“Call me a relic, call me what you will,
Say I’m old fashioned, say I’m over the hill”
— Bob Seger, Compliance Professional
No school, like old school?
“Hard to argue other than that the only people long SOAs make happy are the compliance team and the lawyers”
— Mike Taylor @mmmiketaylor
Given their unwillingness to evolve, the 90s must have been an extraordinary decade for some commentators and Licensee Heads.
Although some are seemingly oblivious, the reality is that the nature of “compliance” – its scope, role and function – has fundamentally changed in the last ten years. The institutionally-driven paradigm of compliance as a control function has been demolished by compliance professionals (and a commercially-attuned regulator) that showed advisers that compliance is simply the name given to them for reconciling their professional obligations and commercial interests with the interests, objectives and limitations of their clients.
In a recent article, the author tackled the transformation of the advice industry (ie the value of licensees) and the new calculus of licensee value: the shift away from hygiene commodities (like compliance) to “advice delivery” and “business optimisation”.
I, perhaps unfairly, dismissed these new priorities as rebranded versions of “distribution” and “share of wallet”. Perhaps even more unfairly, I suggested that the article simply recycled tropes from former institutionally owned licensees for a newer, hipper audience. My pettiness and pedantry aside, the article did (as I’m sure the author intended) generate both an immediate and visceral reaction followed by reflection.
Before I get into the “compliance” stuff, I’d like to suggest that the real shift in what I’d describe as the “emerging profession” is that advisers and licensees are waking up and realising that they don’t need to follow the well-worn BDM path but can, and should, shrug off institutional conventions and decide what arrangements best suit them and their clients.
The best licensees in the new environment understand service and focus more broadly than more conservative licensees.
Let’s consider the Statement of Advice.
As it stands, the current Statement of Advice spectacularly fails to satisfy either goal; documents are bloated, generic and largely incomprehensible disclosure documents that are also expensive and time consuming to produce. As we argued in our recent submission to Treasury, the form and content of advice documents needs to be reviewed and, in our view, be profoundly changed. Making changes will explicitly enable providers to make their own determination about the form and content of the advice they provide. Future reforms should encourage innovation and remove significant barriers to the provision of advice and consumers engagement with the advice process.
In 2019, ASIC’s Report 632 “Disclosure: Why it shouldn’t be the default” drew on international research to confirm the expert view that disclosure has real and undeniable limitations as a consumer protection mechanism. However, for reasons of pragmatism, philosophy and convenience, disclosure became broadly acceptable to most stakeholders; it protected and empowered retail clients, provided businesses with an alternative to heavy-handed regulation and facilitated informed participation in the market. Unfortunately, it didn’t and our reliance on disclosure has resulted in formal compliance, risk-aversion and disclaimers being prioritised over substantive conduct, client understanding and informed consent. Although always intended to be a consumer-friendly warranty and engagement tool, risk-aversion and increasingly prescriptive conventions transformed the SOA into an expensive, inaccessible and occasionally incomprehensible risk-management device.
I understand why legacy businesses, or those that see compliance as a commodity, would bemoan long Statements of Advice and reminisce, wistfully, about Customer Advice Records. Statements of Advice are often too long, but more often as a result of ignoring compliance than listening to it.
I’d suggest that businesses that regard compliance as either a ‘hygiene issue” or a “commodity”, are blithely ignorant about the expertise available to them and its importance. Real compliance experts can minimise regulatory risk, but their core skill is reducing complexity and your cognitive burden.
As compliance professionals, we have always focused on “quality” over compliance but, in our experience, quality is a function of intent, process and outcome.
As Commissioner Hayne recognised, Licensee’s preference for deifying process (“it’s just hygiene”) has undermined the emergence of an advice profession and created a punitive and box-ticking compliance culture. We’ve always been strong advocates of the compliance function and principles-based regulation but we understand that businesses traditionally react to equivocal regulation (with significant consequences for non-compliance) with conservatism, risk-aversion and timidity.
