems, processes, culture, education standards and remuneration.
This is a reasonable position but one that needs to be balanced against commercial realities including the significant costs associated with providing financial advice and services. Given that conflicts can never be entirely removed, ASIC have suggested that these might be more effectively managed and mitigated through the adoption of a ‘balanced scorecard’ approach.
For clarity, a ‘Balanced Scorecard’ is a performance management mechanism that ties benefits and discretionary remuneration – such as bonuses – to a matrix of multiple, distinct and often competing responsibilities. The Balanced Scorecard model recognized the significant limitations caused by the singular focus on financial measures, and proposed an alternative that better aligns strategic and operational matter. By balancing competing perspectives (customer, financial, internal and learning) Norton and Kaplan proposed a model that was seen to be more likely to better align interests, objectives and outcomes.
Although academic research suggests that ‘Balanced Scorecards’ are less effective in ensuring compliance than fixed remuneration models, they remain a widely used, and generally accepted, management tool. Part of their appeal may lie in the fact that a properly weighted balanced scorecard can allow Licensees to receive benefits that would otherwise be ‘conflicted remuneration’ and prohibited by s963L. The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011. Although they are generally applied to ‘sales’ and ‘advice’ staff, they have a broader utility when well-considered and consistently applied.
The Royal Commission highlighted that personal incentives should be based on a range of measures and that ‘sales’ should not be the principal determinant. Interestingly, it also suggested that staff should not be rewarded for complying with the law – compliance should be expected and not treated as discretionary effort. While it’s not reasonable to reward individuals for complying with the law, it is prudent, if not essential, to withhold personal incentives from those who do not comply (and claw-back paid incentives if misconduct is subsequently detected).
These factors suggest that now is the best time for Licensees to review their employment contracts and performance management systems.
The Regulators may exercise restraint in commenting on some commercial matters but their increasing focus on culture, remuneration and competency should herald a more direct focus on how licensees manage their people. While they are unlikely to lessen their focus on the monitoring and supervision of a licensee’s representatives, it would be prudent to anticipate a broader focus on your people. Compliance, in this respect, requires Licensees to invest in their employees, to communicate clearly, set expectations and provide feedback in the form of regular performance discussions and evaluations.
Four: Staff ‘off-boarding’
It is as important to properly manage the departure of a staff member (termination or resignation) as it is to carefully manage their recruitment and appointment. In some respects, departures can me more material – particularly if a ‘key person’or Responsible Manager is being ‘off-boarded’.
Where the employee’s departure is voluntary, Licensees should ensure that departing employees leave with a positive mentality and favourable opinion of the company. Where you have an employee off-boarding and they are a key person, ensure you have adequate coverage and a succession plan in place.
Your approach must be efficient, consistent and respectful. Your internal process should systematically address:
- entitlements and outstanding payments;
- handing over of physical property;
- intellectual property (emphasising their obligations);
- surviving obligations (for example, ongoing duties of confidentiality);
- Regulatory notices (if required);
- outstanding attestations or certifications; and
- completion of continuing professional development requirements.
Where the team member’s departure is, or will be, the result of an employer-initiated termination, it’s important that the action complies with the law, any contract and the requirements articulated by the Fair Work Ombudsman.
If the employee is ‘serious misconduct’, a responsible Licensee should carefully consider its breach reporting obligations, the FASEA Code of Ethics and the Licensee’s general obligations. Community and stakeholder expectations may require Licensees to take additional acts, consistent with their social licence, to safeguard consumer interests and maintain trust.