“So many wires are strung between the fence posts that they inevitably overlap, intersect and leave gaps”
— Kenneth Hayne AC KC
This series of articles has been written for new compliance officers starting roles in the financial services industry in Australia.
Although some advisers might think that being compliance officer requires “nothing more than checklists and sense of malice”, doing the job effectively requires a solid understanding of the legal landscape.
You need, for example, to understand the financial services laws, but you also need to appreciate the role of the Australian Securities and Investments Commission (ASIC), the difference between common law and statutory law, and the key sections of the Corporations Act.
In this article, we’ll provide an overview of these elements, and provide some real-world examples and scenarios.
The Role of ASIC
The Australian Securities and Investments Commission (ASIC) is the regulator charged with enforcing and administering the law in the Australian financial services industry. However, it’s important to understand that ASIC does not write the law, but interprets and applies it. An ASIC position does not affect or amend the statute or regulation to which ASIC refers. That is the factual position, although a lawyer under whom I used to practice publicly marvels at ASIC’s “dark art”; ASIC’s capacity to use policy to reshape and reframe participants’ understanding and expectations of the law.
When Commissioner Hayne observed that, “So many wires are strung between the fence posts that they inevitably overlap, intersect and leave gaps” he beautifully illustrated the complexity and regulatory overlap in Australian laws. It’s a complexity that not only makes compliance challenging, but a level of complexity that also impedes innovation and increases service costs
Common Law and Statutory Law
I introduced statues and regulations in the previous sections, but even these need to be considered in context.
In the Australian legal system, both common law (a body of law derived from principles, customs and norms and established as law by Courts and Tribunals applying precedents or previous court decisions) and statutory law (laws created by the legislature) play significant roles. Understanding the overlap and interaction between these two types of law is crucial for compliance officers.
Statutory law, as a clear and explicit statement of executive authority, can over-ride the common law, but it’s the common law that prevails when there is no statute and it’s the common law precedents that’s often used to guide Courts’ interpretation of the statutes.
For instance, while statutory law might provide the primary regulations or obligations that a financial services licensee must follow – for instance, the obligation to “act efficiently, honestly and fairly” -, the common law precedents will influence how these regulations are interpreted and applied. Any court decision in a relevant case could set a precedent that clarifies (or changes) how a certain regulation is understood or applied.
Relevant case law (particularly Federal Court Cases) is an important resource for compliance officers to study but don’t overlook the decisions of the Administrative Appeals Tribunal (AAT); the AAT is an administrative tribunal and not a Court, and although the decisions of the AAT are not binding precedents they can be persuasive and are often cited in relevant cases. And, a decision is appealed to the Federal Court, they can become legal precedents.
Key Sections of the Corporations Act
The Corporations Act is perhaps the largest and most complex piece of Legislation in Australia; and it’s for this reason that it’s currently under review.
Despite its complexity, it’s a key piece of legislation that compliance officers in the financial services industry need to appreciate and hopefully understand. Don’t expect to master it quickly, or completely, but work diligently to acquire the practical understanding of the framework within you operate and the expectations and obligations of participants.
If you’re working in an advice business, here are a few sections that are particularly relevant:
- Section 961B: This section requires financial advisers to act in the best interests of their clients when providing personal advice.
- Section 961G: This section requires that the advice provided to a client is appropriate for the client, given the client’s individual circumstances.
- Section 961H: This section requires advisers to warn the client if the advice is based on incomplete or inaccurate information.
- Section 961J: This section requires that the provider of the advice prioritises the client’s interests when there is a conflict between the client’s interests and the interests of the provider.
Many new entrants find it easier to start by reading ASIC Regulatory Guides and I understand the appeal; they’re certainly more accessible than the legislation and regulation to which they relate. I would, however, encourage you to read the legislation to understand the legal requirements instead of defaulting to ASIC’s view of those legal requirements. One of the most proficient superannuation lawyers I know once told me that purposely reading the Superannuation Industry (Supervision) Act while he was under-utilised by his employer was the foundation on which his success was built.
Practical Application of Legal Principles
Understanding the legal principles is one thing, but applying them in real-world scenarios is where the rubber meets the road. Let’s consider a few examples:
Example 1: Applying Section 961B
Imagine you’re a compliance officer reviewing the advice provided by one of your Authorised Representatives. You notice that the adviser has recommended a high-risk investment strategy to a client who is close to retirement and has expressed a desire for stability in their investments.
Lesson: This could potentially be a violation of Section 961B, because prima facie, it looks like the adviser may not be acting in the best interests of the client by recommending a high-risk strategy that doesn’t seem to align with the client’s needs and circumstances. Of course, context is still relevant, and further investigation might find the recommendation was entirely appropriate, in the client’s best interest and put them in a better position. In fairness, that position might be unlikely. In reality, contraventions of s961B tend to be obvious and characterised by poor discovery, inadequate consideration and a “product sales” culture; borderline cases tend to be harder to substantiate and the failure is normally inferred as a result of an adviser’s poor record-keeping practices.
Example 2: Navigating the Overlap of Common Law and Statutory Law
Suppose a court case in the industry has recently concluded, with the court ruling that a common practice, or a failure to observe a common practice, is a violation of the Corporations Act. Useful examples could be relate to “completing a risk profiling questionnaire” or “having an Authority to Proceed signed by a client”. Neither of these practices are explicitly required by the Corporations Act, so a court’s ruling that are required processes would set a precedent binding other bodies and potentially influencing how the Act is interpreted and applied.
Lesson: As a compliance officer, you would need to appreciate that you’re dealing with complexity and multiple moving parts, so you need to acknowledge that properly understanding the environment in which you operate requires a more nuanced and considered approach than most would assume.
Example 3: Dealing with Regulatory Overlap
If you’re a compliance officer, you know that in addition to working in a complex and frequently changing regulatory environment, you’re required to serve multiple masters with incompatible, and sometimes conflicting, agendas.
You don’t even have the luxury of being able to rely on a simple play-book.
In some cases, you might be subject to overlapping regulations from different regulatory bodies. For instance, your business might need to comply with both ASIC regulations and regulations from the Australian Prudential Regulation Authority (APRA). Then, comply with FAAA requirements, observe AFCA’s directions and satisfy internal and external expectations. In such cases, it’s important to understand the scope and requirements of each set of obligations and to develop a compliance strategy that addresses all relevant regulations.
Understanding and navigating the Australian compliance landscape is a critical skill for new compliance officers. From grasping the role of ASIC to interpreting the Corporations Act and navigating the overlap between common law and statutory law, these legal principles form the backbone of the compliance role.
However, understanding these principles is just the beginning. The real challenge lies in applying these principles in real-world scenarios, making decisions that not only comply with the law but also serve the best interests of the clients and your business
As a compliance officer, your role is not about ticking boxes—it’s about understanding and reconciling the letter and intent of the law, making ethical decisions, and contributing to a culture of continuous improvement.
In the next article in this series, we’ll consider some of the management principles that can help compliance officers position compliance as a value-add to the business. We’ll also explore strategies for demonstrating the value of compliance, managing relationships with stakeholders, and overcoming common challenges in the compliance role.