Most people would never fly on an airline if the airline did not require its pilots to undergo regular simulator tests. Similarly, most pilots would not choose to fly for an airline that did not properly maintain its aircraft or took shortcuts on maintenance.
The commercial airline industry expects pilots to undergo regular training in all types of flying conditions and all types of scenarios. Part of the simulator test is to assess the pilot’s skills and to ensure they are prepared for whatever situation the simulator throws at them, even if the pilot never encounters such flying conditions outside of the simulator.
There have been some well publicised incidents involving low-cost airlines which compromised standards and as a result are no longer in business.
If we apply the same analogy to the financial services industry we should expect that our advisers have minimum levels of training across the industry and a requirement that advisers continue with regular training and development. We should also expect that licensees have robust systems in place to ensure that it promotes a strong culture of compliance and has enough resources to properly maintain and run the licence.
The proposed FOFA reforms
The announcement of the government’s proposed changes to the FOFA reforms were very well received in particular the changes to the grandfathering. The proposed reforms appear to allow advisers to move between licensees without jeopardising their grandfathered business and as a result it is likely that many licensees will be trying to recruit new advisers. There is no doubt that ASIC will be carefully monitoring adviser migration at this time and what checks are being carried out by licensees.
For the adviser who is being courted by a potential new licensee it is worth remembering that ASIC has previously expressed concern at the rate of rapid growth of some licensees and whether or not this can contribute to poor quality advice. Where ASIC sees rapid growth in a licensee’s adviser numbers, ASIC is more likely to have a closer look to ensure all is in order. The reality is that appointing a new adviser as a representative of a licence takes resources. A licensee who is expanding quickly may be putting its existing advisers, and the advisers they appoint at risk if they don’t have robust systems in place and the resources to monitor and supervise their representatives. A licensee with strong compliance systems will protect their advisers in the long run.
If a potential licensee is making claims that they don’t have minimum standards in terms of adviser qualifications or say things like “we don’t go crazy with our compliance” then it might be a good idea for the adviser to rethink what they are potentially getting into. An adviser who joins a rapidly growing licensee could end up with a target on their back facing a higher chance of being exposed to unwanted regulatory attention and reputational damage. The Corporations Act provides that ASIC can now ban a person who ASIC believes is likely to become involved in the contravention of financial services law. In other words, an adviser who joins a licensee with a poor compliance function may be accused of being likely to become involved in the contravention of the Corporations Act.
When considering a change in licensee, the health of the compliance function may not be the first thing on an adviser’s mind, however it should be considered as one of the factors that influences whether or not they change. Beware of opportunistic recruitment talk, additional skills are never a burden. An adviser should consider the quality of the people providing services on behalf of the licensee and whether they have the skills and ability to assist the adviser to lift the overall quality of their advice.
Where an adviser has received a less than favorable audit result the adviser may think the licensee is being heavy handed, however, the fact is under FOFA the standard of advice is being forced to lift. Rather than baulking at the audit result the adviser should take the opportunity to work with the licensee to help improve the overall standard of their advice. A poor audit result may be an indication of the compliance function of an adviser’s business. As a result of the changes in FOFA more advisers are receiving audit results that they may not have received 12 months ago.
New SoAs for existing clients when changing licensee
Many advisers are not aware that they need to provide their existing clients with a new SoA once they changes licensees. Financial advisers owe their clients a duty of care to review their files when there is a change of an AFSL. While this may not be well received by advisers it is something they need to consider, as well as and how they are going to furnish all their clients with new SoAs once they changes licensees.
FOS has previously handed down decisions that have stated reviews should take place within 30 days of a change of licence. More recent FOS decisions have said that licensees should review their clients within a reasonable amount of time. Part of this review would require new client data forms, risk profile questionnaires and new SoAs.
In FOS decision 22729 a FOS Panel stated the following:
“The Panel notes that upon Mr F obtaining an AFSL for the member, he had an obligation to undertake a full review of each of his client’s investment portfolios to ensure that they were suitable for the client’s needs and objectives. It is a fundamental element of a licensee’s relationship with a client that it clearly understands the client’s existing investment position, their needs and objectives and the scope of the advice to be provided.
Mr F prepared a Review Report for the complainants in April 2008 (the “2008 Review”) – three months after the member obtained its own AFSL and Mr F became an authorised representative of it. The Panel is satisfied that a period of three months is a reasonable time for a review to be undertaken by Mr F.”
The amount of time and resources needed to review existing clients should be a big factor when considering a change in licensee. Given a licensee is required to have adequate resources to run their licence the argument that the adviser did not have the time to do so will not wash.
Given the number of high profile collapses in the industry over the last 12 months and the amount of adviser migration taking place advisers have a lot to consider, yesterday’s shortcuts may be tomorrow’s nightmares.
