3
Compliance Lecture and Ethics
BM Ch 1, 2; TJHM, Ch 2;
CCH Ch 8; Day et al Ch 1;
1
Compliance
Set of regulations and behaviours that must be met
Reflects the attitude companies and their employees have
towards the regulatory environment in which they operate
An ethical framework is supported by and is
reflective of community values which include:
trustworthiness, honesty, integrity and diligence in respect
of professional behaviour
The core of the regulatory environment within
which financial advisers operate:
Corporations Act (2001) together with the Financial
Services Reform Act (2001) (FSRA)
FPAs Code of Ethics and Rules of Professional Conduct
2
Need to protect consumers, and give them
assurance about the advisory services industry
Need for industry professionalism
Growth of new investment products
Failure of some financial services companies
Significant growth in superannuation funds (and
their assets) due to compulsory superannuation
Foreign investment in financial services
Globalisation, and its effect on financial services
Continuing legislative reform, particularly the
Financial Services Reform Act 2001 (FSRA), and
Corporations Act 2001
3
Financial Services Reform Act
2001
In combination with the Corporations Act 2001, the
FSRA:
provides a single regulator for advice in fields of insurance,
investment and retirement advice industry (ASIC)
compels the industry to have a firm commitment to good
ethics
imposes an obligation on advisers to put the clients
interests first (fiduciary duty)
4
Management must ensure that:
the compliance system reflects the firms values
they provide the necessary resources to support
compliance
they make business decisions within the compliance
framework
their advisers comply with the system
they support disciplinary outcomes from the system
that there is a comprehensive and ongoing education and
training program for all employees, not just financial
advisers
Ideally, the organisation should be committed to
best practice
5
Why?
Advisers are potentially subject to a number of offences,
which often have high penalties
Licence conditions require Principals to be vigilant in
ensuring compliance is maintained (legal, policy and ASIC
requirements), as they are ultimately responsible
See CCH, p474 for requirements to be followed by advisers
6
LICENSEES
Have to meet a stringent set of requirements in
order to maintain their licence
Required to monitor, supervise and control the
actions of their Authorised Representatives, to
ensure that they are meeting their obligations and
responsibilities
Where the licensee is a member of the FPA, it is
bound by their rules, as are individual members
7
Structure
cont...
INDUSTRY PARTNERS
A number of other important service providers
work within the financial services industry
One large business may interact with insurance and noninsurance product providers, banking, licensees,
stockbroking, research, technology and in-house training
These partners are governed by the same laws, regulations
and industry standards, and often through significant
contractual arrangements
Where licensees are also product providers, their
responsibilities to the client and their
responsibilities to the business could be in conflict
8
Until the mid-1980s, the FP industry was relatively
small
Generally limited to clients with significant amount of
money who sought advice of stockbrokers, accountants,
lawyers, insurance agents, and taxation specialists
Prior to July 1998, industry was regulated by a
number of government authorities
In July 1998, as part of the recommendations from
the Wallace Commission, there was a reorganisation of the regulatory authorities
express purpose was to simplify and strengthen the
regulatory environment and to ensure a clear demarcation
between regulators
changes introduced were mostly concerned with issues
regarding training, licensing, disclosure, compliance
9
Australian Securities and Investments Commission
(ASIC)
Market integrity, consumer protection and the regulation of
businesses, and financial services in particular
Australian Prudential Regulatory Authority (APRA)
Prudential regulation of deposit taking institutions, life and
general insurance and superannuation
Australian Taxation Office (ATO)
Administration of taxation law and regulation of small
(including self-managed) superannuation funds
Australian Competition and Consumer Commission
(ACCC)
Administration of the Trade Practices Act (TPA)
Reserve Bank of Australia (RBA)
Monetary policy, financial system security and payments
system regulation
10
Audit programs
Banning of advisers
Licensing regime
Obtaining an Australian Financial Services Licence (AFSL) is
one of the areas that the FSRA changed
Requirements to gain a licence have been significantly
strengthened
All existing licence holders had to re-apply for the new
AFSL
Directors are held personally responsible if their statements
are proven false
11
What is an AFSL?
Who needs an AFSL?
Who is exempt from holding an AFSL?
