Financial advice market ‘shift’ a factor in AML/CTF regime: FAAA

In its submission to the Senate legal and constitutional affairs committee inquiry into the Anti-Money Laundering and Counter Terrorism Financing Amendment Bill 2024, the Financial Advice Association Australia (FAAA) said there have been considerable changes to the financial advice landscape since the AML/CTF regime was introduced.

“The financial advice market was predominantly made up of large financial institutions holding AFS licences,” the FAAA said.

“There has been a noticeable shift with the major banks, Macquarie, Insignia and AMP all exiting or significantly reducing their footprint in the financial advice market over recent years.

“Small licensees now make up the largest portion of the advisory market.”

As many of these smaller firms don’t have the “luxury” of employing in-house experts in AML/CTF, the FAAA urged the allowance of “time as well as adequate guidance and support from the Regulator to ensure a clear understanding of the intent of their obligations under the Bill”.

The submission also raised concerns over the consultation process. While there have been previous consultations on modernising Australia’s AML/CTF regime through the Attorney-General’s Department, the actual bill was tabled “without the benefit of consultation on exposure draft legislation”.

“This is a substantial piece of legislation that is critical for the protection of Australians,” the FAAA said.

“It will also have significant ramifications for entities that provide item 54 designated services if they are unintentionally caught by the new designated services putting their exemptions at risk.

“While we appreciate the principles-based nature of the Bill, it is challenging to assess the implications of the changes to the regime in the absence of draft Rules and guidance.

“The inclusion of Rule-making powers allowing the creation of exemptions from the new definitions and certain provisions in the Bill will help minimise the risk of unnecessary regulatory overreach.”

Monitoring ‘unusual transactions'

An are of the bill that the FAAA highlighted as a potential issue for advisers is around the monitoring of “unusual transactions and behaviours” of a customer.

While the association noted that there is an exemption for reporting entities that provide item 54 designated services only, which includes financial advisers, it said there are concerns about the “implications for AFS licensees and financial advisers acting under a third-party reliance agreement with a product provider”.

“In the absence of finalised Rules and guidance it is unclear how the monitoring of ‘unusual transactions and behaviours’ of a customer would apply between two entities – one that is exempt from this obligation – operating under a third-party agreement,” the submission said.

“In practice, this definition will be applied differently by advisers and product providers, purely due to the different nature of the relationship each has with the client – i.e. the adviser-client relationship is different to product-customer relationship – and the different designated services each reporting entity provides.

“As such, we believe it would be inappropriate for product providers to rely on financial advisers to monitor for ‘unusual transactions and behaviours’ of a customer on behalf of a product provider.”

The FAAA added that each type of reporting entity should be responsible for their own customer monitoring based on the type of customer relationships they hold and the designated services they provide.

“While third party reliance provides certain efficiencies for clients, these arrangements can create tension from product providers requesting additional and ongoing CDD [customer due diligence] of advisers (who are exempt from such obligations) even when there is no change in the client’s circumstances and no SMR event,” it said.

“The FAAA recommends the Bill exclude the monitoring of ‘unusual transactions and behaviours’ of a customer from third party reliance arrangements.”

The FAAA has previously noted the tension created between the differing requirements for product providers and advisers, arguing in June that product providers using advisers to comply with their CDD verification, re-verification, and ongoing CDD obligations increases costs for advice firms.

“As product providers have ongoing CDD requirements, financial planners/advisers are regularly requested to undertake ongoing CDD of their clients under the third-party reliance provisions, even though item 54 reporting entities are exempt from ongoing CDD. This is an extra cost to businesses and clients that cannot be recovered,” it said.

FAAA added that feedback from members indicated the additional requirements placed on them by product providers have caused significant concern for advisers and their clients.

“Most financial planners/advisers have long-term clients. However, some product providers request customer identification to be re-verified every six months even if the customer identification or circumstances have not changed, the source of wealth/ source of funds have previously been checked, and no trigger event has occurred,” the submission said.