Trustee licensing: Learning from the mistakes of others

Those who believe the Australian Prudential Regulation Authority (APRA) has adopted a somewhat inflexible approach to trustee licensing would do well to read the Australian National Audit Office’s (ANAO) assessment of the manner in which the Australian Securities and Investments Commission (ASIC) handled Financial Services Reform (FSR) licensing.

What first needs to be understood about the ANAO audit process is that it often extends over more than six months, with each report having a number of iterations and the subject of the audit, in this case ASIC, being able to comment on findings and criticisms along the way.

In these circumstances it is obvious that Australia’s other financial services regulator, APRA, would have been keenly interested in, and reasonably well aware of, the issues that had been raised by the ANAO and the manner in which ASIC handled FSR licensing.

Perhaps more to the point, APRA would have been well aware of the need to avoid repeating the mistakes of its sister regulator.

Perhaps this explains why APRA has been so insistent that the quality of applications for trustee licences are up to appropriate specifications and that those applications are lodged with adequate time to allow them to be appropriately handled.

What also needs to be remembered is that the timeframe allowed by APRA for trustee licensing has been a good deal shorter than that allowed for ASIC to introduce the FSR process.

But what is clear from the APRA approach is that it learned from the lessons of FSR licensing, particularly in terms of avoiding a last minute rush.

It seems many of the problems encountered by ASIC had their genesis in both the timing and resourcing of its efforts, with the ANAO report stating that “two-thirds of all licences granted during the two year transition period were granted during the last six months.

“ASIC successfully dealt with the late influx and generally poor standard of applications by reallocating resources from other activities, such as the surveillance of licensees (so that surveillance staff could be available to achieve licensing targets), and by curtailing analysts’ scrutiny of applications (to reduce processing time).”

The ANAO analysis said the product of these moves had been that “ASIC’s licence systems did not properly record critical elements of its licence decisions, such as ASIC’s assessment of the applicant’s character or its assessment of the applicant’s evidence that they could meet their licence obligations”.

“Overall, important regulatory risks were not systematically addressed until after the end of the transition period,” the ANAO said.

What needs to be remembered about ASIC’s performance with respect to trustee licensing is that it could hardly be argued that it was the result of inadequate financial resources, given the Federal Government provided $90.7 million in the 2002-03 Budget for implementing FSR, including $59.9 million for financial services licensing.

It is also worth noting that the ANAO report concluded that ASIC had spent more on FSR-related activity than was budgeted.

“In addition, to address the peak licensing workload and the generally poor quality of the majority of the licence applications, resources from other units were reallocated to the licensing area. This meant that less resources than were originally budgeted were spent on activities such as surveillance.”

One of the worries to emerge from the FSR licensing process is that even today there exists some uncertainty with respect to whether everyone is appropriately covered.

The ANAO noted that, initially, the licensed population under FSR was less than that of the Corporations Act regime it replaced, and that ASIC and Treasury believe, in light of the rigorous licence assessment process, that a significant proportion of former financial services providers expected to apply for a licence instead chose to act as the authorised representative of another licensee.

The ANAO report noted: “ASIC is aware of lower than expected coverage among financial advisers and in the superannuation sector. However, in this respect, ASIC advised the ANAO that “it was difficult to provide useful estimates of the potential population which might fall within the financial services regime, and therefore of the current rates of coverage”.

With its sister regulator still coming to terms with the adverse media coverage flowing from the ANAO report, superannuation fund trustees can rest assured that APRA will be keen to ensure the trustee licensing issue does not expose it to similar criticism.