Do cheap dealer groups spell bad compliance?

Compliance risks associated with low-cost dealer groups are still a concern, according to industry commentators.

There are groups which offer a low-cost service to financial planning practices, but that comes at the risk of insufficient compliance resources and potential regulator action, according to head of financial advice at Australian Unity Personal Financial Services, Craig Meldrum.

Meldrum said low-cost dealer groups were a concern in the period prior to the introduction of the Financial Services Reform Act 2001, but are still a worry.

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"There are some groups that come along and offer a really low-cost, cut-price service where they're charging an adviser a very low fee to be part of the licence; it's a really good recruitment mechanism and will pick up lots of advisers," he said.

"But you get what you pay for, and the less the adviser is willing to pay for dealer group services, the less they get for it."

Claire Wivell Plater from The Fold Legal said the Australian Securities and Investments Commission (ASIC) is aware of the risks associated with low-cost dealer groups, which include insufficient resources to train, monitor and supervise their advisers.

She added the cost of supervision was significant in terms of the intellectual property, training tools and staff.

"The expectation, for example, is that each adviser at the minimum would have someone review a number of their files each year," she said.

"And that's quite a time-consuming process and it also needs to be done by someone who's familiar with all the regulatory requirements," Wivell Plater added. "Those people don't come cheap."

These comments come after two relatively large dealer groups have had their licences cancelled by ASIC — AAA Financial Intelligence and Perth-based Addwealth - mostly due to issues surrounding compliance.

According to ASIC Commissioner Peter Kell, AAA Financial Intelligence failed to provide its advisers with adequate training, nor did it maintain "sufficient financial resources to comply with its general obligations".

However, things might not be black and white, according to Argyle Lawyers principal Peter Bobbin.

Bobbin pointed to large-scale financial planning businesses with significant resources — such as those owned by the Commonwealth Bank and Macquarie Bank - which are subject to enforceable undertakings.

"Some [dealer groups] are low-cost because they are adviser owned," Bobbin said.

"If you're owned by high-profile, high-quality advisers it may very well be not unreasonable that you've got a more limited compliance."

This type of a low-cost dealer group is relying more heavily for compliance on the quality of its advisers, which could be seen as a risk.

"Another perspective may be that all of those reps help each other to self-comply because they're all equity holders in a licensee," Bobbin said.

"The quality of advisers is higher and commonly these are smaller advisory groups — 20 or 30 advisers or less," he added.

"If a dealer group is rep-owned, they will not accept a representative that does not meet their quality standards."




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