Assured Support has outlined how compliance programs can fail within financial advice practices if they are treated as “necessary evils” and not taken seriously.
A recent ASIC investigation has made clear how inadequate compliance cultures in financial services firms can lead to Federal Court action.
Last month, director Joel James Hewish was banned for 10 years from providing financial services, and the Australian financial services licence (AFSL) of his company, United Global Capital Pty Ltd (UGC), was cancelled after the firm’s authorised representatives contacted prospective clients and recommended they establish a self-managed superannuation fund (SMSF), rollover their existing superannuation into the SMSF, and invest it in highly speculative investments related to Hewish.
One of the key reasons that ASIC banned Hewish was for creating a culture of non-compliance and incompetence at UGC, the regulator stated. The firm has since been put into liquidation by the Federal Court last week, and ASIC’s investigation into the conduct of UGC, Hewish and related entities remains ongoing.
With this recent case in mind, licensee compliance consultancy Assured Support has delved into the reasons why compliance arrangements can fall short within financial services businesses.
“There are a few reasons AFSL compliance arrangements fail, and most of them boil down to the same thing: people don’t understand what compliance is or what it is supposed to do. They treat it as a box-ticking exercise, something that looks good on paper but doesn’t change anything in the real world,” explained Sean Graham, managing director of Assured Support.
Advice directors should not view compliance as a separate department, Graham described, that works in isolation and is detached from the rest of the business. Instead, it should be woven into every aspect of the practice’s culture.
He said: “If the people at the top don’t take compliance seriously, no one else will. If they treat it as a necessary evil, something to be dealt with and forgotten about, that attitude will spread throughout the organisation.
“When people don’t take compliance seriously, they cut corners. They don’t report problems because they don’t want to deal with the consequences. And that’s when things start to go wrong.”
In some cases, such as UGC’s investigation, compliance arrangements are designed to fail in a way that actively encourages risky behaviour and violates regulations due to prioritising short-term gains over long-term stability, Graham argued.
Some of the common pitfalls the managing director has observed in AFSLs’ compliance programs include treating risk management as a separate function and context blindness – the mistake of viewing compliance solely through the lens of regulatory requirements without adequately recognising the underlying behaviours that caused the issue.
Moreover, directors need to create a top-down culture of compliance where it is clearly prioritised by senior management. This also means implementing sufficient training for the wider team and consistent communication across the business.
In more serious circumstances, negligence or deliberate intent is a clear pitfall and evidence of a non-compliant culture, Graham said.
“There’s little doubt that some licensees, like United Global Capital, never implement (or fail to maintain) effective compliance arrangements to meet their AFSL obligations. As these cases demonstrate, negligence, neglect, or deliberate intent to ignore compliance is particularly dangerous.
“It increases the risk of regulatory breaches and the significance of their consequences and damages the integrity of the entire financial system. When financial services businesses choose profit over compliance, they put their clients, their employees and the whole industry at risk.”
Assured Support recently explained why taking a proactive approach to compliance risk management has become a “regulatory necessity” for licensees.
Earlier this year, licensees were also urged at the ifa Adviser Innovation Summit to be more flexible with their compliance obligations as advisers said they had lost sight of how the rules actually work.
