ASIC must investigate entire ‘value chain’ of financial services complaints: FAAA

The Financial Advice Association Australia (FAAA) has once again raised issues with the Australian Securities and Investments Commission’s (ASIC) approach to investigation, particularly as it concerns wrongdoing that lands with the Compensation Scheme of Last Resort (CSLR).

In its submission to the Treasury post-implementation review of the CSLR, the FAAA said the regulator needs to ensure it provides appropriate oversight of firms that provide financial advice and financial products, calling for a review of both ASIC’s powers and investigation processes.

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“This should include a requirement to look beyond the financial advice client files,” the submission said.

“Where there is significant consumer detriment impacting a material number of clients, ASIC should be required to investigate the financial services value chain, including product development, research and performance, the entity’s investment committee considerations of in-house products and any associated fees, and potential conflicts arising with related entities.”

It’s far from the first time the FAAA has highlighted its problems with ASIC’s investigations, particularly as it concerns the collapse of Dixon Advisory.

In its submission to the Senate economics references committee’s inquiry into wealth management companies, the association said ASIC was “slow to investigate” the reports made against Dixon all the way back to 2005.

“There were significant and systematic conflicts of interest evident within the management of Dixon Advisory and related entities, particularly between the advice entity and its related in-house products,” the FAAA’s latest submission noted.

“Based on publicly available information, these matters were seemingly not investigated by the regulator. The apparent focus of the ASIC investigation was on the financial advice – via the client advice files – rather than the business model. This allowed these practices to continue despite ASIC’s 2015 surveillance of Dixon Advisory, to the detriment of consumers.

“Given that it has evidently not been tested, we are uncertain as to whether the law is clear enough and ASIC has sufficient power to pursue matters involving misconduct on the part of a funds management business such as the URF, or where there are systemic conduct issues that are encouraged and condoned by directors and senior management.”

Transparency from the regulator

As the FAAA has pointed out, financial advisers were “some of the first to raise awareness of the problems at Dixon Advisory with ASIC”, adding in the submission that reporting potential wrongdoing is the “only action advisers can take to protect themselves against future CSLR costs”.

“Advisers in any case already have an obligation to report suspected wrongdoing to ASIC, and are doing so,” the FAAA said.

“However, financial advisers have no control over whether or how quickly ASIC will act on reports of potential wrongdoing. ASIC is only acting on approximately 1 per cent of the reports it receives.”

Unfortunately, there is little in the way of transparency from the corporate regulator, with it having no requirement to report back to either the financial advice sector or publicly on how many matters they have been alerted to and whether they have actioned any of those reports.

“ASIC currently holds no risk in not taking action, or delaying action, against wrongdoers. All their costs get paid by each sector via the ASIC Industry Funding Levy, whether or not ASIC takes action, and whether or not that action is successful,” the submission said.

As such, the FAAA has argued that financial advisers should be protected from picking up the cost through the CSLR if ASIC has ignored adviser reports.

“If our sector has reported a financial firm or adviser of concern, and ASIC has chosen not to take any action, or has substantially delayed action, the financial advice sector should be indemnified against having to pay for any future CSLR claims resulting from that firm’s activities,” it said.

Similarly, the association said the regulator should be required to improve transparency through annual reports on its investigations, findings and regulatory action taken in relation to reports of misconduct that “ultimately ends up with insolvent businesses, where clients are being compensated by the CSLR”.

“We seek greater visibility of and accountability for how ASIC responds to reports of misconduct that ultimately end up with the clients being compensated via the CSLR. This should include annual reporting covering what was discovered and what regulatory action was taken,” the FAAA said.

“ASIC reporting is more than likely to be after the investigation is complete or at least public. Such reporting should focus on what ASIC have done with respect to firms that are the subject of a CSLR payment.

“Such firms would most likely already be in administration or liquidation. Some reasonable exemptions from the reporting would be required for matters that are still subject to investigation, however, only for a limited period.”