FAAA ‘disappointed’ latest AML/CTF due diligence rules remain inequitable for advisers

Australia’s financial intelligence agency had a prime opportunity to improve the “equity, cost, efficiency and AML/CTF outcomes of reliance agreements”, according to the Financial Advice Association Australia (FAAA), but instead advisers will be caught doing the heavy lifting for product providers.

In its submission to AUSTRAC’s consultation on its new AML/CTF Rules, the FAAA said the issues with current reliance agreements remain.

“Rule 5-26(1)(c) and (d) require the reliance agreement to enable the ‘first entity’ to obtain all the KYC information collected by the ‘other person’ about the customer that is appropriate to the ML/TF risk of the customer, and copies of the data used to verify the KYC information,” the FAAA said.

The AUSTRAC paper also noted that it would “substantively reproduce the requirements in Chapter 7 of the former rules”.

“Given the current issues with how reliance agreements operate, it is disappointing that the opportunity presented by these reforms to improve the equity, cost, efficiency and AML/CTF outcomes of reliance agreements, has not been fully embraced,” the submission said.

It added that while AUSTRAC has previously stated in response to these concerns that the rules do not intend to allow an entity to shift its obligations to a different entity, rather it is looking to “reduce the costs associated with conducting CDD”.

However, the FAAA argued that in reality, the costs associated with CDD obligations are largely transferred from the ‘first entity’ to the ‘other entity’.

“All the costs associated with collecting and verifying ID documentation and checking PEP status, are passed on to AFSL holders (the large majority of whom are small businesses) and financial advisers,” it said.

“Due to the inherently higher risk of the nature, scope and complexity of the designated services provided by financial product providers, AFSL holders and financial advisers must also incur the cost of conducting any ongoing and enhanced CDD based on the higher risk assessment of the product provider, even if it is not warranted, based on the AFSL holder’s business risk or the AFSL holder’s assessment of the customer’s risk for the provision of item 54 designated services. It is an inequitable system.”

An area that the FAAA did welcome, however, was the “fundamental shift in the law” towards a more principles-based approach focused on AML/CTF outcomes.

In order to realise these improvements in practice, the FAAA said, there needs to be a shift in behaviour of ‘first entities’ using reliance arrangements for ongoing CDD.

“This can only be done with regulatory certainty in the draft Rules and through AUSTRAC guidance,” the submission said.

It added: “The Amended Act is clear that the program and policies of each entity, who is a party to the reliance agreement, must minimise the ML/TF risk of the entity.

“We support the intent of reliance arrangements to facilitate the completion of CDD in a more efficient manner for customers, thereby improving financial inclusion, while reducing the risk of disengagement by suspicious actors.

“However, the current manner in which reliance arrangements operate in our sector is unreasonable and imposes significant additional costs and regulatory burden on the ‘other party’.”

The FAAA has previously noted the tension created between the differing requirements for product providers and advisers, arguing last year that product providers using advisers to comply with their CDD verification, reverification, and ongoing CDD obligations increases costs for advice firms.

“As product providers have ongoing CDD requirements, financial planners/advisers are regularly requested to undertake ongoing CDD of their clients under the third-party reliance provisions, even though item 54 reporting entities are exempt from ongoing CDD. This is an extra cost to businesses and clients that cannot be recovered,” it said.

FAAA added that feedback from members indicated the additional requirements placed on them by product providers have caused significant concern for advisers and their clients.

“Most financial planners/advisers have long-term clients. However, some product providers request customer identification to be reverified every six months even if the customer identification or circumstances have not changed, the source of wealth/source of funds have previously been checked, and no trigger event has occurred,” the submission said.

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