ASIC's report on financial advice

By Michelle Levy
Banking Corporate Governance Financial Services Risk & Compliance

In brief

Written by Partner Michelle Levy and Managing Associate Simun Soljo

ASIC has recently released a report about its work with the big four banks and AMP on adviser misconduct. The report is essentially an update on the progress of ASIC's Wealth Management Project, and mostly contains information we already know. The most interesting part deals with the results of ASIC's review of adviser audit processes by the banks and AMP. They indicate that internal audits are not identifying compliance issues.

To date, ASIC has:

  • Asked the institutions to identify advisers with serious and other compliance concerns ('Phase 1')

    185 advisers were identified and ASIC has banned 26, with ongoing investigation or surveillance of 75. ASIC said that, in over half of these cases, breach reports had not been lodged. It also complained about the delay in lodging reports and pointed to the prejudice that can result for consumers.
  • Overseen the development and partial implementation of Advice Review and Remediation Frameworks by the institutions that comply with the principles in regulatory guide 256 ('Phase 2')

    ASIC is very keen on institutions building their data analysis capability in order to help identify high-risk advisers using key risk indicators. It will be interesting to see whether this is a more reliable measure than the internal audits ASIC has criticised. ASIC has also provided an update on compensation paid by the institutions to clients.
  • Focused on 10 licensees and reviewed the adequacy of their background checking of advisers and their audit processes ('Phase 3'). They scored poorly on both.

    ASIC reviewed 160 customer files that had been audited by the institutions. ASIC found shortcomings in 82 per cent of the sample files. It said that the failure of auditors to identify non-compliant advice may be the result of lack of competence, or lack of adequate resources and training. In some cases, auditors even recommended that customer files be amended to make them compliant.

    ASIC has provided a checklist of issues it says auditors should consider, which repeats ASIC's guidance in RG 175 that the best interests duty requires that a reasonable adviser would believe that the customer is likely to be in a better position if they follow the advice than at the time the advice is provided. It is doubtful that the duty requires this.

    ASIC said that it will meet with each of the institutions to discuss the file review findings and its concerns about the audit processes, and will consider enforcement or other regulatory action.