Licensees warned on client files

Financial planning licensees may have to curtail the practice of allowing authorised representatives to take both clients and client files with them when they move to new licensees.

At the very least, licensees have been told they will need to tighten their arrangements around authorised representatives and client files or risk finding themselves in breach of their licensing obligations.

That is one of the key warnings contained in a guidance note issued to subscriber firms by Paragem Dealer Services, based on increased activity levels by the Australian Securities and Investments Commission (ASIC).

The compliance note, written by Paragem head of compliance Michael Rowles, reminds firms that it is a condition of the licence that licensees retain client files for seven years after the advice has been provided to the client.

“In practice, many licensees operate through authorised representatives and typically allow the authorised representative on termination to take the clients to the new licensee. Consequently, the files remain with the authorised representative,” the guidance note said.

“This would appear to be an immediate breach of the licensee’s obligation and equally, it poses a costly challenge for all licensees to maintain their records on file,” it said.

Rowles said that licensees had sought to address the situation through commercial arrangements with their former authorised representatives and the new licensee, aimed at ensuring the files would continue to be available.

However he said the effectiveness of this arrangement was now questionable because of the number of licensees for whom an authorised representative might work inside the statutory seven-year period.

Rowles said Paragem had a licensee client that had followed this commercial approach but, when confronted by an ASIC requisition for particular files, the authorised representative could not be contacted and a licence breach was deemed to have occurred.

The Paragem guidance note points out that the ASIC regulations do not specify how files should be retained, and that licensees can address the problem by keeping either hard or electronic copies of the files.

It suggests that given the storage problems associated with hard copy files, licensees should move toward electronic files using web-based financial planning software.

“You should also provide representatives with a file naming regime and specify scanning requirements for all files,” the guidance note said.