There is a direct relationship between the size of a licensee and their likelihood to admit to having conflicts of interest, three quarters of smaller AFSLs believing they have none.
The finding is from survey research from financial services law firm Holley Nethercote, which launched the inaugural ‘Compliance Trends Survey Report’ at a briefing in Sydney on Thursday morning.
The findings come amid debate sparked at the Professional Planner Licensee Summit last month, where CoreData Research founder Andrew Inwood claimed self-licensed advisers would be “the next failure” for lack of effective governance, leading to a rebuke from former licensee boss Paul Harding-Davis.
The Holley Nethercote research found the smaller the licensee, the less likely it is to perceive it has no conflicts of interest, with 77 per cent of licensees with under five representatives citing none.
But for larger licensees (over 100 representatives), only 27 per cent said they had no conflicts.
Source: Holley Nethercote via HN Hub.
Some 96 per cent said they maintain a conflicts of interest register, but half of financial advisers surveyed said they had no conflicts of interest.
After the briefing Holley Nethercote managing partner Paul Derham told Professional Planner he was surprised that over half of respondents did not believe they had conflicts, but wasn’t surprised the larger licensees reported a higher amount.
“It’s not unusual to see the bigger they are, the more they spend on education and understand their obligations,” Derham said.
He added that Standard 3 of the Code of Ethics, which deals with conflicts of interests, has perpetuated the misunderstanding.
“Standard 3 requires the advice provider not advise, refer or act in any manner where they have a conflict of interest,” Derham said.
“That’s a misunderstanding of a conflict of interest. Everyone has conflicts, the question is how do you manage them? When the Code of Ethics says avoid conflicts, what it’s really saying is manage them.”
My Dealer Services director Alex Euvrard offered a similar perspective at the briefing.
“It wasn’t so much about the perspective of the conflict being used to subsidise or influence the advice, it was more from the perspective of these conflicts are normally being used to actually create and deliver effective efficiencies within a business,” Euvrard said.
The survey noted licensees tended to rely heavily on their compliance committee or internal compliance team to identify conflicts of interest, often relying on questionnaires for new and existing staff.
The most common conflicts of interest related to benefits received by the licensee or its representatives, or associations associated with ownership structures such as vertical integration.
Benefits from a client or third party each were cited by around one-in-five each. Other conflicts noted included being owned by a product provider, relationship with a product provider, training from a product provider, or investments of a personal nature conflicted with the business investments.
Life’s a breach
In the survey, breach reporting was cited as the second biggest compliance concern, after cybersecurity.
Known officially by the regulator as the reportable situations regime, it commenced at the start of October 2021.
ASIC’s first report about the regime which covered the first nine months found only 6 per cent of licensees made any reports, which had become a concern for the regulator.
However, the Holley Nethercote survey found over 50 per cent of licensees didn’t report any breaches.
Financial Advice Association head of policy Phil Anderson said feedback from the regulator suggests the next report will show a higher proportion of licensees submitting breaches.
“[The below survey] stats say 50 per cent, but that’s probably more than the larger licensees that have contributed to this survey rather than the really small licensees, so that might explain the difference,” Anderson said.
Source: Holley Nethercote via HN Hub.
Derham said licensees were reporting breaches to ASIC, citing staff error or negligence, but the regulator had expressed concern in the inaugural report there was systemic issues being overlooked.
“[ASIC believed] there is a root cause or systemic issue in the licensee that they’re not picking up and they’re blaming on a human,” Derham said. “Whenever you’re doing a reportable situation that’s something I would consider.”
In ASIC’s annual report, it stated it finalised 3362 breaches without 10 per cent of them being referred onto stakeholder teams to investigate further.
Derham noted that in the annual report, ASIC said it received 14,038 reportable situation form lodgements from licensees.
“What happened is ASIC didn’t get a budget increase when the law changed and they’re triaging everything,” Derham said.
