Mitigating conduct risk

Mitigating conduct risk

Upon the conduct of each depends the fate of all. Here are some tips for understanding the regulator’s views on conduct risk, ASIC’s drivers, focus areas, examples of good conduct and ways to manage conduct risk within your business.

Financial planning is about people placing trust in their financial adviser in the belief that the strategy recommended to them will help them achieve their financial and life goals. Advisers are privileged in that they have insight into their client’s personal situation i.e. aspirations, challenges, health and future plans to name a few. Some advisers have built such close relationships with their clients that their client(s) may see them as part of their family, a consigliere of sorts.

Many advisers have built such strong relationships and aim to protect their client’s best interests, unfortunately the banking and finance industry continues to be plagued with numerous instances of misconduct that have tarnished this position of trust, causing ASIC to continue to focus on ‘conduct’ (or misconduct) and, in its Market Supervision Strategic Priorities 2017-18, question whether existing controls relating to conduct are appropriate and effective.

Conduct is, and will continue to be into the foreseeable future, in the spotlight. Here we unpack and review conduct risk to gain an understanding of the regulators views on what conduct risk is, ASIC’s drivers, focus areas, examples of good conduct and ways to manage conduct risk within your business.

What is conduct risk?

Misconduct is when someone in the firm at some point decided to do the wrong thing for their customers, often because they were incentivised to do the wrong thing, and put personal or shareholder interests ahead of those of customers. Or sometimes it can be that systems and processes failed, or were not designed correctly.


Conduct failures can be caused by deliberate actions or may be unintentional due to shortfalls in an organisation’s practices, frameworks or education programs.
Conduct risk, particularly for financial services firms, is very real. Misconduct can result in significant financial costs, including the cost of customer remediation, compensation and fines. Even more significant than fines and compensation is the reputational damage that misconduct can cause.

The cost of compliance and non-compliance is placing enormous financial, operational and reputational pressure on licensees and this does not appear to be going away any time soon, particularly when the regulator continues to identify poor culture and incentive structures and systems motivating misconduct and resulting in poor investor and consumer outcomes.

Why is there a continued focus on conduct?

ASIC’s vision is to allow markets to fund the economy and, in turn, economic growth. In doing so, contributing to the financial well-being of all Australians. One way of doing this is by promoting investor and consumer trust and confidence.

Pockets of unethical ‘conduct and culture’ have existed, and continue to exist, within the finance industry, causing some investors and consumers to be sold products and strategies that do not meet their needs or expectations, or worse yet are outright being defrauded and robbed.

A quick ASIC media and Google search reveals a relatively large list and timeline of incidents and scandals within the finance sector that includes fraud, misleading and deceptive practices and enforcement activity, such as: enforceable undertakings, permanent banning of financial advisers, AFS licence cancellations, punitive fines, customer compensation and remediation activities.

A quote from Alexander the Great shows the importance of conduct: “Remember, upon the conduct of each depends the fate of all.” As such, all members of the financial planning industry are responsible for its future course. The continuous and relatively high mis-conduct, and less than effective supervision and monitoring issues, that have been identified across the finance industry and their impact on customers, investors and the economy has guided the destiny of the industry and resulted in an increased and relentless focus on conduct, increased legislation and heightened consequences.

Areas of conduct in focus that relate to advice providers
Although an inadvertent error with some loss can have serious consequences, ASIC will react differently where there is a component of dishonesty as opposed to carelessness, but carelessness or inadvertence still has significant consequences.

ASIC has focused on two areas that relate to financial advice:

1. Reporting suspicious activity

ASIC continues to supervise market participants’ trade monitoring and surveillance practices and compliance with their suspicious activity reporting (SAR) obligations under the market integrity rules.

Occurrences where suspicious market activity has been identified and the market participant has not lodged a SAR with ASIC or a suspicious matter report (SMR) with AUSTRAC will be investigated by ASIC.

On 3 August 2017, AUSTRAC initiated civil penalty proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA) for serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF).

AUSTRAC’s action alleges over 53,700 contraventions of AML/CTF, which included CBA failing to give 53,506 threshold transaction reports to AUSTRAC on time for cash transactions of $10,000 or more through intelligent deposit machines from November 2012 to September 2015.

AUSTRAC’s action should send a clear message to all reporting entities about the importance of meeting, and the financial and reputational implications of not satisfying, their AML/CTF obligations.

2. Quality of advice

The quality of advice provided to retail clients is an ongoing focus for ASIC, and we believe that it will continue to be in the longer term. ASIC will be conducting compliance reviews where appropriate, focusing on the implementation of the Future of Financial Advice requirements. ASIC has suggested that licensees should ensure that they have appropriate compliance, risk and adviser supervision frameworks in place that have been designed to identify and address any process deficiencies, knowledge gaps and inappropriate advice.

What ‘good’ looks like (and does not look like)

According to ASIC, good financial advice looks like:

  • Act professionally (avoiding conflicts of interest and treating consumers and investors fairly); and
  • Ensure that consumers or investors are fully compensated when losses result from poor conduct.

So, what does bad look like?

The introduction of “significance” adds a subjective element to the process of identifying notifiable breaches. While “significance” has a subjective and contextual component, the following examples could, in the absence of compelling evidence to the contrary, generally be considered as significant issues and therefore may be notifiable breaches:

  • Not maintaining professional indemnity insurance or sufficient cover;
  • Theft of client funds or fraud in the provision of services;
  • Continual failure to provide retail clients with disclosure documentation or appropriate advice;
  • Representatives providing financial advice outside the scope of your AFSL authorisations;
  • Inadequate financial resources;
  • Unauthorised release of client information;
  • Misleading and deceptive practices; and
  • Unconscionable conduct.

Practical ways that licensees can manage conduct risk

Despite the increasing use of, and investment in, various technologies to help manage compliance, occurrences of misconduct appear to be increasing in volume and intensity. In recent years, we have seen numerous examples of conduct related issues and a lack of appropriate and effective systems to supervise and monitor compliance.

Nevertheless, the fact remains that supervision and monitoring is not only a regulatory requirement, ASIC considers this risk and compliance control to be important in maintaining customer trust and confidence in the financial sector and will lead to a positive culture that directs better conduct.

There are many ways to boost your ability to manage conduct risk and stay in control. Below is a brief, non-exhaustive list of some ways that you can manage conduct risk and promote investor and consumer trust and confidence.

Review/audit of advice and processes

  • Arrange for ‘independent’ and comprehensive compliance file reviews/ audits;
  • Review and update remediation policies and procedures;
  • Measure and monitor key conduct risk metrics; and
  • Monitor the nature and level of complaints that your business receives.

Reward, remuneration and incentives

  • Evaluate and control sales incentive programs and promotions; and
  • Effective management of conflicts of interest.

Recruitment and training

  • Review and update recruitment and training policies to include conduct risk;
  • Educate and train existing staff about conduct expectations;
  • Manage and communicate about conduct risk; and
  • Create policies and procedures focusing on conduct risk outcomes and ensure that staff are trained on new regulation policies that impact their roles.

For further information or support relating to how your business can effectively identify and manage conduct risk and promote investor and consumer trust and confidence, please contact us at Advice Compliance Support.

Nikolas Kloufetos is director of Advice Compliance Support. 

Advice Compliance Support makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information in this article and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Inadvertent errors can occur and applicable laws, rules and regulations may change. The information contained in this article is general and is not intended to serve as advice be it legal advice/opinion or otherwise. No warranty is given in relation to the accuracy or reliability of any information. Users should not act or fail to act on the basis of information contained in this article or on this site. All data and information provided here and on this site is for informational purposes only.

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