Fix unreasonable product provider CDD demands on advisers says FAAA

The Financial Advice Association of Australia (FAAA) is urging AUSTRAC to provide appropriate exemptions for financial advisers within the proposed new AML/CTF rules regime in circumstances where product providers are imposing unreasonable demands.

The FAAA has pointed to so-called third-party arrangements between product providers and Australian Financial Services Licensees and has claimed “over-reach” on the part of the product providers with respect to customer due diligence (CDD) demands.

It has told AUSTRAC that limits should be placed on product providers including prohibiting them from placing extra requirements on AFSLs and advisers.

The FAAA has also recommended that AFSLs and advisers should be permitted to recover costs from product providers for undertaking CDD.

“Over time, product providers have reportedly over-reached in the ongoing CDD demands they place on advice practices under the auspices of their own AML/CTF obligations, with little regard to the impact of this practice or costs incurred on both the advice practice or the client,” the FAAA said.

“While an Item 54 reporting entity is not obliged to conduct ongoing CDD, product providers frequently include these obligations in commercial agreements or operating procedures obliging the AFS licensee and adviser to carry them out. This creates a significant power imbalance,” the FAAA has told AUSTRAC.

“The most significant issues with the operation of third-party reliance is that the entity conducting the CDD (the ‘other person’) is not being relied upon by the other reporting entity (the ‘first entity’) – product providers do not rely on an adviser’s attestation regarding their client’s identity – they outsource, rather than rely,” it said.

“Instead, commercial arrangements require that copies of all documentation be collected and held for production on request. This results in the item 54 reporting entity having to collect and store copies of documentation that they would otherwise be able to destroy once verification has been completed, significantly increasing cybersecurity risks for their practice.”

“Financial advisers are also being used as a mechanism to conduct additional CDD, including when no new designated service is being provided by either party, with the adviser and client bearing the cost of this process,” the FAAA said.

“There is currently little consistency in what product providers request of advisers and many requests seemingly go beyond what is required in the law. Product providers expect advisers to undertake all CDD requests made by them. This has become a common contractual inclusion in AFSL/product provider distribution agreements which may include unreasonable expectations and demands placed on the adviser/AFSL, with no compensation for costs incurred by the advisers for doing this work,” the FAAA said.