How not to get sued in 2017. Advice for the AFSL and the adviser

Where do you and your advisers find the time to do it all and monitor compliance, especially considering the vast area of risks you are exposed to?

My compliance manager, during one period when I was an adviser, was a lawyer. She used to say over a post audit coffee, “Andy, I love your files. They tell such a vivid and connected story of your client’s journey. I have a question though. When do you find the time?”.

The truth was, I spent way too much time on constructing the story of the client and it was incredibly inefficient.

Where do you or your advisers (if you are an AFSL) find the time to do it and/or monitor compliance? Especially considering the vast area of risks you are exposed to.

As an AFS licensee, regulatory guides 104, 105, 165, 168 and 175 to mention a few, document the responsibilities you have to monitor. But in practical terms, is it possible to have in place what would be considered relatively robust processes relative to your peers and still fall foul of not only the regulator but also the law?

Yes, it is indeed. And it is an understanding of the areas of where advisers can be sued and how in most cases there is very little these AFSLs and advisers are doing to protect themselves.


First of all, for the disgruntled client, what are their options? Well, they could post a complaint to the adviser and their AFSL or appeal to FOS. It is a low-cost option and the client can expect to wait two years for a resolution, with less likelihood of a settlement and a cap on what level they can be compensated up to.

Lawyers are a faster route and are more likely to achieve a settlement outcome.

What can you be sued for? And what is the current most common ‘risk mitigation’ utilised by the adviser/AFSL?

1) Recommending a strategy not in line with a client’s risk tolerance.

But advisers use a risk assessment fact find don't they? It defines a client as, say, ‘balanced’. Any investment strategy/portfolio with the word ‘balanced’ and we’re sweet, yes? Well, it ain’t necessarily so. Many risk profile processes are flawed and the connection between the assessed risk profile and the investment is often lost on the client and undocumented in the client’s file. Without a significant investment in a risk discussion and the full documentation of the discussion that shows the client’s understanding, there is a potential problem here.

2) Churning. It is not my term, but it is what the lawyers define as the process where commissions or fees are generated from portfolio or insurance changes without adequate or any rationale that is in the client’s benefit. This is complicated in the insurance scenario where duty of disclosure is involved. How is this nuance understood by the client? How have you documented that understanding? The client signing the duty of disclosure, or simply acknowledging it in many modern insurance application processes, is woefully inadequate protection.

There are dozens of scenarios that lawyers are focused on where the current practices of documenting the clients understanding do not make the grade.

What happens when your client lawyers up? Well, the lawyer will request a few of your files and look for systemic flaws in the delivery of your advice. Please excuse their disbelief if all of those clients are balanced, if all of those clients have had an insurance policy change every two to three years.

Now let me state strongly, the above paragraph does not mean there is anything wrong if those files showed the above pattern. But I’m looking at what is defendable here. As my compliance manager said to me, she also liked my files because she could “defend them in court”. If you are a lawyer trying to prove that a client’s individual circumstances were not taken into account, demonstrating a cookie cutter approach is legal gold as is any practice identified that even hints that there is more a business model decision made than a client-centred one. 

It’s all about perception.

For the AFSL, which products do your advisers deal with that form part of their client strategy solutions that you think are a risk? For what processes is it crucial that there is a high demonstrated degree of personalisation? Please don’t hold up the statement of advice (SOA) as the saviour here. Templates are great for efficiency and consistency, but therein lies the problem. Making sure that clients John and Joan do not stumble across Helen and Tom’s names in the SOA is a pitfall of templating that I know many an adviser has had to explain. And a single page as a summary for John and Joan inserted into the SOA is not personalisation.

For the adviser, similar challenges arise. The client disagrees with the sum insured and it’s changed after the SOA. How was the SI calculated? Do they understand the product? How was the application done? Was it online? Did they read and answer the questions or did you have control of the keyboard and you read the questions and ticked the boxes? Did you read out the questions exactly as they appear? Prove it.

And the ticking time bomb – insurance cover funded via a superannuation account. Exactly what will happen to the superannuation account over time? Do you know? Does the client?

Well, FOS actually tries to help you in one of its articles outlining the top 10 tips for financial advisers.

But how will you record that you’ve done these 10 things? Which are the key conversations/processes in your advice business that carry the most risk?

Decide on what you need to document and document it.

As a process in your business decree that those conversations/processes must have a robust recording mechanism. One way these compliance issues can be overcome is by using online cloud-based portals that offer a more efficient and simpler way of working, both for advisers and their clients, with all pertinent discussions and documents recorded and stored, making the information easily accessible to auditors.

There is efficiency and engagement benefits and remarkable business growth in this process. But at its core, this is about making sure you have a business to grow.

How are you going to record, document and store your client conversations and key processes of advice dispensing?

Andy Marshall is the regional sales manager APAC at SuiteBox Solutions

How not to get sued in 2017. Advice for the AFSL and the adviser
Andy Marshall
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Adrian Flores

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].

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