ASIC yesterday released the findings of its questionnaire of financial product advice licensees, which reviewed the business model, training, dispute resolution and risk management practices of the 21st to 50th largest licensees.
Among a number of key findings, the report states some licensees are bringing new advisers onto their licence without sufficiently undertaking background checks.
“Some [licensees] did not conduct reference checks, while others attempted to but found that previous licensees were reluctant to provide references or there were restrictions on the references provided,” the report stated.
“This is a surprising and significant shortcoming because it allows ‘bad apples’ to move between licensees, thereby transferring the risk of their poor advice.
“Our experience is that the effort involved in remediating the poor advice and compensating clients affected by such ‘bad apples’ is almost always significantly greater than the effort involved in properly vetting a new adviser in the first place.”
The report recommended pre-vetting the advice of a prospective new adviser for a minimum period before allowing them to provide advice unsupervised.
It also reiterates that “where a new licensee fails to discover that an incoming adviser is providing poor advice for some time after they have joined the licensee, it will not be a defence that the new licensee has not yet had the opportunity to audit the adviser”.
Rather, the licensee will be liable for breaches committed, the report reminded.
More broadly, the report said that while all participating licensees do conduct advice reviews, ASIC is concerned that “some licensees may not have sufficient resources to properly conduct these reviews”.
“Provision of inappropriate advice” was the most commonly reported “high probability risk” facing licensees.
It’s all about sales. Fee for advice is a loss maker to most licensees. They need product to be sold. Blame an over regulated compliance regime for that.
Good point, Old Risky.
Like a lot of the important things in business and life, following up on references is optional.
And, as in other areas, the choices we make tell the rest of the world a lot about us.
Susan you are correct.
BUT there is one other pertinent matter
AFSLs currently have discretion as to whether they ask for references from the former Licencee
ASIC should insist the questions always be asked of the previous AFSL, AND the top three product providers of the adviser in question.
If necessary, give the previous AFSL legal protection from defamation
BUT, as is said, production is always king
ASIC should make obtaining references mandatory
There are 2 main reasons for avoiding reference checks, as related to me by licensees and advisers:
1) They don’t believe they’ll get any information
2) They don’t believe they’ll get honest information
This is a ‘supply’ issue that unfortunately reflects poorly on the culture and professionalism of the industry.
Some people refuse to answer reference queries for fear of being sued – and that may happen if you lie in your responses. But if Joe Blow has a high level of client complaints and you have data to back this up, you will be doing everyone a favour by sharing this information (confidentially, of course) when asked in this context.
Also, if you don’t answer reference check questions at all, the new licensee may infer there was a problem and you can damage someone’s career, often unintentionally.
My new AFSL did those checks and I encouraged them to do so.. And yes, the previous insto AFSL was a little un-helpful, initially.
BUT, we all know the only checks being done by some AFSLs on potential advisers is the size of the risk book, and its ” potential”
It may get a lot of flack but when ASIC is being proactive like this their good work isn’t heard enough.