These authorised representatives choose their ‘flag of convenience’ licensee in order to avail themselves of minimal supervision, minimal training, a suitably broad authorised investments list (everything) and, of course, absolute control of their client base.
For them the licensee is a speed bump on their highway to success and as such real engagement with the licensee is to be avoided in order to maintain their ‘full speed ahead’ ambition. The real surprise is not that these planners exist, but rather that they can actually find these ‘flag of convenience’ licensees to meet their requirements.
Only the other day I was contacted by ‘Terry’. He told me his compliance contractor had found some fairly serious problems with a file being looked after by ‘Thomas’. Thomas had insufficient documentation in the file and had helped a client take out an investment that was not only not on Terry’s already very broad authorised investments list, but was in any case unsuitable for the client. Terry also confirmed this was not the first time Thomas had been caught doing this.
“Can I have a look at your authorised representative’s agreement with Thomas?” I asked.
“We don’t have one,” came the reply.
“So what are you going to do?” I asked.
“I want to contact the client and tell them to come in so we can review this inappropriate investment. But I don’t have their contact details,” was the reply.
He had allowed the compliance officer to see the file for the purposes of the internal audit, but he had not allowed any copying of the documents. Abashed, Terry went on to explain Thomas had come to him with a large mature client base that produced a substantial commission every year. All he needed was an Australian financial services (AFS) licensee to operate under. He didn’t want any bells and whistles, he told Terry. He just wanted the bare minimum of obligation on both sides.
Terry had few obligations but was guaranteed a material sum as his share of the substantial commission. Thomas didn’t want much in writing and he certainly didn’t need a restrictive covenant to be signed because, as we know, he controlled the clients’ files completely.
But now Terry was starting to see the error. He’d forgotten a most important point. As the licensee he was primarily liable to the clients. And without a written agreement he may not even be able to seek indemnity from Thomas as the authorised representative primarily responsible for the client’s problems.
To try and nip this matter in the bud he had to be able to contact the client to set them right. Terry had demanded that Thomas provide the contact details for the client and make all his files available for a full compliance audit. Thomas had replied through his solicitor who informed Terry that Thomas had surrendered his authorised representative status with Terry and no longer felt bound to comply with Terry’s demands.
Thomas had already found another AFS ‘licensee of convenience’ who would also be lured by the promise of easy money through the significant and assured commission stream in return for a promise of minimal interference. The speed with which Thomas had located his new haven indicated to me this is a more widespread problem than might first appear.
“Should I threaten to go to ASIC?” Terry asks boldly.
That could pose problems in itself. Terry’s obligation to advise ASIC exists independently of any quarrel he has with Thomas. If he truly believes Thomas has breached the securities laws in a material way, Terry has no choice – he must raise it with ASIC. The threat is therefore essentially meaningless because by making it Terry reveals that he does not want to report the matter (including the lack of management of the relationship with Thomas) and is therefore unlikely to do so.
For good measure Thomas’ solicitor warned Terry that any comments made publicly by Terry about Thomas would result in the commencement of defamation proceedings. Despite this being an idle threat, Terry is now further spooked by the predicament he finds himself in.
The main lesson here is that AFS licensees would do well to appoint authorised representatives only on conditions that ensure the representative can be made fully responsible for their actions and that if necessary the licensee can indeed take charge of the clients’ files in order to rectify problems the representative may otherwise not be interested in fixing.
With more individual licenses being issued every day, the new crop of such licensees must seem fertile ground for planners like Thomas. The temptation of accessing a share of a readily-available commission should not blind licensees to their proper role and to the methods of ensuring compliance with that role, including a well-drafted written agreement with the authorised representative.
