The compliance Olympics

The Beijing Olympics will take place in 2008 and athletes from the competing nations will be preparing their training campaigns to perform at their best and win a medal. The preparation is intense and the attention to detail will often separate the winners from the other competitors.

The Athens Olympics took place in 2004, the same year participants in the financial services industry had to demonstrate they were worthy to qualify for the ‘financial services Olympics’; namely, to be granted an Australian Financial Services Licence.

A long bow? Of course it is, but if I had begun this article by referring to the major compliance issues of 2006, I would not have expected you to get past the first paragraph.

So at the risk of stretching the analogy too far, I will pursue the theme and name the gold, silver and bronze medal winners of the compliance issue of the year for 2006.

The awards criteria are what I perceive as the issues that have had and continue to have the most significant practical impact on the day-to-day role of the financial planner and their licensee.

Of course, there is a high degree of subjectivity in the selection process for which I make no apology.

In my dealings with licensees and their representatives (providing legal advice, conducting licensee and adviser reviews, running training sessions and presenting at conferences), I am often asked questions like: ‘When are all these compliance changes going to slow down and how do we meet all the obligations we have now?’

I am encouraged by these queries because it suggests a couple of things to me:

1. They know there are many obligations they need to be aware of and comply with; and

2. They want to comply but just need a clear direction through the maze of obligations in the legislation, regulations, policy statements, guidelines, class orders, association codes, and so on.

There was no let-up in regulatory developments and compliance issues in 2006, and we saw some new entrants and some ‘old-stagers’.

These included:

~ conflicts of interest;

~ claims against advisers and licensees for inappropriate advice;

~ use of approved product lists;

~disclosure of remuneration;

~compensation requirements;

~ an active regulator in the Australian Securities and Investments Commission (ASIC); and

~ efficient and appropriate monitoring of advisers.

However, not everyone can be a winner, so the winners are:

Gold medal:the documentation of advice

Statements of Advice (SOA) have now been with us for nearly three years, but for many advisers they continue to be a cause of grief for a variety of reasons, including:

~ uncertainty as to whether advice has been given;

~ the content — in my experience, the SOA that ‘speaks to the client’ remains a relatively rare thing;

~ full and accurate disclosure;

~ the timing in giving the SOA to the client;

~ whether a Statement of Additional Advice (SOAA) is more appropriate; or

~whether a SOA has to be given at all because a Record of Advice (ROA) will suffice.

The Financial Planning Association (FPA) released A guide to the development of effective Statements of Advice in October 2006 for use by its members.

As well as covering SOAs, the guide provided assistance in relation to SOAAs and ROAs. It describes legal requirements, ASIC requirements, FPA requirements and FPA suggestions.

This is a helpful resource licensees would be wise to review in conjunction with their templates for their SOAs, SOAAs and ROAs.

However, such guides can only take the drafter of the SOA so far. It is up to the adviser to ensure the SOA is coherent, easy to understand and focused on the client’s particular objectives, circumstances and needs. That much cannot be templated and, to my mind, there is no way around the fact that time and skill are required to achieve such an outcome.

The SOA was never intended as a form to be filled in. It was intended to accurately, concisely and effectively document the professional adviser’s advice to the client.

So, despite all the template documentation that has been prepared and the various options that advisers now have at their disposal to communicate their advice, this, in my opinion, is a worthy winner as the major compliance issue for 2006 (and one could say 2005 and 2004 as well), simply because the effective and compliant documentation of advice to the client will address many of the other issue contenders such as disclosure, conflicts and complaints.

So what lies ahead for SOAs? Plenty it seems, if the Proposals Paper released by Treasury in November 2006 is any indication. The proposals include:

~ Financial service providers may provide product sales recommendations that are not considered to be financial product advice in some situations that under the current law would be considered personal advice and require a SOA to be provided to the client. To me, this has a slightly Back to the Future ring about it, but, if adopted, will mean that some representatives (no longer allowed to call themselves advisers) will not have to provide a SOA when they make such recommendations.

~ A ROA rather than a SOA would be sufficient where an adviser makes a recommendation that does not involve a specific product, or makes a recommendation that the client hold an existing product, and the adviser receives no additional remuneration in relation to the advice.

~ A SOA would only be required if advice is given in relation to an investment amount that exceeds $10,000, except in the case of superannuation. Otherwise, a ROA would be kept for advice in relation to an amount less than $10,000.

Of course, the prudent adviser will always carefully document their advice, even if there is not a specific regulatory requirement that it be contained in a document called a SOA. Some things should not change.

Silver medal: AMPFP enforceable undertaking

An enormous amount has been written in relation to the AMPFinancial Planning (AMPFP) enforceable undertaking (EU) and its effect on the industry.

The response from licensees has been varied, ranging from treating it as gospel to ignoring it, although, in my experience, the latter providing financial services in the superannuation space are few.

Of course, the EU is not the law, but it is a clear indication of ASIC’s view on issues such as conflicts of interest, replacement of products recommendations, approved product lists, disclosure of management expense ratios in SOAs and misleading and deceptive conduct. From that perspective, it is a helpful guide.