It’s not the Compliance Function that drove increased complexity and compromised principles but, instead, licensees and advisers that limited the scope of the strategic discipline to a punitive and bureaucratic function in pursuit of regulatory certainty and zero risk. There’s no doubt that, at least some of us, were complicit in (and benefitted from) the conception of compliance as discipline. However, compliance teams anticipated and adapted to regulatory shifts, noticeably faster than their Distribution Masters.
Compliance as a commodity
I think the unqualified application of economic terms to the advice profession is problematic.
Markets treat commodities as largely equivalent, and often disregard their source and origin. I don’t think all compliance services are equal (nor, I’d suggest, did Commissioner Hayne). If advisers thought that all compliance services were equal, the environment would look very different.
Let’s examine the commodity view a little more closely.
To provide advice in Australia, you either need to be licensed or authorised by a licensee.
To maintain a licence you need to comply with the financial services laws. The obligation is perpetual.
Compliance is therefore an essential prerequisite to providing advice.
It’s perhaps unreasonable to suggest that compliance, for an adviser or licensee, is analogous to air, water, food and a liveable environment for a human being, but we can, for example, understand the limits of choice that “commoditisation” conceals; you can accept compromised quality but you can’t simply opt out (without significant and possibly permanent consequences).
The “commodity” valuation (which assumes equivalency) is actually very poorly suited for an emerging profession. Beyond being built on a dated and poorly thought out foundation, it appears to do nothing more than refresh and rebrand the “optional” approach some licensees historically took to their legal and professional obligations.
To be clear, I think the unqualified application of economic terms to the advice profession is problematic. Markets treat commodities as largely equivalent, and often disregard their source and origin. I don’t think all compliance services are equal (nor I’d suggest did Commissioner Hayne). If advisers thought that all compliance services were equal, the environment would look very different.
I’ve seen enough bad-compliance, and been engaged by clients escaping it, to know that advisers and licensees are actually quite proficient in differentiating the capabilities and quality of different compliance providers (admittedly, often only after bad experiences).
Where to from here?
“It’s tough to make predictions, especially about the future”
— Yogi Berra
In the context of the Quality of Advice Review, it’s understandable that advisers want to look forward.
Recently, industry dynamo Hari Maragos asked if the industry is shifting, what does the future look like for authorised representatives and licensees?
In my view, if we see the AFSL as the point of entry for all advisers (either directly or indirectly), then the only barriers to a broader change are competency, capability and capital.
As advisers change from “product distribution agents” to “problem solvers/strategists/regulatory arbitragers” capable and willing to act independently of a controlling entity, then the legacy licensee can’t remain a command module and must evolve to become either
- a buying agent (offering discounted services in response to membership and member obligations) or
- a franchisee model where, like McDonalds, your participation provides you with IP, marketing support, proven processes, a national brand and regular innovation (plus the security and reassurance this provides).
Legacy licensees were almost like Franchisors (but with all the control and none of the benefits).
New licensees start differently because they put service, common interests and innovation at their core.
So, for those advisers that are “simply authorised reps” I think they’ll gravitate towards those licensees that best reduce friction and free their time to actually advise their clients. The future will see advisers move more towards newer licensees or shared enterprises to improve their capability, deal with common problems, share resources and promote a common brand proposition.
If we look at similar professions, there are still sole-practitioner lawyers and doctors, but the vast majority are in collectivised or corporatised businesses, self-regulated very effectively and overseen by professional associations with credibility and clout. Hopefully, advice will go the same way.
If Treasury implement our suggestion to remove the prescriptive elements of s947A, s947B, s947C and s947D with a principles-based approach that focuses on consideration an understanding, they will explicitly enable providers to make their own determination about the form and content of the advice they provide. This change will encourage innovation and remove significant barriers to the provision of advice and consumers engagement with the advice process. From an adviser perspective, it would also reduce their costs – why pay monthly for planning software when advice precedents can be generated using word?
If I had to bet, I’d bet on authorised representatives joining larger local/regional licensees to maximise the value of community and minimise the risks posed by a distant/institutional licensee.
And, to be clear, those licensees that can “best reduce friction” will be those licensees that neither regard compliance as a commodity nor regard it as a bureaucratic control function.
Old school compliance is dead. We just need the old guard to notice.