Dr Hillary Ray

So-called “look back” requests, otherwise known as client file requests, which licensees have been making of their current and former authorised representatives, increased throughout 2018. This trend has continued into this year, industry participants have observed.

Requests for client files, which have been prompted by a confluence of programs undertaken by ASIC in recent years, have been made with increased frequency and requests have been made for files as far back as six, seven and in some cases eight years, Hillary Ray, a partner with law firm Cowell Clarke, who advises many advice businesses that are the subjects of the look backs, said.

“I’m being engaged for advice on client file requests more than ever before. Most of the requests are being made of advice practices that are part of the networks of large institutions,” Ray said. She added the requests are being made under sections 30 and 33 of the ASIC Act, which outline the securities regulator’s compulsory information-gathering powers.

The look backs have become so frequent and disruptive to business owners and practitioners that Ray said advisers are quite often sharing their emotional distress regarding the requests.

“I’m finding clients who are juggling the reputational damage brought on by the [Hayne] royal commission findings with the regular challenges of running a small business [now being] confronted by consistent demand for client file audits from licensees they’ve in some cases not been licensed by for many years,” Ray said. “I’m finding a lot of distress amongst advisers who are increasingly finding themselves in these situations.”

Advisers and licensee heads in contact with Professional Planner have corroborated Ray’s interpretation of the increasing frequency of the look backs and the disruption they’ve caused.

Lisa Watzek, from Compass Wealth Strategies Queensland, noted in a letter sent to this publisher that the way dealer groups are auditing client files as requested by ASIC and, in some cases, refunding fees, has the ability to ruin her practice financially.

“Throughout the audit process – spanning a time when I’ve been licensed under my current and previous licensees for several years – I have had to correct the auditors’ interpretation that ASIC would perceive a client had not been serviced,” Watzek noted. “… [T]he auditors directly contact the clients without my knowledge and issue the refunds without consultation with me.

“Being a small practice, I don’t have a cash reserve to do any refunds. Further, I have taken out a business loan based on the revenue to buy out a partner. I have to maintain a level of cash flow as part of the lending requirements. I feel alone in this process and have been told I have no legal standing.”

Rolling surveillance

An ASIC spokesperson pointed to a series of programs and compliance projects it has undertaken in recent years in response to a request for information on the topic.

The regulator pointed to a rolling surveillance program that started in July 2015 to investigate how large institutions oversee advisers; a report on the findings was published in March 2017. It also pointed to an ongoing project to uncover instances of fees for no service within advice practices in institutionally owned networks.

Advice representatives of licensees held by AMP, ANZ, National Australia Bank, Commonwealth Bank, Westpac and Macquarie Group were the subject of the ASIC programs mentioned above, the reports revealed.

Beyond highlighting these existing programs, the regulator could not point to any specific additional programs or surveillance activities that may have resulted in a spike in client file requests in recent months.

“ASIC’s longstanding role in overseeing standards across the financial services industry, and seeking to improving them, requires ongoing surveillance activities across a variety of matters relating to financial advice. These surveillance activities often involve requests for client files. ASIC’s requests for client files vary according to the corporate environment, business cycle, or particular issues that may arise,” ASIC said in a statement.

The regulator also highlighted that AFS licensees have an obligation to monitor and supervise their representatives and will have to review client files as part of obligation.

Buried in compliance

Aside from whether the Hayne royal commission final report makes a direct recommendation to dismantle vertical integration, the biggest question in the wealth management industry will face this year is whether it can sustain its current economic models while managing compliance risk, Morgan Stanley equity analyst Daniel Toohey said in a January 30 research note.

The outlook for lower fees alongside the elevated compliance – greater cost, capital at risk – likely demands increasing scale to insulate margins, with potential implications for industry structure,” Toohey noted.

Compliance costs have been the topic du jour at Professional Planner’s recent advisory board discussions, held at the end of 2018 and early this year, participated in by heads of licensee businesses and financial planning practice principles. This cost has been exacerbated early this year by ASIC’s adviser levy, which was invoiced on Thursday.

One adviser, Steve Blizard, at Roxburgh Securities in Western Australia, described the ASIC charge as “gobsmacking”.

“An incredible set of fees for no service. All having to be passed on to the clients,” he said.

Compliance costs will almost certainly climb thanks to increased surveillance, greater regulatory powers and intervention and higher penalty and fine regimes likely to be recommended in the final Hayne royal commission report, Toohey noted.

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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