Financial institutions need to be more aware of the organisational cultures they are fostering and how these correlate with compliance breaches, according to Greg Medcraft, chairman, Australian Securities and Investments Commission (ASIC).
“Where we’re undertaking front-line supervision and we see a pattern of breaches…not by just one, but a whole series of bad apples, it begs the question ‘is there a problem with apples, or is there a problem with the tree?
“If you think about the definition of culture, it’s attitudes, policies and practices – it’s the mindset of the firm. And often when you see breaches of the law, often if you dig down into what’s behind it…you will see a cultural problem,” Medcraft told attendees at the CFA Australian Investment Conference in Sydney yesterday.
He said that large financial institutions often appeared to be unaware they had a cultural problem inside their organisation when approached by the regulator.
“When we meet the boards of big banks, we often say to them ‘you’ve got a problem with this particular division. From what we’re seeing on our front line, you’ve got a cultural problem,’ and often it comes as a surprise to them.”
Medcraft’s presentation repeatedly emphasised his and ASIC’s belief that financial planning continues to suffer from a lack of consumer trust and confidence. He referred to figures that suggest only 24 per cent of Australians trust financial advisers, according to an April 2015 study conducted by Roy Morgan.
In helping ensure consumers have greater levels of trust and confidence in financial advisers, Medcraft outlined three broad areas ASIC is focusing on. These include providing consumer education and tools; helping ensure Australian Financial Services licensees and other “gatekeepers” fulfill legal obligations; and enforcing laws.
At a consumer level, he pointed to ASIC’s public website, moneysmart.gov.au, which has received more than 5 million unique hits in the last year, up 14 per cent on 2014 numbers. Medcraft said a study showed that 85-90 per cent of these website visitors changed something in their current financial situation as a result.
Having negotiated a number of high profile, large scale review and remediation programs at some of Australia’s largest banks in recent years, ASIC is also producing a guidance paper.
“These programs have been large scale exercises to review personal financial advice provided to retail clients and to compensate those clients where losses have been suffered as a result of non-compliant advice, fraud or other breaches of the law.
“We want to ensure that if a financial advice firm needs to provide remediation, they do so in a way that is fair, honest and efficient,” Medcraft said.
Financial planning surveillance
In terms of surveillance, he reminded attendees of ASIC’s working group focused on Australia’s four banks, AMP and Macquarie. Advice compliance and the systems and processes in place for identifying and removing ‘bad apple’ planners from advice firms are key areas the regulator is watching.
Outlining how ASIC moves between its surveillance and enforcement functions, Medcraft said it needs to have considered three areas. These are the amount of harm or loss that has occurred; the cost versus regulatory benefit; and the availability of evidence.
Recent cases of adviser misconduct at Commonwealth Bank, for example, clearly met the first criteria, with a large number of clients losing substantial sums of money.
On the second point, “we look at that cost versus regulatory benefit. Deterrence is all about sending a broader message. To take a deterrence action, you want to actually leverage that to send a message to the broader community.”
Despite the importance of these first points, the third is the most crucial.
“If we don’t have the evidence, but we’ve got the first two, then we haven’t got a case.
“Sometimes we start out saying ‘okay, it matches the first two, let’s gather further evidence…but if we can’t, then we don’t progress [to enforcement],” Medcraft said.
