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ASIC’s Federal Court win puts licensees on notice over compliance outsourcing

Mike Taylor10 August 2021
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Financial planning licensees should regard themselves as having been placed on notice by the Australian Securities and Investments Commission’s (ASIC’s) most recent Federal Court win that they cannot seek to minimise costs by outsourcing regulatory compliance.

In what represents a landmark case for licensees, ASIC emerged victorious from a Royal Commission test-case in the Federal Court which endorsed the fact that licensees have unavoidable obligations with respect to overseeing the conduct of their advisers and authorised representatives.

The case concerned RI Advice, previously owned by ANZ, but which is now part of IOOF, with the Federal Court have heard that RI Advice’s compliance oversight had been outsourced to ANZ Wealth.

The Federal Court outcome has prompted the chief executive of one of Australia’s largest publicly-listed licensees, CountPlus, Matthew Rowe to declare that compliance should be part of a licensee’s DNA and should never be outsourced.

“Compliance, professional standards and quality assurance are all key functions that should form part of the DNA of the licensees business, it speaks to capability and culture.” Rowe said. “You should never outsource that which forms your DNA.”

“Advisers should be asking the question why are these ‘mission critical’ functions being outsourced? If they are being outsourced then this is being done for base economic reasons, there is no benefit for the adviser being part of a licensee business that outsources its core DNA,” he said.

Rowe went further in suggesting that the days of a licensee doing a once-year audit of a selection of four or five client files were well and truly over, with supervision and monitoring now needing to be data-driven in real-time to form part of an overall risk management framework.

“It should form part of your value proposition and act as an ongoing ‘coaching’ service if it is done well. To build this costs money, time and needs a quality data set and data analytics expertise,” he said.

“I remain concerned that a number of licensees appear to engage in regulatory arbitrage to minimise costs, it is not an even playing field for those doing the right thing.  We are still seeing low-cost licensees of last resort – inadequately resourced, under-capitalised and doing less than the minimum required by law yet this cohort is operating largely unobserved.”

“Given the introduction of the compensation scheme of last resort, there is a moral hazard being introduced into financial advice, whereby licensees operating at low cost with no capital and minimum resources will not focus appropriately on compliance with the law or regulation and will simply fold if there is an issue, pushing the liability back onto industry.”

Mike Taylor

Mike Taylor

Managing Editor/Publisher, Financial Newswire

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