‘Bring liability closer’: How individual licensing could help limit advice fallout

It’s unclear at this stage exactly how much the financial advisers working at firms like Venture Egg knew about the realities of the Shield and First Guardian funds.

There are solid grounds to argue that much of the advice was not in the best interests of their clients – from cookie cutter statements of advice that didn’t take personal circumstances into account, reports of “negative consent” being used, and heavily weighting investments in just one managed investment scheme.

However, it is also reasonable to surmise that the individual advisers were unaware of the broader issues with the funds’ management and were largely following the direction of people higher up than themselves.

This doesn’t absolve any of them of responsibility – they are professionals with a legislated duty to their clients that, based on available information, appears not to have been met.

It bears some similarity to the Dixon Advisory collapse, in which the firm’s investment committee determined the recommendations, and the advisers went along with them.

According to Central Queensland University researcher Dr Angelique McInnes, closing the distance between the position of liability and the client would help limit these kinds of situations and ensure that advisers are taking full accountability for their advice.

That’s where individual licensing comes in.

“I think the problem at the moment is the accountability isn’t clear-cut. Often you find an individual is managed via the AFSL, and the AFSL has responsibility towards preventing any compliance contraventions, but they can only do as much as they are willing to do within their resource constraints,” McInnes said.

“But also, when do they discover these breaches, and have they got the ability to do so within their network, especially if it’s a larger organisation?”

For instance, an Australian Financial Services (AFS) licencee may not be alerted to an outsized volume of SOAs being delivered or fail to act once they are aware.

In the case of Shield and First Guardian, Sequoia has stressed that once its subsidiary, InterPrac, became aware of Venture Egg investing “unusual volumes” into the funds, it “prudently” placed Shield investments on hold in June 2023 and did the same for First Guardian between June and September 2023.

McInnes added that ASIC also holds some responsibility for failures.

“I think partly it’s a resource constraint issue, and they’re far away from the individual. If it’s an individual involved, they’re further away from the individual to actually do anything about it, or they wait to see, ‘OK, how far will this person go’, and then it’s too late,” she said.

“When you look at it from [the perspective of] separating the AFSL from the individual and licensing them separately, their accountabilities will be separated. So, if it’s a licensee’s fault because of a product failure, it’s not the adviser that has caused a product to fail.

“The adviser has recommended a product that has failed but the adviser is not responsible for the product failure, it is the licensee.”

Similarly, when it is an advice failure, she said it can be hard for a licensee to discover that the adviser is failing in their duties or lacks knowledge.

“A lot of the issues around these failures that we’re seeing, in this these scandals, is the fact that accountability can’t be pinpointed clearly,” McInnes said.

“What’s happening, and I think it’s very unfair, it’s often the adviser that gets targeted, and it’s their fault, ultimately. But there’s been more than just the adviser involved in the whole process of giving the advice to this client.”

According to McInnes, an individual licensing system with self-regulation would empower the profession to handle issues of poor advice themselves, similar to the way doctors, lawyers, and accountants can.

“The majority of advisers would look at an individual who clearly gave poor advice, would look at their SOAs and be able to say, ‘This is unacceptable, you are damaging our reputation’ and they’ll get rid of him,” she said.

“Just like the accounting professions do and all the other professions where they are individually licensed through self-regulation. I think the advice profession, where it is now and what the advisers have been through, will be adamant that they want to protect their reputation, as opposed to an AFSL that has other vested interests.

“Not to say that they want to be unethical, but they sell product, they are in the business of distributing product. Then you’ve got the other AFSLs who are in the business to employ or contract authorised representatives to make money for them, so their product is more service oriented, but there’s a distance between them and the client.”

This final point is key for McInnes, arguing that if you want to stop contraventions damaging clients, the point of liability needs to be at the “closest source”, which is the adviser themselves.

“The main point when you licence advisers individually, any breaches will be at the individual level and those breaches will be identified by other advisers who do not want to see this sort of thing happening,” she said.

“It’s costing them a fortune with the CSLR, with ASIC breathing down their necks, having to constantly report to ASIC via their licensee, having constant scrutiny from many parties, including journalists and everybody else.

“Whereas, if they are able to do what other professions are doing, I believe it will make a huge difference from the adviser-client perspective, where the adviser is more accountable for what he’s doing.”