In the wake of the Hayne royal commission, as big banks exited the financial advice arena and the number of advisers authorised by the biggest licensees plummeted, the corporate regulator faced the growing issue of how to effectively protect as many consumers as possible from poor advice.
When the space was dominated by a handful of large licensees it was relatively easy to focus on the very big end of town as an efficient way to cover the greatest number of individual advisers and, by extension, prevent or mitigate harm to the greatest number of clients.
It was also handy the large licensees had the financial resources to compensate or remediate clients when necessary. But the equation changed as advisers that had previously been authorised by banks moved to smaller licensees or obtained their own AFSLs. For a resource-constrained entity like a regulator, that became headache.
Danielle Press, a former CEO of Equipsuper and senior executive at UBS Asset Management, finished her five-year term as ASIC commissioner last September.
In her first interview since leaving the corporate regulator, she tells Professional Planner that what kept her up at night was how to deal with single operators.
“The challenge for me as we move away from large licensees, which is where we were 20 years ago, to being more fragmented, is how does the regulator actually oversee that broad fragmentation of advisers?” Press says.
“When you had five or six licensees, you basically just looked at the licensee and the licensee was doing much of the compliance work for the regulator, whereas that doesn’t occur in the smaller operators.”
Press’ comments come amid industry debate about how the regulator can effectively police a scattered advice sector, with CoreData Research founder Andrew Inwood suggesting it could be the next regulatory failure, while AdviceIQ general manager Paul Harding-Davis countering that PI insurers will charge less to self-licensed firms and are considered less risky.
As a regulator ASIC was often criticised for an over-focus on the top-end of town, while allowing smaller licensees and own-AFSL firms off the hook. Press disputes the idea that it focused more on big licensees.
“In fact… I’ve heard the argument from the small operators time and time again [that] you’re being unfair on us and asking us to do too much and asking us to be like a large operator, and we can’t be,” Press says.
But there’s no doubt that when it focused on big licensees ASIC’s actions had a much greater impact, were much more visible, and resulted in higher remediation or compensation figures in total dollar terms.
Press says the regulator views its actions through the prism of preventing harm to the greatest number of individuals possible, “and when you’re thinking about harm, if you’re looking at a licensee – be it medium or large – the harm is more clear, because [the licensee is] harming many, many clients, as opposed to one or two”.
“Unfortunately, the [harm to an individual] is equally as bad, if not often worse, at that very small end. But collectively, if we’re thinking about allocating scarce resources, do I want to protect 100 people, or am I going to protect one person?”
Press says this is the trade-off a regulator considers every single time action is taken.
Size matters
In a different world the regulator would have the resources to monitor every licensee equally. But even now, the cost of regulation, particularly via the ASIC levy, attracts criticism from those who have to pay it.
“I think the reality is that the system cannot afford the regulator that the system actually thinks it wants,” Press says.
The post-royal commission adviser diaspora and the growth in own-AFSL firms has driven scepticism about the motivations of advisers who might be leaving licensees that hold them to stringent standards of compliance and moving to an environment where they’re out of the spotlight and can, to put it bluntly, get away with sloppy processes or lax advice standards.
Press says “it was a real issue in a small cohort of that small cohort” who obtained their own AFSLs.
“I never thought this as a regulator, and I don’t think it today, that financial advisers generally go to work thinking how am I going to screw my client and how am I going to get away with stuff that’s bad,” Press says.
“I just I just fundamentally don’t believe that that is the majority of the advice space.”
But she concedes that there are some people in the advice who do, even if it is a fraction of all advisers, and it’s a challenge to monitor them if they’re a small licensee, self-licensed.
“Or they’re actually unlicensed, which is even worse,” Press says.
“If they are unlicensed, then where on earth is the protection? At least at least if there’s a license there, there’s AFCA, there’s a Compensation Scheme of Last Resort, there is some form of support. But at an unlicensed level, oh my goodness. It’s fraud, its theft, it’s illegal, but it’s whack-a-mole to try and find it.”
Crushing statements
An important piece of recent regulatory reform is the removal of Statements of Advice which will be replaced by advice records as part of the Quality of Advice Review reforms confirmed by the government at the end of last year.
But there was nothing in the law that says an SOA has to be a huge, unwieldy and basically unreadable document. But the countervailing argument is to try and issue clients with a simplified SOA and see where that gets you with ASIC.
“We heard that a lot,” Press says.
“I don’t think I would have done a presentation or [had] a conversation in financial advice without getting to that point of ‘SOAs are broken’. “
Press echoed similar comments to Minister for Financial Services Stephen Jones that SOAs are being used as protection mechanisms rather than client documents.
“Whereas, ASIC would argue – and I think rightly – that if you have good records, your SOA is almost irrelevant because you are going back to the record-keeping,” Press says.
“I would argue that actually what ASIC pings financial advisers on is not the SOA, it’s the record-keeping.”
Press says both are different but get wrapped “in this furore” about whether an SOA is useful or not.
“Depending on, obviously, what the law ultimately gets to, as a regulator, as an advisor, as a client, I actually don’t care what the SOA says,” Press says.
“I just want to make sure my clients are protected and that as a client, I’m protected from the wrong things occurring. I think the problem is that the SOA has become the legal document of choice, if you like, which is actually not helpful.”
Give and take
Press acknowledges there will always be us-and-them tension in a relationship between a regulator and the entities it regulates, but there are ways that relationship can be made to work better if both sides are willing to give a little.
“You can’t please all of the people all the time,” Press says.
“For me, it was about making it better, and improving that outcome, and I think acknowledging that change needed to happen on both sides actually: industry needed to shift, and the regulator needed to shift.”
Press adds she had said publicly when she was commissioner that some of the regulator’s guidance was “horrible”.
“[Even] I didn’t understand it, and I was a practitioner in it,” Press says.
“Particularly in the advice space, there is a recognition that the regulator needed to do better on some of that stuff as well, but the industry also needed to stop just blaming the regulator, because every time there was a problem it was always the regulator’s fault. Well, I’m not sure that’s right.”
The problem lies with people with zilch practicing experience telling advisers how to do their job.
Let’s say your surgery is to be performed by a surgeon who has a certification hang on the wall which says “My practices and surgical procedures are compliant in accordance to regulatory requirement laid down by people who haven’t perform any surgery.” What do you think?
Regulations should be there, but only to provide the dos and don’ts, not to tell advisers how they should do their job. Just like there are rules in sports for the players to follow. Regulators should not control how they employ their skills within those rules. Advisers have different approaches to a solution, and that is not a bad thing. Because it suits the different consumers’ behaviour – not a one size fits all approach. As such, I select clients who understand and comfortable with the way I operate. If only the regulators can understand this, rather than forcing advisers to do what they think is right on paper.
Perfectly summarised Anthony Dunn. The disconnect in understanding is astounding
These comments in summary are, regulators sleep at night when dealing with large organisations, as if they are found to be doing the wrong thing, they have shareholder funds to pay compensation, whereas with a smaller licensee they don,t.
Ms press look at the results of the royal commission and current complaints brought to AFCA.Small organisations have reputation risk and the large percentage of small advisors have either worked or seen what the large organisations practice. There values do not align with the best interest of clients, its best interest of the shareholders or the ceos of large superannuation funds on million-dollar salaries.
ASIC/APRA needs to be restructured so that the associations and the regulator are working together to enforce standards whether you are large all small.