Of concern is that the EU may be interpreted in such a way that consumers will not receive any advice in relation to superannuation because all the details of the ‘from’ fund are not reasonably ascertainable. This would be an unfortunate outcome given the potential impact on consumers and is the reason I have selected the EU as the silver award winner.

In my opinion, the way to deal with a situation where reasonable attempts have been made with limited success to find out adequate information about the ‘from’ fund is to make a recommendation to the client in relation to the ‘to’ fund, but make it very clear that this recommendation has been made without the adviser, despite reasonable enquiries, having been able to undertake a thorough comparison with the ‘from’ fund.

The SOA should then warn the client to check for themselves the benefits of the ‘from’ fund, with some hints for things to look out for (for example, life insurance).

Effectively, the adviser is making a recommendation to influence the client in making a decision in relation to the ‘to’ fund, but expressly not making a recommendation to influence them in making a decision in relation to the ‘from’ fund.

The adviser is saying to the client, ‘You must make up your mind about that one yourself because, despite my best efforts, I have been unable to obtain all the information that would be ideal to provide the complete picture’.

The adviser is placing the client in a fully informed position to make a choice, in so far as the adviser has been able to do it, and I can’t see any court requiring more of a licensee than this.

Please note that I am not suggesting the scope of advice should automatically exclude providing advice in relation to the ‘from’ fund. Such enquiries are relevant for the purpose of providing advice in relation to the ‘to’ fund, plus it is not difficult to imagine that such an approach could easily become part of the modus operandi of the adviser/licensee and, thereby, a device to avoid the reasonable basis of advice requirements.

One hopes the availability of information for all superannuation products will become more readily available sooner rather than later so investigations into the ‘from’ and ‘to’ funds will permit the adviser to make a full comparison. In doing so, I would like to think that this issue would not be a contender in future ‘compliance Olympics’.

Bronze medal: to report to ASIC or not to report?

Nobody likes dobbing themselves into the regulator.

However, an increase in the number of breach reports to ASIC suggests licensees are being more vigilant in doing so — or are they?

On May 2, 2006, ASIC stated that since July 1, 2005, a total of 690 breach notifications had been received. This is a significant increase on earlier figures, and ASIC welcomed this response with an information release titled Industry embraces early notification of breaches.

This is a complex regulatory regime and, in my opinion, it is not possible to comply 100 per cent of the time. There is simply so much to know and understand.

Lawyers practising in the area and compliance professionals will be familiar with the obligations, but the smaller licensee/planner who has not had the time or inclination to study the Act, regulations, policy statements, licensee compliance manual and so on will generally have a superficial understanding, which is usually found wanting in a compliance audit.

Given the number of licensees, 690 reports to ASIC in a nine-month period seems a little light-on to me and reflects the difficulty licensees are facing in identifying, assessing and, where significant, reporting the breach to ASIC.

This is also confirmed by the outcome of the ASIC survey in 2006 of breach registers and procedures, which showed 20 per cent of breach registers inspected were empty and 47 per cent did not have enough detail to assess the breach for significance.

Jennifer O’Donnell, ASIC’s executive director of the compliance directorate, has indicated that in assessing breaches the regulator is looking at whether there has been a genuine attempt to comply, a genuine effort to rectify the issue, time taken to report the breach and, not surprisingly, the impact or potential impact on consumers.

The November Treasury proposals also consider breach reporting. The proposal is that all breach reporting requirements in the Corporations Act (and in the prudential Acts) stipulate that a significant breach must be reported to the regulators as soon as practicable and, in any event, within 10 business days after the breach is first notified to a person responsible for compliance.

Clearly, the additional five business days is a bonus to the existing 912D reporting requirements, but the interesting aspect of the proposal is from when the time runs; namely, when the breach is first notified to a person responsible for compliance.

Compliance professionals would argue that everyone is responsible for compliance within an organisation. Ideally, the board and employees who are not in the compliance department would understand this too.

If that is the case, then the time limit will run from the date anyone within the organisation becomes aware of the breach.

I suspect that is not the intention of the proposal and it is more likely that it refers to someone within the compliance department or in smaller organisations who has compliance management as part of their position description.

If this is so, then one can envisage without too much difficulty a scenario where the compliance people are ‘kept in the dark’ completely or until the breach is researched more fully. Such an outcome would be undesirable.

Accordingly, it would not surprise me if this remained a contender in the next ‘compliance Olympics’.

So what of 2007?

No doubt, new issues will present themselves with little or no warning. And, of course, some of the current contenders will be starters again.

However, one compliance issue is in heavy training right now and will undoubtedly be right up there this year and in 2008.

Anti-money laundering is ‘the next big thing’, and some financial services providers will be more prepared for it than others, having already implemented some strategies to cope with the new compliance requirements, which are to be fully phased in over the next two years.

Tim Nethercote is a partner of Holley Nethercote CommercialLawyers.