Licensees feeling the heat at royal commission

Andra Lazarescu
— 1 minute read

The revelations coming out of the royal commission hearings could give advisers the upper hand in their negotiations with licensees, writes legal consultant Andra Lazarescu.

The revelations coming out of the royal commission have been nothing short of astounding, and for some, confirming.

Indeed, they make for very good headlines and memes: fees charged to dead people, fees for no services, lying to the regulator, and reports which are independent in title only and not much else.

However, looking past the easily sensationalised information, the revelations also have the potential for turning the negotiating tables between dealer groups and advisers dramatically.

The relationship between licensee and adviser, has been built on the statutory enforced responsibility the licensee carries for the adviser’s actions.

Dealer groups have taken great care in extracting contractual protection and oftentimes guarantees from their advisers, to manage the liability they face under the Corporations Act.

The presumption has been that only the actions of the adviser have the potential to severely impact the dealer group's business.

The revelations from the royal commission suggest that mismanagement at the dealer level, is just as much of a contributing factor, if not more, than the actions of individual advisers.

It is time to move the relationship between dealer and adviser onto a more equal footing, and effect this through initial thorough upfront due diligence and a rewriting of the terms of the authorised representative agreement.

Three areas which stand out are compliance, reputation management, and regulatory disclosure.


ASIC’s finding that a stunning 90 per cent of SMSF advice fails to consider the clients' best interests surely challenges the notion that the dealer knows best.  

Advisers looking around for a licence to operate under, would be well served to check out the dealer’s compliance track record, systems, and assess the allocated budget designed to maintain the required compliance standard.

One question, which has finally received some airtime by the royal commission and which everyone working at the coal face is all too aware of, is that of resourcing. How big is the compliance team?

Does it have any external supervision and/or assistance? What mechanisms does it use to ensure currency of the advice provided? How many reviews are conducted?

What actual access do they have to the governing body and what support are they receiving from management for this difficult task?

Reputation management

Advisers whose dealer group has been maligned at the royal commission must be particularly concerned about their own reputation being tarred with a very broad brush.  

Reputation management clauses which are usually tacked on to the requirement for the adviser to disclose the identity of the licensee, and obtain the licensees sign-off on all marketing material, are generally only designed to work one way.

The recent revelations, make it clear that the actions of a licensee have just as much potential to harm, by association, the business reputation of an adviser.

Regulatory disclosure

The licensee has a positive duty under the law to report significant breaches to ASIC, and usually imposes a back-to-back duty on the adviser to require reporting of any breaches or compliance failures to it.  

Interestingly, contractual arrangements with advisers do not usually impose a similar duty on the licensee to disclose to its advisers that it has submitted breach notices to ASIC. 

Not even in a redacted form, not even to the adviser named in the breach notice. How can the licensee’s failure to comply, even if resulting from an isolated case of rogue adviser behaviour, not be relevant to the other advisers in the dealer group?

A positive duty imposed by contractual terms will provide the adviser with a fuller and more current picture of the licensee’s business, and allow easier access to documents especially when it concerns their own conduct, doing away with more cumbersome applications under the Privacy Act.

There should be positive contractual obligations on the dealer not only to meet their requirements under the law, which are common, but to also consult with the adviser on these matters and alert them to any discrepancies. 

The advisers are supposedly not only paying for this, but are also making a significant investment into the long-term viability of the dealer group, and therefore have a vested interest that their business be operated ethically and sustainably.

Andra Lazarescu is a financial services lawyer working from Melbourne and New Zealand.


Licensees feeling the heat at royal commission
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