ASIC: insto auditors not reporting adviser non-compliance

The finding was part of ASIC’s review into how institutions have dealt with non-compliant advisers, with concerns arising in a number of areas.

The report, titled Financial advice: Review of how large institutions oversee their advisers, focused on the conduct of the financial advice arms of AMP, ANZ, CBA, NAB and Westpac between January 2009 and 30 June 2015.

In it, ASIC said it found inadequate audit processes, where advisers providing non-compliant advice are going undetected.

Part of this is due to a competence issue, although it seems “unlikely to be the only reason”, the regulator said.

Auditors were also discovered to have been recommending changes to advice documents to make them compliant, which sometimes happens months after the advice was provided and without the customer knowing.

“In our view, this practice is undesirable because it is inconsistent with the obligation for the adviser to maintain records to demonstrate that they have complied with the best interests duty and related obligations,” ASIC said.

“File notes should be made at the same time as the events they record. In some cases, we observed a time delay of up to 12 months between the advice being provided to the customer and the recommendation from the auditor to update the file.

“Often, amendments to the customer file were made without any customer engagement. Where record-keeping deficiencies are identified – and, in particular, where these relate to instructions provided by, or information given to, the customer – any amendments to the customer file should occur in consultation with the customer.”

ASIC also found instances where licensees did not retain the full copy of the customer file at the time it was audited. One explanation for this was that retaining these so-called “point-in-time” copies would be too costly and time consuming.

“We also observed that, for a significant number of the sample files where we assessed the advice as non-compliant, the licensee’s auditor made no recommendations for consequence management of the adviser or customer remediation,” ASIC said.

In addition to inadequate audit processes, the regulator said it has found some licensees had failed to notify ASIC about serious adviser non-compliance. Other breach reports were provided to ASIC only after a “substantial period” had passed since the institution first became aware of the misconduct.

The regulator also discovered inadequate background and reference-checking processes, which have allowed rogue advisers to circle within the industry.

As part of the review, ASIC identified 185 advisers with “serious compliance concerns” (SCC). At least 26 of these have now been banned while 75 are undergoing investigation or surveillance.

Further, the review resulted in $30 million being paid from across the institutions to 1,347 customers who had suffered loss or detriment as a result of non-compliant conduct during the review period.

ASIC deputy chair Peter Kell said he acknowledges the work already undertaken by the firms as well as the Australian Bankers' Association's recently announced Reference Checking and Information Sharing Protocol.

“However, there is further work to be done to assist in re-building consumer trust and confidence in the financial advice industry,” he said.