ASIC Report 362 Review of financial advice industry practice: Phase 2 is based on detailed survey responses from the 21st to 50th largest financial services licensees.
The report follows on from a September 2011 report that scrutinised the 20 largest financial planning licensees.
Report 362 raises a number of flags about conflicts of interest within licensee business models.
In particular, the regulator pointed out that around half of licensees are either wholly owned or majority owned by a product issuer. The majority of licensees’ income also comes from product issuers.
ASIC also raised concerns about the monitoring and supervision of advisers – highlighting the need to thoroughly reference-check advisers who have moved from another licensee.
In total, the regulator makes 12 specific recommendations for licensees and advisers in Report 362.
In regards to licensee business models, licensees were advised to consider whether “excessive product concentration represents a risk to their business”.
Compliance with the Future of Financial Advice reforms must include changes to internal policies and procedures (ie, not only business procedures).
Risk management controls must be “commensurate with the level of risk identified, focusing more heavily on those risks that would have a greater impact on the business and/or investors, and a higher probability of occurring”, according to the report.
When it comes to the training requirements, licensees must ensure their more experienced advisers keep their education up-to-date, said ASIC.
The report makes four separate recommendation when it comes to the monitoring and supervision of advisers.
Firstly, licensees and their advisers must fully understand their monitoring and supervision procedures – continually refining and updating those procedures as required.
Secondly, reference checks for new advisers must go further than police and criminal checks.
Thirdly, breach reports to ASIC must be made as soon as it is evident that a client has been disadvantaged, and the licensee should explain how the clients’ circumstances will be remediated.
Fourthly, licensees should use electronic storage platforms to retain client records rather than simply relying on contractual agreements with advisers.
In circumstances where the product approval process is outsources, licensees must “ensure they have adequate controls in place to manage any risk that may arise from that practice”.
Advisers need to understand that risk profiling tools are just one of the tools that can be used to understand their clients’ risk profile, said ASIC.
Licensees must put additional controls in place when it comes to risky or more complex strategies, said the report.
Finally, a trend analysis of complaints made against a licensee must be “fed back to the business so that the likelihood of similar issues arising in the future at both a licensee and adviser level is reduced”.
