The Government just triggered a client audit chain reaction

Alex Burke,  Senior Writer,  No More Practice Education

Amidst criticism that there has been insufficient detail on how the proposed single disciplinary body (SDB) will function come January 2022, Treasury has released a proposals paper for consultation.

You can read the full paper here, but in short: it explains the process by which a complaint or breach could ultimately be escalated to ASIC's Financial Services and Credit Panel (FSCP). 

Under the proposed system, an issue that emerges through one of multiple channels (AFCA, ASIC surveillance, consumer complaints and so on) will be considered by ASIC and investigated. From there:

ASIC determines whether a breach has occurred and, if so, whether that breach merits a banning order under existing regulations

If it doesn't, ASIC must either issue a warning or reprimand or refer the matter to the FSCP

Once the matter is before the FSCP, the panel will consider evidence and decide whether or not a sanction is appropriate. If they determine that it is, they will then give notice to the relevant adviser and inform them of their rights, which include requesting a hearing and making a submission. Depending on the outcome, the FSCP can impose the original sanction, add new sanctions or make a recommendation that ASIC pursue civil penalties. 

As discussed previously, the stated purpose of this new system is to give ASIC more granularity in how it polices adviser misconduct and compliance breaches; as per the observations in the final Royal Commission report, the regulator has typically been limited to banning orders in this regard. 

The problem, according to a submission by the AFA, is that this granularity (at least as currently defined in the proposals paper) could lead to ballooning costs and complexity "where even some of the most minor and administrative matters may end up in front of either ASIC or the FSCP." 

The submission notes that "the laws applying to financial advice are very complex, extensive and easily breached," which means that any routine adviser audit - which typically occurs at least annually and comprises a full review of up to six client files - could turn up minor breaches that would trigger the process detailed above. 

"Where even the most minor of matters are reported to ASIC or the SDB and involves unavoidable additional cost," the submission argues, "this only discourages the application of rigorous processes. This is certainly compounded by the incredible complexity of the new breach reporting regime, that will unfortunately make it so easy for licensees to take no action on the grounds of extreme confusion."

Because of this, the AFA recommends that the SDB focus solely on "significant issues" and that "minor matters should not need to be reported to the FSCP or acted upon." 

Beyond the potential detrimental effects on licensees' compliance processes, there is also the issue of cost to consider. With the proposed SDB system currently casting such a wide net, it's difficult to determine how many matters will require FSCP convention. And as ASIC financial advisers senior specialist Martin Stockfield said recently in a parliamentary committee, it's unclear what resources ASIC will need to operate the SDB (and therefore how much advisers will be levied to fund it) because "we don't yet know exactly how many matters and what sort of matters we will necessarily be referring to the panel." 

If you'd like to make a submission regarding the proposals paper, you can do so here


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