When the watchdog starts to bark, a licensee has a decision to make. David Newman’s experience over the past 12 months has convinced him that there’s really only one constructive response.
When the corporate watchdog decided that Darren Pawski had been “instrumental” in multiple and repeated compliance failures at Perth-based licensee WealthSure, Pawski understood that radical change was the business’s best hope of survival.
Pawski, WealthSure’s founder and managing (and sole) director, took a step that other business owners might find inconceivable. He stood down as managing director, and effectively relinquished control of WealthSure. While he would remain the company’s major shareholder, he would not have any say in the way the business was run.
That decision was central to the Australian Securities and Investments Commission (ASIC) accepting in September an enforceable undertaking (EU) from WealthSure.
In stepping aside, Pawski marked a watershed in the development of WealthSure as a substantive non-aligned Australian financial services licensee. It could have done the bare minimum to satisfy ASIC, and battled on in much the same way it always had. But Pawski had retained David Newman as a consultant to liaise with the regulator on WealthSure’s behalf. And Newman, a former head of adviser distribution at Plan B and former state manager for AMP, had very different ideas.
“The driver here – and we discussed this openly with ASIC – was that this wasn’t let’s tick the boxes and just satisfy the EU,” Newman says.
“This was a fundamental shift. If you like, what we wanted to do was try to embrace ASIC around, here’s an opportunity to work with ASIC, the regulator, as a case study for how you can really turn something from where they had concerns, into a model AFSL [Australian financial services licence holder].”
The EU was developed during intensive consultation between WealthSure and ASIC, following an investigation by the regulator that started almost two years ago.
(ASIC’s investigation actually resulted in two EUs: one covering WealthSure; and one covering Pawski himself.)
Clean-out
The EU resulted in a clean-out of WealthSure adviser ranks; a complete overhaul of how the licensee monitors and enforces its remaining representatives’ compliance; a new board; and the establishment of an adviser academy, designed to help WealthSure advisers position their practices to flourish in the years ahead.
“WealthSure, perhaps from afar, conjured up ‘licensee of last resort’ and big adviser numbers – all those sorts of things,” Newman says.
“So I was cautious. But I was impressed with Darren’s frankness and what I’ve admired about him is his honesty in terms of saying, look, the buck stops with me. He was prepared, and never, ever, shirked that. In fact he was very proactive.
“Darren was quick to conclude that all roads, from ASIC’s perspective, led to him.
“I’d go to ASIC and I’d come back and he’d say, how’s it going? What’s their reaction? And I remember having a conversation with him on one occasion and saying, look, this is one of those hard conversations.
“He could have chosen to fight and to do all those things. But he came back and he said, look, my commitment is to the business; that has not changed. He’s done what a lot of people would love to have done but couldn’t – that is, he’s built some scale. Admittedly it had a tail, but it still had some scale. And as I, in a consulting role, had got around and met lots and lots of the advisers, the thing that started going off in my head was that the quality of advisers I was impressed with.
I thought, hang on: this isn’t a dog here.
“As we worked through that and it became clear where ASIC’s head was, Darren was very quick to say…I’ll take myself out, as a circuit-breaker to that whole thing,” Newman says.
“He also realised that taking the business forward couldn’t simply be an extension of the past. It isn’t the same.”
Newman was initially retained as a consultant, but as the EU negotiations continued and it became apparent Pawski’s position was untenable, Newman emerged as the ideal candidate to step in. He joined WealthSure full-time in February this year.
ASIC had concerns dating back to 2009 about WealthSure’s ability to monitor and enforce compliance among its advisers. It had already identified concerns with specific issues, which it believed had not been adequately remedied, and that led the regulator to believe the compliance issues were widespread, and systemic.
Interest piqued
ASIC’s interest was further piqued by WealthSure’s rapid growth.
“Along the way, we might have peaked at nearly 400 [advisers],” Newman says.
“There’s some warning bells there – ASIC sees WealthSure spike in terms of growth, and that made them a bit more uncomfortable. At that point they said they needed to see some structural reform to how the business is managed, around corporate governance, around managing conflicts, separation of compliance and commercial – while they’re still important, they’re separate – and not just having people. It’s not just more bums on seats, it’s leveraging technology in terms of how you can manage the business.”
Newman stresses that ASIC’s concern was about compliance and monitoring, not necessarily about the behaviour of the advisers themselves.
“Our EU wasn’t specific about a breakdown about the advice component at the advisers’ end,” Newman says.
“It was about us, about our systems – about the licensee.
“The extension of that is they want to ensure the corporate governance and compliance framework we’ve got is sufficiently robust to avoid any breakdowns [in advice].
“It’s fair to say there’s some correlation with advisers [and] that ASIC probably thought [that] had we had robust enough systems, we could have had an earlier
intervention on one or two things. But it was premised on us [taking action].”
A review of the licensee’s resources led to a conclusion that it had to cull adviser numbers.
“Some of those that left we’d genuinely probably preferred to have kept,” Newman says.
“But we understand and respect that they have the right to make the decision. But the vast majority of the others were simply too small.
