The FSC changed its advice licensing plan, but it still lets management off the hook

The Financial Services Council deserves credit for listening.

Its White Paper on the Future of Advice Licensing is a great improvement on its green paper. The FSC abandons tiered licensing, rejects practising certificates and accepts that licence size is not a reliable proxy for risk. Most importantly, it concludes that we don’t need to replace the AFSL framework; we need to supervise it more effectively.

That’s the right direction.

But the white paper still leaves one critical question largely unanswered: who is accountable when a licensee’s compliance systems fail?

The paper continues to focus on “the licensee” as though compliance is something organisations achieve simply by having governance frameworks, policies and compliance teams. Bitter experience tells us a different story. Compliance failures are rarely caused by a lack of systems or an absence of frameworks. More often, they occur because the people responsible for those systems fail to act.

The white paper rightly acknowledges that large licensees can have mature governance structures, sophisticated compliance functions and greater financial resources. Yet history repeatedly demonstrates that these attributes don’t guarantee effective compliance.

The FSC’s bias and preferences are understandable, but they’re not facts.

Westpac, Macquarie and, more recently, ASIC’s proceedings against InterPrac Financial Planning illustrate the point. None of these organisations lacked compliance personnel, reporting systems or access to information. The question was whether management recognised warning signs, exercised authority and responded appropriately when risks emerged.

That’s why licence size is ultimately the wrong measure. Capability depends on judgement, leadership and accountability, not adviser numbers.

The InterPrac proceedings are particularly instructive. ASIC alleges that the licensee identified significant warning signs, including deficiencies in advice files, concerns about product recommendations and issues involving lead generators, yet failed to respond effectively. Those allegations remain before the court, but they highlight an important regulatory principle: the effectiveness of compliance depends on how management uses the information it already has.

This exposes the white paper’s principal weakness. It discusses the capabilities of licensees without giving equivalent attention to the directors, executives, controllers and responsible managers (RMs) who determine whether compliance arrangements actually operate.

A licensee is a legal entity, not a real person. It doesn’t read compliance reports, investigate misconduct or decide whether to terminate profitable advisers. People do.

If we want to strengthen confidence in the advice profession, accountability must follow practical authority rather than corporate structure. Regulators should ask who received the relevant information, who had authority to intervene and why action was, or wasn’t, taken.

One practical reform would be to require periodic independent reviews of a licensee’s governance, compliance and supervisory arrangements. Similar models already exist elsewhere in Australia’s regulatory framework. Independent reviews are more likely to reveal governance weaknesses than additional administrative meetings because they test whether controls operate effectively rather than simply confirming that policies exist.

The FSC has made an important contribution by shifting the debate away from replacing the AFSL framework and towards improving supervision. That deserves recognition, but the more critical step to take is to stop treating compliance as an attribute of corporate entities and start recognising it as a function of management behaviour.

The central issue isn’t how many advisers operate under a licence or how many compliance staff a business employs. It’s whether those with authority use the information available to them and are held accountable when they fail to act.

That’s where advice licensing reform should begin and that’s where real leadership is needed.

Sean Graham is the managing director of financial advice compliance firm Assured Support.