New record keeping obligations for advisers that could lead to five-year jail terms will be decided without parliamentary debate after the Treasurer’s office decided the compliance parameters were at the mercy of “emerging industry practices” and should be deemed ‘delegated legislation’.

The obligation for advisers to keep five-year fee records is part of a Bill that passed on Thursday headlined by the requirement for advisers to provide annual forward-looking service agreements.

Failure to meet the as-yet-unspecified record-keeping obligations would be “a criminal offence with a penalty of up to five years imprisonment”, the Bill states.

The issue for advisers is that these obligations haven’t been set in stone yet.

In late January the Standing Committee for the Scrutiny of Bills brought up not only the disproportionate harshness of the penalty, but the lack of guidance as to what exactly is required of advisers.

“Why it is considered necessary and appropriate to leave the scope of recordkeeping obligations which are subject to significant penalties to delegated legislation?” asked the committee, which suggested that the Bill should be amended to include “at least high-level guidance regarding the scope and type of records that must be kept on the face of the primary legislation”.

Treasury validated the harshness of the five-year penalty for advisers by citing comparable penalties for financial record keeping offences.

Its response to the lack of concrete guidance on the record-keeping obligations, however, was less convincing.

“The financial advice industry is dynamic and it is not possible to foresee how the industry will change in the future,” Treasury stated. “Delegated legislation is necessary to be used in this situation because it provides the flexibility to change record keeping requirements in line with emerging industry practices.”

It would not be appropriate to include any further guidance on what records should be specified, Treasury advised, as this could “inadvertently limit” future record-keeping rules and hinder ASIC’s regulatory efforts.

The committee, which accepted all of Treasury’s other explanations, baulked at its reasoning for not setting down the rules on advice fee record keeping, saying it remained “concerned”.

Heavy concentration of power

According to Mills Oakley’s Bland, the term ‘delegated legislation’ simply means the rules will be decided by subsequent regulation, instead of by legislation.

Mills Oakley’s Mark Bland

“However if too much is left to regulations, important laws are not subject to the scrutiny of the parliamentary process,” he says.

For advisers, this means the crucial goalposts they’ll need to be aware of to avoid stiff penalties are not only yet to be drawn up – with the new law set to be in motion by July 1 – but will not face the rigour of parliamentary scrutiny.

“Treasury will retain the right to decide later on what compliance is appropriate,” Bland says. “This approach enables the Government to push legislation through more quickly. It clearly wants to retain its discretion in these matters.”

The implications of delegated legislation did not escape the Scrutiny Committee either.

“The committee notes that a legislative instrument, made by the executive, is not subject to the full range of parliamentary scrutiny inherent in bringing proposed changes in the form of an amending bill. It is unclear to the committee why at least high-level guidance in relation to the scope and type of records that must be kept cannot be provided on the face of the bill,” the committee stated.

Bland says the tactic is part of a “broader trend” of government using delegated legislation to pass laws away from the accountability provided by parliament. Delegated legislation is also being used for critical parts of the best financial interests and annual performance tests within the government’s Your Future, Your Super reforms, he notes.

“There’s a bigger story here, a theme running through the approach of the current government, where the details of important obligations are increasingly left to Treasury’s regulation-making power,” he says. “The result is a heavy concentration of regulatory authority in Treasury.”

For advisers, the repercussions extend beyond the threat of jail for not complying with rules that haven’t been properly addressed. The lack of scope will make risk-averse licensees even more gun-shy about compliance, Bland believes.

“Risk-averse licensees can respond to broadly worded obligations by overcompensating, especially in the environment of an aggressive regulator,’ he says.

One comment on “5-year adviser jail terms hang on unwritten rules”
  1. Avatar
    Michael O'Hara

    These regulatory and legislative approaches make a mockery of any concept of “professionalism” in financial planning.

    To date, there has been zero professional status allocated to advisers. We have been treated as untrustworthy, criminal and incapable of acting in a client’s best interest. And all of this while navigating poorly thought-out legislative and regulatory changes.

    So far, we have had a Royal Commission highlight the inability of institutions to deal with conflicts of interest and recommending the banishing – rather than managing – of such conflicts. Yet the same Royal Commission did nothing on vertical integration and ignored the inherent conflicts of AFSL structures.

    Financial planning is not a profession and will not be so until vertical integration is dismantled, product association is banned, and advisers can hang out their own shingle without the need to sign up for an AFSL.

    5 year jail terms for not having records in line with legislation and regulation that has not yet been established just proves that financial planners are still seen as criminals and not professionals.

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