Financial adviser monitoring and supervision: Who will guard the guards?

Financial adviser monitoring and supervision

ASIC reviews the adequacy of financial adviser monitoring and supervision at large institutions.

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As the Australian Securities and Investment Commission (ASIC) continues to focus on the financial advice and services industry, financial advice monitoring, supervision and remediation processes have come under the regulator’s microscope in a recent report.

Reviewing 10 major AFS licensees’ financial advice monitoring and supervision processes, ASIC found a mere 18 percent were effective, the vast majority falling short of ASIC’s expectations. KPMG looks at what these findings mean for financial advice providers and their monitoring and supervision programs.

Raising the standards of financial advice

In 2014, ASIC established its ‘Wealth Management Project’, an ongoing program of work aimed at raising the standards of financial advice provided by the major financial institutions to retail customers. The Wealth Management Project is one of the ways in which ASIC is driving investor and consumer confidence in the financial advice services industry.

As part of the Wealth Management Project, ASIC released a report (Report 515 – Financial advice: Review of how large institutions oversee their advisers) focusing on how the major financial institutions and their licensees oversee financial adviser behaviour.

ASIC identified three primary areas of focus for the report:

  1. How the institutions identified and dealt with non-compliant conduct by advisers.
  2. Frameworks in place for large-scale review and remediation of customers who received non-compliant advice.
  3. Whether the institutions and their AFS licensees have sufficient monitoring and supervision processes in place to effectively identify advisers who provide non-compliant advice.

Spotlight on Phase 3 – Monitoring and supervision of advisers

ASIC notes that an effective adviser audit process “is fundamental to the success of an advice licensee’s monitoring and supervision processes”. Accordingly, ASIC conducted an in depth review of 10 licensees business-as-usual advice audit process by selecting 160 customer files and comparing the results of the licensees BAU audit and ASIC’s own, independent audit.

ASIC found that licensees’ business-as-usual adviser audit processes were only effective 18 percent of the time, partially effective 57 percent of the time and ineffective 25 percent of the time. In addition, ASIC determined that 36 percent of the partially ineffective and ineffective audits failed to recommend corrective action to the relevant adviser.

ASIC identified several key underlying deficiencies in the licensees’ BAU adviser audit processes:

  • Inadequate file audit questionnaire, often failing to properly align to the best interest and related obligations.
  • Poor judgement or lack of expertise displayed by the file auditors, which may be attributable to a ‘competence issue‘, ‘the level of resourcing available’ and/or the ‘adequacy of auditor training’.
  • Recommendations that the customer file be updated during the adviser audit process, long after the advice was provided and without and customer engagement.
  • Inadequate audit record keeping.

Opportunities for data analytics and KRIs

A positive trend identified in the report was the increasing use of data analytics in the development of Key Risk Indicators (KRIs) for identifying high-risk advisers. The most common KRIs used as part of the institutions’ monitoring and supervision processes included:

  • adviser audit ratings informing the level of risk, and accordingly the frequency of audits
  • the occurrence of potentially systematic issues identified by the adviser audit process.

Although still an emerging capability, ASIC believes that “the use of data analytics to develop KRIs is a useful and efficient method to improve the identification of high-risk advisers and non-compliant advice.”

What does this mean for financial advice providers?

It’s clear from this report that ASIC remains committed to improving the standard of financial advice within the industry, with a key focus on the execution of effective adviser audits. However, conducting thorough and comprehensive financial adviser reviews can be a complex and time-consuming exercise for licensees, often testing the limits of existing resources and capabilities.

KPMG believes that financial advice licensees seeking to maintain a financial adviser review program that meets the standards set by ASIC in Report 515 should be asking themselves a number of questions:

  • Are there sufficient internal resources to carry out thorough adviser audits?
  • Do staff conducting monitoring and supervision activities have sufficient experience and expertise to properly identify issues concerning the quality of advice, particularly with regard to ASIC guidance and relevant legislation?
  • Does the organisation have appropriate training frameworks to ensure both advisers and supervisory staff remain current with recent ASIC guidance and interpretations of the law?
  • Does the licensee have internal reporting systems to enable data analytics to proactively identify poor quality advice, trends or risks?
  • Is current reporting fit for purpose for executive and board level consumption?

For licensees concerned about any of these issues, outsourcing or co-sourcing monitoring and supervision activities may be an attractive alternative. Benefits of outsourcing include:

  • confidence that reviews are conducted to industry leading standards in line with ASIC guidance
  • flexible resourcing with the ability to rapidly scale up or down work-programs based on risk indicators
  • access to highly qualified and experienced advice compliance professionals with oversight from industry experts
  • reduction in key person risk and disruption to BAU activities
  • Industry and leading practice insights.

KPMG has extensive experience in providing advice monitoring and supervision services to financial services licensees. Our industry involvement provides a deep knowledge of industry best practice, enabling valuable insights that support licensees to grow and protect their business.

Compliance & Conduct Risk

Compliance & Conduct Risk

KPMG’s Conduct Risk team helps clients to maintain a compliant and sustainable business, protecting customers, staff, directors and stakeholders.

Financial Risk Management

Financial Risk Management

KPMG’s Financial Risk Management team supports clients with financial risk management frameworks that assist compliance, decisions and performance.

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