12
Need to ascertain if current business practices are
meeting or exceeding ASIC requirements (see next
slide)
May have had to introduce new procedures and processes
Need to ensure that their compliance system is
fully documented
Implementation strategy for compliance must be
developed
Needs to be communicated to everyone in the company,
and successfully implemented
Entire process must be monitored, reviewed and updated
whenever necessary
13
Licence Holder Requirements
Specific requirements for a licence are contained
in various ASIC guidelines:
Organisational capabilities RG 164 (i.e., knowledge and
skills of responsible officers, risk management and
compliance procedures systems in place, adequate nonfinancial resources (IT, HR), annual audit compliance)
Dispute resolution schemes RG 165 (internal and
external schemes)
Financial requirements - RG 166 (financial resources,
security bond)
14
Organisational Capabilities RG
164
What a firm needs in order to comply will vary
according to the nature, scale and complexity of a
licensees financial services business:
different products and services offered
diversity, structure, and scale of its operations
volume and size of transactions
split between retail and wholesale clients
whether personal or general advice is given
whether main business is the provision of financial services
number of people in the organisation
15
Responsible Manager
Senior person(s) in the firm who has/have the power
and authority to make significant decisions relevant
to the carrying on of a financial services business
directly responsible
Good fame & character
Dont necessarily give advice, but must ensure
licensing conditions are met
Expected to have some FP training, even if not giving
advice personally
Responsible for ensuring those who give advice are
properly trained and qualified
Skills - RMs must have at least 3 years relevant
experience over the past 5 years (5 possible options)
16
Responsible Managers cont...
Knowledge - firm can show that RMs comply in a
number of ways:
1. must meet widely adopted and relevant industry
standards, or relevant standards set by APRA; or
2. successfully complete an individual assessment; or
3. hold a university degree in a relevant discipline and
complete a relevant short industry course; or
4. hold relevant industry qualification at full diploma
level (e.g Diploma Financial Services, Adv. Diploma
Financial Services, Diploma Financial Markets); or
5. provide a detailed submission to ASIC that satisfies
them that the RMs nominated have the necessary
skills and knowledge
17
Other Organisational Aspects
Risk management must be able to demonstrate
that systems are adequate
Compliance ongoing review of anyone Authorised
under a licence:
type of advice given
products recommended
training
disclosure
whether sufficient resources are held (IT, HR)
risk management
annual compliance audit
18
Financial Requirements RG
166
Net assets, be solvent
Sufficient cash resources to cover three months
expenses (with adequate cover for contingencies)
Audit compliance annually and at ASIC request
Surplus liquid funds of $50,000, if more than
$100,000 of client money held
Security bond of $20,000 (always required until
recently)
unconditional & only revocable at request of ASIC
payable (in part or whole) immediately on demand by ASIC
not related to any other security or arrangement
ASIC doesnt have to prove its demand
provided PI insurance is held that meets certain minimum
criteria this is no longer required
19
Representative of a Licence Holder
Can be an Authorised Representative of an
existing licence holder, who is ultimately
responsible for the advice given
At a minimum, need to have undertaken compliant
training as detailed in RG 146
However, very likely to have to undertake much
more training, and gain relevant experience before
giving advice (until then, trainee or para-planner)
Licensee is responsible for setting standards,
provided they comply with the minimum
requirements in RG146 (no one size fits all)
20
Code of Ethics
Rules of Professional Conduct
Training and education (CFP Programme)
Develop industry policy, opinions on issues
Advisers and licensees do not have to be members
of the FPA
However, the FPA Code and Rules will probably form part of
the industry standards that courts may use these to judge
the behaviour of advisers and licensees
If you want be become (and remain) a CFP, you must be a
member of the FPA
21
FPA Code of Ethics
Client First
act in the best interests of client
Integrity
observe high standards of honesty and integrity
Objectivity
disclose any limitation on their ability to provide objective
FP services
Competence
maintain necessary knowledge and skill
Fairness
provide services in a fair and reasonable manner
22
FPA Code of Ethics
cont...
