Compliance can blind you to clients’ needs

Sean Graham

By

August 31, 2017

When forced to choose between clarity and compliance, most advisers make the wrong choice.
I appreciate that their choice isn’t entirely voluntary; some advisers consciously embrace formal compliance as the safer option. Others do so unconsciously, in a Pavlovian response to complexity, confusion and fear of consequences.

Whatever their reasons, they make the wrong choice because the research shows that disclosure and formal compliance frequently frustrate clients’ understanding, legitimise conflict and, too often, conceal the most egregious conduct behind prominent commitments to ethical conduct.

As an industry, we’ve consistently struggled to promote quality above process. I appreciate that advice groups want to insulate their core banking and product manufacturing functions from the risks inherent in their wealth management activities, but emphasising consistency over quality has delivered sub-optimal outcomes for our industry and our clients.

Compliance may have delivered a measure of consistency, but it has limited consumers’ access
to exceptional advice and robbed advisers of the courage and certainty needed to provide clear, concise and effective advice.

We’ve seen how this ideological conflict has played out in our advice documents; long, rambling and repetitive SoAs have become the norm. Checked steps and repeated commitments “to act in your best interests” substitute for any real attempt to act in the clients’ best interest.

Licensees and advisers obsessively focus on the “safe harbour” provisions and demonstrating how their advice is in the client’s best interest, rather than obsessively focusing on actually providing advice that is in their clients’ best interest.

I appreciate that the sustainability of an industrial advice model depends on minimising risk and delivering consistent product, but doesn’t this emphasis perversely demonstrate a failure to act in, or prioritise, their clients’ best interests?

The challenge of the best-interest duty

I think that the current debate over the best interest duty and the value of the safe harbour provisions is representative of the broader challenge to advice. If one believes that industrialised and corporatised models are the future of the advice industry, then prescription and structured processes are the keys to consistent profitability.

If one believes, however, that the future advice profession will be independent and structurally unconflicted, then clients’ needs, objectives and required outcomes need to be prioritised above a process map.

In my experience, while great advisers embrace process, they don’t allow an obsession with it to distract their attention from the desired result or the steps required to achieve it.

This is a controversial view. It’s convenient to accept Justice Moshinsky’s reasoning, in ASIC versus NSG Services in March 2017, that section 961B of the Corporations Act is concerned with the process of giving advice. It’s reasonable to acknowledge that “retrospective testing against financial outcomes” was never intended to be the measure by which compliance with the best interest duty is assessed. It’s pragmatic to assume the law imposes a “better position” test. But as convenient, reasonable and pragmatic as these positions are, they’re fundamentally wrong and ultimately destructive.

Form over substance

Licensees’ willingness to embrace form over substance and to venerate process over results should concern us all. It’s naive to believe that outcomes are entirely irrelevant or somehow less important than complying with steps designed to provide, at best, a partial defence against failures to act in a client’s best interest.

It’s illogical to suggest that advice in the client’s best interest must involve a change in circumstances. While established professions cleave to principles – such as the doctors’ “first, do no harm” – we demand, offer or receive increasingly prescriptive measures designed to minimise negative outcomes. Unfortunately, the legal safety provided by the “safe harbour” is illusory.

Instead of complaining about uncertainty, we need to embrace the opportunity to deliver exceptional outcomes. We should be confident that appropriate and considered advice, demonstrably in our clients’ best interest, cannot be inconsistent with our obligations and duties.

I understand that uncertainty engenders caution but I think that we, as an emerging profession, need to accept the view that the best interests duty is more than a “legislative requirement to ensure the processes and motivations of financial advisers are focused on what is best for their clients” as Bill Shorten, then-minister for financial services, described it in a speech to Parliament in debate on the Corporations Bill in 2011. There has to be a substantive element. While the retrospective testing of advice outcomes is unhelpful, the consideration
of likely outcomes should be a key component of any adviser’s duty.

ASIC’s “better position” compliance test, as laid out in its regulatory guide on licensing earlier this year, may be an aspirational standard in excess of the obligation imposed by Section 961B, but it should be the guiding star for those advisers leaving the legislative safe harbour in search of better outcomes.

Licensees need to place less reliance on checklists and more on advisers’ skill, competence and professionalism.

In reality, an advice relationship is not a series of transactions but a relationship of trust, dependence and reliance. This relationship is the foundation of an adviser’s duty to act objectively, diligently and in their clients’ best interest.

While the statutory defences outlined in Section 961B(2) may suggest whether, or to what extent, an adviser has complied with the section, the adviser’s substantive conduct is, in my view, the key determinant for assessing their compliance with this duty. The processes followed by the adviser may, at best, suggest their advice was provided in the best interest of their client but it does not prove it.

Let’s hope the regulator shares this view.


TOPICS:  asicASIC versus NSG Servicesbest interestssafe harboursection 961B of the Corporations Act