Competence, judgement, diligence the minimum required of licensees

ASIC’s statement this week that it considered the former chief executive officer and managing director of Sequoia Financial Group – who was also a director and responsible manager of its InterPrac licensee – was neither a fit and proper person nor competent is a timely warning to all advisers that there may be more than meets the eye when it comes to assessing the quality of a licensee’s management.

In banning Crole for 10 years from “from performing, as a director or responsible manager, any function involved in carrying on a financial services business”, ASIC said that he “lacked the diligence and judgement required to perform one or more functions as an officer of an entity carrying on a financial services business”.

It is a damning assessment of someone carrying out a role that is, frankly, all about diligence, judgement and competence. 

If you were to sit down and list out the key characteristics of a professional – in any field – those would be at or very close to the top of the list. Maybe you’d add “ethical” to it; ASIC delivered no judgement on that specific issue.

Advisers authorised by InterPrac were entitled to expect their licensee’s leadership to be at least fit and proper and competent. Why they didn’t know that it wasn’t is a question only they can answer. 

Diligence is another issue, and perhaps that was a plus for some InterPrac advisers. But maybe a “light-touch” licensee isn’t all it’s cracked up to be. Maybe licensees knock on the door, review files and generally like to know what’s going on with their advisers – even if advisers don’t like it – for a reason.

The characteristics of diligence, judgement and competence are among what a client would want in their adviser, as a minimum; but it’s equally important that the same characteristics exist in the senior ranks of licensee management.

ASIC note that Crole “was aware of serious concerns regarding the Representatives’ financial advice model, which included the use of lead generators, and failed to adequately respond to these concerns”.

It plays directly into the current narrative about governance of licensees, kicked off a year or so ago by the Financial Services Council when it opened consultation on a review of the licensing regime and licensee businesses, and brought to a head in its white paper published last month.

It’s worth noting that the FSC consultation paper canvassed the idea of “reforms to shift liability and responsibility closer to individual practitioners in line with other professions”. 

“This could include a greater role for professional associations in accreditation, alongside an enhanced adviser registry.”

Self-regulation is a long-held pipedream of the advice industry as it continues its progression towards becoming a fully-fledged profession. 

Individual advisers held fully accountable for the advice they deliver and to standards of conduct above the bare minimum set out in law, and the creation of a centralised, adviser-run and adviser-led body that has the power to expel advisers from the profession, is a kind of holy grail.

It’s always been the licensee-adviser relationship that has got in the way. For as long as licensees are ultimately responsible for the advice their authorised representatives provide, full accountability is structurally a step removed from the practitioner. But that does not mean advisers, for their part, should not hold their licensees accountable for what they do.

Licensees only exist because the law says they must. Whether it’s the best way to hold advisers to account for their behaviour and the advice they deliver is debatable. Good licensees do that for sure – and to the point made in the FSC white paper, they should do that irrespective of their size – and the role of the licensee is shifting anyway, from bare licensing and compliance to being essentially partners in their advisers’ business, whether as suppliers of services or as equity investors.

But as the advisers and many of the clients of the InterPrac group now know only too well, when the leadership of a licensee is asleep at the wheel or, worse, is looking the other way, it’s a recipe for disaster. An inattentive licensee might be an easy ride, but advisers who do not hold their licensees accountable might only have themselves to blame if something goes catastrophically wrong.