The expectations of both regulators and clients, will only go higher.
That creates a conundrum for financial advisers, who are caught in a difficult situation trying to meet what appear to be conflicting demands.
“The reality is, regulation often lags behind innovation,” tech maven Bill Maris has said. He knows what he’s talking about. Maris is an entrepreneur who founded Google Ventures, the internet giant’s venture-capital investment vehicle. Regtech can help close that gap.
Regtech – regulatory technology – pairs innovation with regulation. New solutions help advisers navigate an increasingly complex regulatory environment while also cutting the cost and time involved with compliance. That gives advisers more time to spend with clients, and a set of tools to engage with them and educate.
Regtech has two aspects: it can improve the quality of advice as it is being formulated, and it can confirm the quality of that advice once it has been delivered.
As advisers know too well, identifying clients’ goals and relevant circumstances is a key part of delivering advice. But all too often, this is hindered by inaccurate information.
As the Australian Securities and Investments Commission warns in its recently updated Regulatory Guide 175 (Licensing: Financial product advisers – conduct and disclosure), advice providers must consider whether the information clients initially disclose to them is enough to give an adequate picture of their circumstances.
“We expect that, often, it will not be sufficient,” the guide states. “In this situation, advice providers will need to make further inquiries to identify the client’s relevant circumstances.”
The ‘safe harbour’ aspect of the best-interests duty also rests on how thoroughly an adviser makes inquiries into a client’s relevant circumstances.
Satisfying increased requirements to maintain an audit trail demonstrating care and diligence has the potential to be fraught with frustration and administration.
Fortunately, our financial lives are now increasingly electronic, with digital payments rising at almost 10 per cent a year, according to data from consultancy Capgemini. This makes it relatively simple for advisers to use regtech to learn more about their clients than they consciously know about themselves.
Great advisers will always be adept at uncovering clients’ values, attitudes, expectations, financial experience and literacy. But technology can be more efficient and accurate at multiple aspects of the fact-finding process, cutting through many behavioural biases that distort clients’ thoughts and actions.
Fix errors before it’s too late
Scandals have, unfortunately, become synonymous with the advice industry. Millions of dollars in remediation has already been paid to clients.
Regtech can lift the quality of advice, making it easier to comply with the best-interests duty, but it can also correct mistakes before they cause harm. This aspect of regtech is still in its infancy but, over the long-term, will radically reduce the number of regulatory breaches.
At the moment, only a small percentage of case files are thoroughly reviewed before advice is handed out. The situation will change as paper files are consigned to the dustpan of history and replaced with digital files that regtech – specifically artificial intelligence – can quickly scan and analyse.
These processes can easily be scaled across organisations and improve real-time risk controls. And it is processes that offer the greatest protection against potential regulatory sanctions.
That has been demonstrated with the first civil penalty imposed for breaching the best-interests duty. In October, the Federal Court ordered Melbourne financial planning practice Golden Financial Group (formerly NSG Services) to pay $1 million for a total of 20 contraventions.
Some of NSG’s control weaknesses included lack of regular checks over the accuracy of client fact-finding forms, and forms being completed by staff after client meetings. That contributed to NSG providing advice “in the absence of proper, sufficient and complete instructions and information about the client’s objectives, financial situation and needs”.
Regtech can automate the process of knowing your client using robust solutions that draw on clients’ real financial situations and behaviour. Those solutions make it easier, not harder, for staff to comply with internal controls and discharge their professional responsibilities.
Culture is central to the success of both compliance and innovation. Regtech offers a path to help advisers bring that culture to life and build a stronger and more profitable business.
TOPICS: asic, Golden Financial Group, NSG Services, Regtech