In many ways, engaging in do-it-yourself compliance for your Australian Financial Services Licence or financial advice practice is not dissimilar to doing DIY jobs around your own house – for those who live and breathe it, the job can be a joy. For those who have only a vague idea how it should be done, however, the idea could be fraught with danger. I don’t know many advisers who look forward to rolling up their sleeves and putting a few hours into the compliance function of their business, particularly if it means forgoing a meeting with a new prospect.
My neighbour recently put up a new picket fence at the front of his house. Little did he know, the height of his fence exceeded the council’s legislated maximum. Our street isn’t busy and the chances of the council driving by to notice the height breach weren’t high.
As fate would have it, however, another neighbour was going through the process of obtaining a council permit, and the official who came and inspected that neighbour’s property noticed the fence had breached the height restriction. With a contravention of this kind, once it’s seen, it cannot be unseen. Sure enough, the council made my neighbour take down his fence (leaving his house exposed to the street) and apply for the fence permit.
As a result, my neighbour had to endure six weeks of bureaucratic red tape dealing with the council. By the end of it, he had run out of energy and paid someone to put the fence back up at the appropriate height. At the end of it all, my neighbour said to me, “In hindsight, I should have just got someone who knows what they’re doing to help me out at the start.”
The regulatory landscape around financial planning isn’t too dissimilar. I have seen many licensees take a risk that their compliance processes ‘should be OK’ because they haven’t had any issues in the past. In an adviser’s language, this is like a client saying, ‘I haven’t reviewed my income protection policy for seven years but that’s OK because I haven’t had any issues in the past.’ Ultimately, no one can predict the future.
Eventually, when the ill twist of fate befalls, like my neighbour, everybody (licensees and clients alike) wishes they’d done it right from the start. We all know laws and regulatory scrutiny will only increase. The rules don’t discriminate based on the size of your business and all it takes is for one practice (or in the case of my neighbour, one household) to come up on the radar and the rest of the dealer group or industry will be under scrutiny.
The economics of investing in compliance
How long will it take someone who doesn’t live and breathe regulation to work on the compliance function of their business properly? Even if they did have the time, our clients do not want to do compliance. They just want to be able to sleep at night knowing they are compliant.
Therefore, in reality, the value of investing in compliance is much more than suggested in the old phrase ‘good compliance is good business’. How do you put a price on your opportunity cost? How do you put a price on the ‘sleep test’ for your business? How do you put a price on managing regulatory disruptions so your business doesn’t grind to a halt if there is scrutiny?
The benefits of good compliance are at least threefold:
- Investing in the services of experts who work with you to manage your day-to-day compliance means you can take the comparative advantage at a lower opportunity cost and you can use that time to work with your clients.
- Staying on top of compliance means fewer distractions. In the case of smaller firms, a compliance issue can often grind the business to a halt because the compliance manager is the responsible manager, who is the director of the licensee. Minimising these distractions, or treating symptoms early, gives licensees a better process for addressing any materially adverse events.
- Of course, the primary benefit is that you sleep better at night, knowing your business is looked after by people who do it for a living.
Ultimately, putting a value on compliance or external compliance help is akin to your clients putting a value on their income protection. After all, for a lot businesses, their AFSL is their livelihood. Just like when advisers ask their clients about ‘what ifs’ when giving them insurance advice, the licensee’s own ‘what if’ in relation to the drive-by from ASIC is not any less likely, given the increased scrutiny on the industry. How licensees want to respond depends on their risk appetite.