Diligence
act with due skill, care and diligence
Professionalism
ensure their conduct does not bring discredit to the FP
profession
Confidentiality
not disclose confidential information without the specific
consent of provider unless compelled by law
Compliance
ensure their conduct complies with FPAs constitution,
regulations and professional standards
23
The Legal Environment
Corporations Act 2001, and Financial Act Services
Reform 2001 (FRSA)
Provisions that relate to those who deal in, or give advice,
about financial products
Licensing regime for the financial services industry
Various policy statements (e.g., RG 146 (Training), RG
168 (Product disclosure statements), RG 175 (Financial
product advisers - conduct and disclosure)
Regulator is ASIC
24
Elements of a contract
Offer and acceptance
Consideration
Intention to create a legal relationship
Capacity to contract
Genuine consent
Discharge of contracts
Breach of contract
Contract management
25
Contract Law
cont...
Financial advisers who operate on a fee for service
basis are under a contractual obligation to their
client
Failure to perform, or performance of services in
an unsatisfactory or negligent manner
May result in client seeking redress (common law)
Compensation may be sought for losses suffered
or cost incurred
But not anticipated gains (e.g. no opportunity cost)
26
Agency law derives from common law
Establishes the relationship between principal and agent,
whether expressed or not
A contract of agency is formed when one person
(or company) who is the principal, gives authority
to another person (or company) to act on his or her
behalf
That is, the agent is given the power to bind the principal to
agreements with third parties
27
Common law is based on precedent, i.e. decisions
of previous judges over time
The relationship of a financial adviser to a client is
based on the expectations of the client and those
of the wider community that the professional can
be trusted (reasonable person test)
With this expectation of trust, comes a high level of
responsibility on the adviser
Must constantly warrant that trust by being reliable,
confidential, careful and concerned
28
Common Law
cont...
This fiduciary relationship is recognised in law
If broken, has legal consequences for the adviser (and
possibly the principal)
Common law provides remedies in relation to contract and
negligent misrepresentation
Therefore, if a financial adviser gives advice to a
client, the client should be able to reasonably rely
upon that advice
29
Civil Liability
The Law of Tort may impose a civil liability
Even when the advice or information is given
without charge
Whenever a financial adviser is trusted to give
information or advice and it is reasonable for
the other party to act on that information or
advice, there is a duty to exercise reasonable
care in so doing
30
Other Acts, Regulations
Trade Practices Act 1974
Imposes penalties for certain types of false
representations and undesirable business conduct
In particular, Section 52 prohibits corporations in trade
or practice from engaging in conduct that is misleading
or deceptive or is likely to mislead or deceive
31
Other Acts, Regulations
cont...
Superannuation Industry (Supervision) Act 1993
(SIS Act)
Main legislation that regulates the insurance and
superannuation industry
Main objective is to properly safeguard the benefits of
policy holders and members
Regulator is APRA
32
Other Acts, Regulations
cont...
Life Insurance Act 1995
Disclosure of any association of an adviser with a life
company whose products are recommended
Insurance (Agents and Brokers) Act 1984
Insurance advisers must be registered
It is an offence to make false statements or insert false
information in a proposal or claim form
33
Other Acts, Regulations
cont...
Insurance Act 1973
Retirement Savings Accounts Act 1997
Australian Securities and Investments
Commission Act 2001 (ASIC Act)
Privacy Amendment (Private Sector) Act
Insurance Contracts Act 1984
Superannuation (Resolution of Complaints) Act
1993
34
Important in building a professional and competent
service industry
Until FSRA, the education was based on a minimum
core curriculum established by education providers
Under the FSRA and RG 146, education for financial
advisers must be competency-based and cover
both minimum competency and specialist
competencies
35
Financial advisers are bound by a fiduciary
relationship with their clients, regardless of
whether there is a formalised agreement or
contract between them
The core of this fiduciary relationship is that the
adviser must always put the clients best interests
first
Reasonable basis for advice
36
Products and services offered, include:
development of a full financial plan
asset allocation optimisation
selection of products and fund managers
model portfolio development
insurance and estate planning
salary packaging
leasing
small business advice
DIY superannuation, super and retirement planning
referrals
monitoring and review
educational services, e.g. seminars
BUT NOT DIRECT PROPERTY, MORTGAGES, CREDIT
37
If an adviser makes a recommendation which leads
to the transaction of a financial product and the
client might rely upon the advice, Section 942 of
the Corporations Act requires the financial adviser
to disclose:
any commission, fee, or other benefit or advantage,
