This week ASIC released an update on compensation for financial advice related misconduct for six of Australia's largest banking and financial services institutions. Although the amount paid or offered to clients is nearly $750 million, the remediation still has a long way to go, with the current payments being just a fraction of the ultimate estimated cost to be borne. What will happen when smaller firms are targeted?
Most remediation so far is for Fee-for-no service (FFNS) at $607.85 million, and another $141.87 million is for non-compliant advice, according the corporate watchdog’s data. These figures amount to the compensation payments made or offered by the institutions as at 31 December 2019 and include Macquarie, but not IOOF – who will continue customer review and remediation for non-compliant advice in relation to the ANZ Aligned Dealer Groups they purchased using the same independently assured framework implemented by ANZ.
The big institutions are all at various stages of implementing their remediation, and the total estimated liabilities continue to rise as more work is done. According to estimations by Shaw & Partners toward the end of last year, the total cost of remediation provisioned for by the four banks and AMP / IOOF is approaching $10.6b.
This includes the cost of determining the extent of the problem as well as customer compensation. The total bill for the industry may be substantially greater as original estimates have been easily surpassed, and when ASIC turns its attention to other institutions and the larger privately-owned licensees.
To conduct this exercise the banks, AMP and IOOF are looking at all advisers who are current or were previously authorised representatives at any stage over this period, as well as practice principals who were in charge at the time and who may have access to the same files that the firms are attempting to secure from the advisers. These past advisers and practice principals are in various stages of transition: still practicing (somewhere else); in new careers and industries; retired; or deceased, highlighting the challenge of getting back in touch with them.
In each institution there are many hundreds of people each making contact with the advisers and in turn sampling SOAs from their client base. If certain key reporting indicators are triggered the sampling could move from 20-30 clients per adviser into the vast majority or all of the adviser’s client base. This is exposing the difficulties of retrieving files (often paper- based) from the past. This exercise is continuing and there are also indications many larger, privately owned licensees are also receiving these notices from ASIC. This issue has added to the overall pressure felt in the market. Many practices report feeling squeezed on costs and overwhelmed by compliance request and requirements.
The internal teams assembled for this remediation work are reaching breathtaking proportions. It is not unusual to see teams of well over 500 internal compliance professionals, contractors, paraplanners, ex-advisers and major accounting firms.
It’s a huge drain on risk and compliance talent and it is driving substantial demand for retired advisers and younger paraplanner resources as expert eyeballs to review SOAs. This is contributing to a spurt in recruiting costs and upward pressure on salaries, for junior staff in particular.
Conversations with advisers have revealed more negative externalities that have surfaced with this process. Several advisers we’ve spoken to have lamented that the additional review and compliance work associated with this process is being carried out by junior and/or inexperienced staff who are making the entire process more complex and ungainly. One adviser noted that it was like some of those charged with reviewing advice seemed to be running through a checklist and flagging many issues that were not warranted, potentially because they did not have the experience or skill to correctly read an SOA document. Advisers are thus burdened with providing much more accompanying material than they need as a result of this situation, adding to the cost and angst of the entire process.
The large institutions have the resources to be able to undertake this process (CBA has just delivered a first-half cash profit of $4.47 billion) but when ASIC start coming for the smaller end of town, the review process, let alone any potential remuneration may be a cost many smaller firms may struggle to meet.