Red tape reforms must fix a broken system

While the Melissa Caddick scandal may have met its tragic end in February, what continues to intrigue both the public and advisers about the case is Ms Caddick’s apparent descent from being a legitimate employee of an advice practice swimming within the flags of the licensing system, to being an apparent unlicensed fraudster trading off her previous legitimate employment to win clients.

As has been mentioned in numerous recent media reports, Ms Caddick appeared in ifa in the mid-2000s when she worked at Wise Financial Services and the publication was under previous ownership. At the time, the firm had won an award for best practice.

While she is not listed in the ASIC adviser register, older records kept by the regulator indicate she was indeed licensed as an authorised representative of two separate financial services businesses in 2004 and 2009. It’s after this point that she slipped off the radar of the AFSL system.

While ASIC’s affidavit as part of its civil case against Ms Caddick – which is set to continue in July, according to court documents – indicates her company Maliver never held a financial services licence, once she set up the business she was leveraging off her previous legitimate experience in advice to draw in clients, positioning herself as an “award-winning adviser”.

According to a position paper put together by legal representatives of some of Ms Caddick’s former investors, she had also used the AFSL number of a legitimate business to avoid suspicion from any clients or associates who may know enough about the system to look her up on the ASIC database.

It was an elaborate scam that highlights a number of problems with the current licensing framework which many practitioners have pointed to. As long as advisers are authorised as part of a business, rather than responsible for their own licensing and registration that are directly traceable to them over the course of their entire career in the industry, it’s more difficult for the public and those in the sector to keep track of “bad apples”.

Recent reference-checking protocols introduced to the industry go some way towards trying to shore up these problems. But they’re not foolproof and they add another layer of regulatory red tape to licensees and adviser businesses when, as some in the industry have rightly pointed out, it may be easier simply to move to individual licensing.

The FPA’s proposal last year to make this move has received a lot of industry support, not only for its ability to reduce the opacity of the system from an enforcement perspective, but also to remove layers of costs from the sector that are ultimately being passed on to consumers. 

With the government moving its soon-to-be-established adviser disciplinary body in-house to ASIC, the FPA says the regulator’s register should become “an authoritative source of information on each financial planner, including their qualifications, compliance with professional standards and disciplinary record”, rather than the adviser’s licensee being responsible for this information.

This is an important second piece of the puzzle, were the sector to move to individual licensing – the adviser register must be a reliable source of information around all disciplinary actions taken against an adviser, and it must be publicly promoted by ASIC and the industry as such so that consumers know it’s their first port of call before engaging an adviser.

In the same way as many employers require a police background check as a precondition of recruitment, consumers should be encouraged to search their adviser’s name and report anyone holding themselves out to be an adviser who is not appearing on the register. Improving the regulator’s ability to deal with such complaints is also vital, as a common complaint from advisers is also that many tip-offs around unlicensed behaviour or misconduct are not acted upon until it’s too late.

With the government committed to continuing to cut industry red tape in the lead-up to the election, and ASIC conducting a major consultation around how the affordability of advice can be improved, the Caddick case serves as a timely reminder that increasingly restrictive regulations in themselves may not be the answer to stamping out financial crime. As many of our readers have pointed out, unlicensed advisers don’t bother with SOAs, annual opt-ins or FASEA exams. While these reforms have the best intentions, what may be needed when addressing the framework of the future is giving advisers more individual accountability and uncoupling them from their institutional or licensee masters.