Operational Compliance – Can We Tick All the Pre-FoFA Boxes?

While we don’t intend to debate the merits (or otherwise) of each component of the Future Of Financial Advice (FoFA) reforms in this article, like everyone who is truly committed to building a robust and sustainable advice profession, at Business Health we have been following the discussion surrounding the reforms with great interest.

However, while it is always wise to have one eye on the forces shaping the environment of tomorrow, it is also prudent to understand where the marketplace is today and how well Australian advice practices are managing their current operational compliance obligations. It is here that the key findings from the recent Business Health Future Ready IV* research paper provides real insight.

*     Since 2002, Business Health has released a series of white papers providing a comprehensive insight into the health of the Australian advisory industry and its preparedness for the future. These papers have become known as the Future Ready analysis. The fourth in this series, Future Ready IV, has recently been released and is based on the consolidated analysis from Business Health’s HealthCheck data warehouse which now contains information on over a 2,000 Australian advisory practices.

As can be seen from the following graph, there has been very little movement in the “health” of Australian advisory firms in this critical area over the period 2007-2010.

One in three practices were assessed to be less than Fit (albeit against a quite stringent judging criteria) and 19% were rated as Poor or Average Health.

So what is contributing to these results? Of course it is always dangerous to generalise, and each business is unique and hence the challenges and solutions will vary between practices, we were able to identify the following flaws in many operational compliance regimes.

• 74% of practice principals stated they document/note all of their discussions with their clients (somewhat surprisingly, this down from 85% in our previous Future Ready III analysis).

In the case of a dispute (and if a client’s recollection is different to the adviser’s), the quality of the file notes can bolster or destroy a case – let’s hope this does not become an expensive problem for the one in four advisers who are not currently file noting all of their client interations.

And, while such action is thankfully quite unlikely, in the situation where the original adviser has subsequently left the business, thorough files notes will allow someone else within the practice to deal confidently and competently with the client.

• 87% of principals indicated that compliance is a specific responsibility of a director or senior manager of the practice. While compliance should be everybody’s responsibility, ASIC has indicated that a director or senior manager should be allocated the responsibility for overseeing compliance measures, and (in the case of larger organisations) to report to the governing body.
• Less than half (43%) of the practices who employ contractors to perform some of their business functions (eg: information technology, paraplanning, compliance, etc.) have a written agreement in place with their outsource service provider.

While outsourcing certain operations can be a prudent and cost effective business model, the practice principals still remain ultimately responsible for what their outsource partners do. They need to ensure that they can demonstrate that they have in place appropriate measures and processes to select suitable providers; monitor their performance and deal with any actions which may lead to a service breach. It becomes incredibly difficult (if not impossible) to do this if the relationship is not underpinned by a signed agreement.

• One in three (30%) of practices stated they do not have a key person plan in place – with principal dependency alive and well in many smaller practices, this poses a very real business risk and is perhaps indicative of “plumbers with leaky taps”?
• Given the recent media interest in our profession shows no real signs of abating, it also remains a concern that less than one in four practices (24%) stated they have a written plan in place to manage unforseen problems with the media (such as major market downturn or public criticism of their licensee or firm) and only 32% of principals stated they always proactively communicate with their clients when bad news is reported about the industry or the markets in general.

Regardless of the FoFA reforms that are eventually passed into law, every licensee and advisory practice in the country will need to review their business systems and process and ensure they are operating within the requirements of the new framework. This may also present the ideal opportunity for them to address these issues.