“We’ve terminated [them] because they were simply too small in terms of the revenues they generated for the risk that we would undertake. And it was also a diversion of our resources. Instead of focusing on our core high quality, you tend to find that the tail takes up more time than you’d like. The return on our investment there just didn’t make any sense. That meant we parted company with 100, or thereabouts.”
Adequate support
The licensee currently has about 230 authorised representatives, a number Newman believes can be adequately supported.
“ASIC have a view that if you’re going to be a top dealer group, as if you were going to be a [top] business, you would have in place some reasonable corporate governance structures,” he says.
“That’s a reasonable position to take. So some of it was just some good business sense, and it was a question of making sure that you had structures in place.”
Those structures are designed to identify and manage compliance and other issues, not to hide or bury them. Newman says licensees should not be shy about reporting any breaches that occur.
“With advisers, when you mention the word ‘breach’, they run for cover,” he says.
“Yet if ASIC go in and review a dealer group and they see there’s nothing on their incident register and there’s nothing on the breach report, they’re going to dig around. It’s just impossible for someone to not have incidents or breaches. The idea is, identify them, report them, and manage them. That’s what ASIC wants to see – that you’re managing the business proactively.”
Newman established an audit and risk management committee, made up of Newman himself; WealthSure’s head of compliance; and, initially, Perth lawyer Mark Halsey as an independent member. Halsey has since been replaced by another independent, yet to be announced, and a WealthSure adviser has been added. A non-executive director from the WealthSure group executive will also sit on the committee.
“This is not about compliance, [about] what do we need to jump,” Newman says. “It’s about doing better business.”
Regular audits
All of WealthSure’s advisers will be audited, and the frequency of future audits will be dictated by what the audits find. Where issues are uncovered, there is
now a defined process to deal with them.
“That’s where ASIC described our previous approach as a ‘light’ compliance version,” Newman says.
“We identified early that for us to get real leverage in terms of that process, and to be on top of it, we needed to have some technology in the business that enabled us to do it better.
“We got introduced, as it turned out, to Kate Humphries at Pathway. Their core business is around risk management and compliance. Kate had some really, really good experience managing licensees. One of her frustrations was how to produce meaningful information for a board when you had, in her case, four licensees, without scrambling around. So she produced, with the significant help of Business Health, a system called RTC – real-time compliance. That is a really neat system: it automates the entire compliance process, end to end.
“Information is input and it will produce the remediation work – and it automatically sends it by way of an email to the adviser. So they have got their list of things to do. They can run, but they cannot hide. If the due date is not met, it is escalated to…the head of compliance. If it’s not met again, it’s escalated to me, and I take it to the audit and risk management committee. The ability to ensure the follow-through is there is enhanced.
“But what it also does, at the other end, is automate all of our registers. Complaints, incidents, breaches. It’s got an algorithm that sits behind it. It’s taking all that data in, and it’s picking up trends. If a compliance officer is with a practice and the audit process is identifying something around product, advice – whatever it might be – it flags it, and it produces a report for us to say, here’s the issue. It might be a minor issue, that’s fine, or it could be a bigger issue or a more serious issue where we say, hmmm,
we need to drill down there.
“It does the same across all of the audits, and then that algorithm says we’re getting a repeat on some of those issues. So we’re trying to get early identification of potential systemic issues.”
More than cosmetic
Newman says Pawski’s departure is not merely cosmetic, and he will not be working behind the scenes pulling the strings.
“Part of it, clearly, is to satisfy ASIC, because of their long-standing concerns and because they felt Darren wasn’t able to differentiate between some of the functions and they didn’t want that influence there going forward,” Newman says.
“In an operational sense it was agreed that he cannot have a directorship, or have a management role. They just wanted a clear delineation of that.
“Like any business, it’s the entrepreneur driving the business who says I can do this, I can do that – sometimes you’ve got to step back and say no, you’ve got to have the right people in the right place doing the right things. And perhaps we didn’t have that along the way. You just leave yourself so open to compromise.
“It’s about process, and it’s about having the right people engaged in that process, where they own it, and they’ve got autonomy to do their job.
“There’s a bit of letting go, to say there’s a skill set [needed] here, the business has got to a level and it needs to mature to another level. Part of that is driven by the industry landscape, things like FoFA [Future of Financial Advice reforms], and by
and large all those things are good. We’ll look back at FoFA
as being a catalyst for some wonderful change. But it’s challenging a lot of advisers.
“A good dealer group needs to have an education reform around helping advisers come to grips with today and tomorrow, and providing them with a clear pathway for how to do that.”
Newman says the problems WealthSure faced and the concerns that ASIC raised were well founded and real, and needed radical action to fix.
The measures the firm has taken are extensive. The EU has taken time, effort and expense to implement, and some of the problems caused by the previous structure and management won’t go away overnight. WealthSure remains embroiled in several legal actions involving former advisers. He takes issue with suggestions that it’s “business as usual”.
“It’s not business at usual,” he says. “It’s a fundamental shift. There’s an old WealthSure and there’s a new WealthSure. The EU is a line in the sand [between] the past and the future. And we’ve been working on that.”