whether pecuniary or not, direct or indirect, that the adviser
may receive in connection with the recommendation
any other pecuniary or other interests whether direct or
indirect, of the adviser that may be capable of influencing
him or her when making the recommendation
38
Disclosure Documents
Client must be given a number of documents
which disclose different aspects relating to the
transactions they have with financial service
providers:
Financial Services Guide (FSG)
Product Disclosure Statement (PDS)
Statement of Advice (SoA)
39
Financial Services Guide (FSG)
Assists retail client to decide whether to obtain
financial services from an organisation whether
personal or general
Describes various aspects relating to the
financial services they provide, such as:
amount of remuneration, commission or other benefits
attributable to service
circumstances in which the benefit is to be received
for a monetary benefit, factors that will influence the
amount of the benefit (e.g. hourly fee rate)
for a non-monetary benefit, clear description of benefit
40
The information required to be included is:
name, ABN, registered and local address of the licensee
identification of the authorised representative and his or
her capacity (including qualifications, experience)
a disclosure of the type of advice being offered, including
the range of securities and products and services, such as
portfolio monitoring
disclosure of fees and charges, and methods of calculation
of fees and charges, for all services offered (including
annual reviews)
discussion of clients basic rights when obtaining advice
right to know of any conflicts of interest
right to receive advice appropriate to the clients needs
right to know the risks involved when investing
41
FSG cont...
a comparison of the services offered with those offered by
other dealers
the mechanisms in place for complaint resolution, both
internal and through the external complaint resolution
scheme, including response-time standards
42
Product Disclosure Statements (PDS)
Assists retail client to decide whether to obtain
financial product recommended by an adviser
Describes the financial product:
point-of-sale document which sets out the significant
features including the risks, benefits, and cost
not necessary where the product is a share or debenture
(since this is covered in a prospectus, a similar
document)
Broad objective is to help consumers make
informed choices about financial products
43
Statement of Advice (SoA)
Document that outlines in writing the personal
advice provided, or to be provided, to a client
Should be written in easily understood language,
and must include the reasoning which led to the
advice, including:
summary of clients relevant personal circumstances
recent and expected short-term economic conditions
generic description of the range of financial products,
classes of products or strategies considered
statement as to why the advice proposed is considered
appropriate, including advantages, disadvantages if acted
upon
all remuneration, commission or other benefit to be
received in relation to the advice
44
Annual reviews are important
Can be more work than production of the original plan
A number of personal and economic changes can
occur over a year
The impact of these changes on a clients current and
future financial situation must be assessed
45
Dispute Resolution Scheme RG
165
Need to develop and document procedures for
handling complaints, both internal (IDR) and
external (EDR) dispute resolution:
procedures and policies for receipt, investigation,
responding within time limits, referring unresolved to
an EDR scheme (must be a member), recording
information about complaints, identifying and recording
systemic issues
types of remedies available
internal structures and reporting requirements for
complaint handling
46
External Dispute Resolution
Licensee must be a member of an EDR
Some of the complaints tribunals available to
which an adviser may be required to answer:
Financial Ombudsman Service (FOS)
Superannuation Complaints Tribunal (SCT)
General Insurance Enquiries and Complaints Scheme
(GIECS)
Complainants should have contacted the original
service provider first (IDR), and if not satisfied
with response, contact the appropriate EDR
47
Since FSRA, ASIC taken over many responsibilities
for administering the law and regulations
regarding life and general insurance
Insurance brokers
Insurance agents
Life insurance Code of Practice
48
Commonwealth Privacy Act 1988 introduced the
process of more closely ensuring that customers
privacy is honoured
Act looked at safeguards that must be in place when
collecting, storing, using, disclosing personal info
Includes information regarding:
consumer credit
insurance claims
employment
superannuation
social security information
tax file numbers (TFNs)
49
Disclaimers and Exclusion Clauses
May be used to limit liability to clients and/or
third parties where:
uncertainties apply to the information
the information was supplied by the client to third parties
who may seek to rely on it
Should not be used to abdicate responsibility
cannot avoid statutory obligations or professional
negligence
Client should be asked to sign an
acknowledgment of any disclaimer or exclusion
clause
50
Key Elements of Best Practice
51