One of the obvious outcome from the ongoing royal commission inquiry is increased compliance, according to most reports.
However, I am yet to meet a financial adviser who craves more compliance or a client who chooses an adviser because of their “compliance-based competitive advantage”.
It’s time to rethink the role of compliance in financial advice.
A quantitative perspective on the impact of increased compliance costs
We conducted a high-level analysis to assess the impact of a potential increase in compliance costs to advisers. The 1,838 practices in Australia were grouped into three cohorts:
Cohort A – 644 single adviser practices (35 per cent)
Cohort B – 763 practices with 2 to 5 advisers (42 per cent)
Cohort C – 431 practices with 6+ advisers (23 per cent)
Today, these businesses pay between $25,000 and $100,000 in compliance related costs. This includes costs borne by the practice as well as a portion of the fees paid to the dealer group. We estimate the cost of compliance to go up by about 30 per cent per practice, given the uproar following the royal commission, translating to additional costs of $7,500 to $30,000 per annum.
For practices in Cohorts A and B, this would represent between 1 and 2 per cent of their top line being eroded. I feel for the advisers in Cohort A in particular.
It takes real passion to set up a “one-person” business and they are now set to endure the most pain, lacking the economies of scale enjoyed by those in the other cohorts.
The current compliance tools and methods are falling short. This then raises the question – is there any way we can contain compliance costs while increasing compliance?
We researched shortcomings as well as best practices in compliance. The current compliance model was designed in a different time and with a different intent, wherein teams would outline regulations and policy in an advisory capacity and monitor enforcement.
However, many businesses still struggle with the fundamental issues of the control environment, including compliance literacy, accountability, performance incentives and risk culture.
Sometimes practices are left on their own to figure out what specific controls are required to address regulatory requirements, typically leading to a build-up of labour intensive controls with either limited or unproven impact on the resulting risk profile.
The most commonly used tools to embed compliance are a combination of policy handbooks, training and some form of corporate statements.
Any realist will explain that the policy handbook, no matter what it contains, is nothing more than a booklet – on its own, it does nothing. While training is more dynamic than a policy handbook, it is also not a program.
Boring lectures have little impact, except perhaps as punishment for employees too passive to escape. The same conclusion applies to various forms of value statements, mission statements, and pledges by employees. A regular cycle of well delivered attestations can support a culture of compliance, but it can also run the risk of creating underground reporting channels.
In general, there is agreement in the research literature that the tone at the top is the single biggest influencer of effective compliance within an organisation, in that it helps shape the company culture.
Alan Greenspan once said: “If the CEO chooses, he or she can by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. But, regrettably human beings come as we are – some with enviable standards, and others who continually seek to cut corners. Rules cannot substitute for character.”
How do we embed ethics and compliance in the DNA of an organisation? The fundamental theory of compliance is that the values behind the law are essential, and that the objective is to have all those in a society adhere to those laws and act in a positive manner. I would like to push this a step further and propose a new compliance paradigm.
Customer as the compliance officer – a new paradigm
Have you ever seen a compliance driven medical practice? Probably not, because the client and their wellbeing are put front and centre. The client is briefed upfront on the process for complex procedures and the results are pretty obvious to the client as the engagement progresses.
Akin to the medical profession, what if financial advisers made the process, including compliance, obvious and easy to understand for their clients? In its simplest form the adviser shall outline the exact process, tasks, responsibilities and timelines to the client and other stakeholders.
They would explain the different documents required and produced along the way, including those necessary for regulatory compliance. All of this as part of a cohesive system that is inclusive of the client and not just verbally stated or on transient documents.
This would not only help clients better understand what lay ahead, but also help advisers be accountable to their client – the “compliance officer”.
Everybody wins when compliance is baked into the ecosystem and is not an afterthought. Today, concepts like remote audits and exception-based management are becoming a reality through advanced software platforms.
ASIC and internal auditors can inspect the process flows “virtually” at any time without having to rely on periodic physical checks of sample client files. With reduced manual labour, standardised processes and a higher degree of automation, costs associated with regulatory compliance should come down drastically – probably shaving 25 per cent off today’s compliance costs.
No organisation can comply with rules and regulations overnight. Compliance is a continuous process that requires businesses to understand regulation and work with clients to deliver effective outcomes.
Advice businesses are encouraged to leverage technology and provide client-centric engagement platforms to ensure customer delight as well as reduced business costs. This process will help corporate compliance become an integral part of the business.
Sandeep Rao is the chief executive officer of Bondle Australia.
Compliance costs are higher that suggested I believe. Headline costs are one thing, but in my practice, we have had to add another person to the team to cope, that is way more that 1-2 % of our top line cost, closer to 10% in reality. We are a two adviser small business.
If an adviser was suitably qualified and experienced with a good audit history, why are they being treated like a first year cadet? Why are we making it increasingly difficult for experienced and qualified advisers to service the public? This makes the situation worse, not better. We should be making the quality advice easier to provide and the crap advice harder to provide. Life as an adviser is now one big audit and little else.
As the Royal Commission and Productivity Commission are uncovering, our compliance is complicated by the myriad product options that are window dressing so as to justify higher fees. Simplify and consolidate the product offerings, and reduce the high product margins to something more reasonable.
That would be a start.
Just read Hi profile planners ” Collins House ” in Melbourne online website . Hey , want to save some money !!!, 5 quick questions with a robot and presto $35 for a SOA … Compliance costs ??? whats that ??? Who needs the client or adviser , well done ASIC for approving such crap – 2 sets of rules , Both get paid , 1 must do 5 hours work though , the other set up a Robot , go figure ???
Some really good points here. When we take a step back and look at a lot of compliance processes, they are about fitting into a regulatory process that policy makers have deemed suit the consumer, and that defines the playing field. As we move to client best interest standards, increasingly the subjectivity is not what the policy makers think but what the client thinks and feels. This can only be done in conjunction with the client !
Compliance is a personal decision. Regardless of what the rules or oversight, you can choose to comply or not. Compliance cannot be imposed, only enforced. Surely every financial services entity, whether it be an adviser or an institution, understands what is ethical? Some choose to ignore what they know is correct in pursuit of a dollar. More training on the subject will not ensure ethical behaviour. The whole industry is chasing a mirage. More regulation is not a panacea. It is a burden that will crush many good advisers & gut the industry.
one of the most costly and regulated industries in the world..
You mean “Overregulated”
So, institutions fail the smell test when it comes to compliance as greed intervenes. The fact that there is a Royal Commission revealing this level of disgrace speaks volumes as to the incompetance of the regulator and flawed ministers in terms of the model of 4 pillars when it comes to the major banks and constantly giving in to the financial services council. Meanwhile we have an economy which is on a massive level of household debt, massive undersinsurance and an ageing population that worries politicians and treasury that they will come out with underfunded retirement benefits that pension laws need to be pushed out to 70 by 2035 and the value of the pension reduced via the assets test. Yet somehow, I as a practice owner need to retrain myself or get more qualified and pay more for compliance cost at a time when wages growth is lousy and peoples budgets are tight as it is via cost of living pressures. What damn planet are these fools on.
You have obviously never been an adviser have you