4.2 A new approach to discipline

As I said at the start of this section of the chapter, a coherent system of professional discipline must be established for financial advisers. The system should have the following key features.

  • First, each financial adviser should be individually registered.
  • Second, only those who are registered should be permitted to give financial advice.
  • Third, there should be a single, central disciplinary body with the power to impose disciplinary sanctions on financial advisers – the most serious sanction being cancellation of registration.
  • Fourth, there should be a system of mandatory notifications, requiring AFSL holders to report particular information about the conduct of financial advisers to the disciplinary body.
  • Fifth, there should be a system of voluntary notifications, enabling AFSL holders, industry associations and clients to report information about the conduct of financial advisers to the disciplinary body.

I say more about each of those features below.

4.2.1Mandatory individual registration

A requirement of individual registration as a condition of practice is common to most professions. For example, health practitioners (including doctors and nurses) must be registered with the Australian Health Practitioner Regulation Agency (AHPRA).[1] Lawyers must be admitted to practise, and hold practising certificates.[2] Architects and teachers must be registered with a relevant state or territory registration body.[3]

Mandatory individual registration is also a feature of other regulated occupations. For example, a person may not practise as a tax agent unless he or she is registered with the Tax Practitioners Board,[4] and a person may not practise as a migration agent unless he or she is registered with the Migration Agents Registration Authority.[5]

Mandatory individual registration for financial advisers is likely to have a number of benefits.

  • It will formalise the existing FAR, and ensure that valuable information about financial advisers is made available to the public.
  • It will facilitate the introduction of a central disciplinary body for financial advisers, focused on the conduct of individual advisers and complaints about individual advisers.
  • It will ensure that the central disciplinary body can impose sanctions that have effect even if an adviser leaves a particular AFSL holder or professional association.
  • It will facilitate the introduction of additional requirements for advisers directed at raising standards in the industry. To give two examples, compliance with continuing professional development requirements could be made a precondition for renewal of registration, and disclosure of particular matters relating to fitness to provide financial advice could be required on renewal of registration.

Introducing a system of mandatory individual registration may also assist in impressing upon financial advisers that they occupy a position of trust, and that their entitlement to continue to occupy that position of trust depends on their obeying the law and other standards applicable to them.

In its submissions following the second round of hearings, ASIC addressed the possibility of introducing a ‘dual licensing system’ for financial advisers, in which individual financial advisers would be registered not just with the AFSL holder, but with ASIC too. ASIC said that any such system must address two issues:[6]

  • first, the possibility that individual licensing of financial advisers may dilute the responsibility of a licensee and create ambiguity and uncertainty about the relative responsibilities between a licensee and ASIC; and
  • second, that the close scrutiny involved in an individual licensing regime would require substantial resources to administer effectively.

While the dual licensing system that ASIC addressed in its submissions is somewhat different from the system of individual registration that I propose, it is appropriate that I say something about both matters raised by ASIC.

The answer to the first point is that, under a system of individual registration, AFSL holders would maintain all of their existing obligations in relation to financial advisers. The new system would not detract in any way from the existing obligations of AFSL holders who employ financial advisers or appoint authorised representatives. Rather, it would ensure that financial advisers who fail to adhere to the standards expected of them would face consequences that extend beyond their employment with or appointment by a particular licensee, and affect their capacity to provide financial advice more generally.

This is not so different from the arrangements that govern other professions. In most cases, a system of individual registration and discipline exists alongside the consequence management frameworks of employers. So, for example, an employee solicitor who misappropriates client funds may expect to face both disciplinary consequences from the relevant statutory body, and employment consequences from his or her law firm.

The answer to the second point is that ASIC already maintains a register of financial advisers (the FAR). It is difficult to see how formalising that register, and making registration a precondition to providing financial advice, will add significantly to the cost of maintaining the existing register.

I accept that if ASIC is given other functions in connection with the registration of financial advisers (such as assessing whether advisers are fit and proper persons to provide financial advice), fulfilling those functions may require additional resources. However, whether any such additional functions are conferred on ASIC is a question for Government. If any additional functions are conferred, at least part of the cost of providing those functions could be recouped through a requirement to pay an annual registration fee.

4.2.2A single, central disciplinary body

A single, central disciplinary body for financial advisers is important because it will ensure that appropriate disciplinary consequences are imposed where a licensee fails to impose them, and that the disciplinary consequences imposed on a financial adviser can extend beyond the adviser’s employment with or appointment by a particular licensee.

ASIC currently has the power to make banning orders, which extend beyond an adviser’s relationship with a particular licensee. But there are several reasons why I do not consider it appropriate to continue to rely on ASIC’s existing powers as the sole means by which to impose disciplinary consequences that extend beyond a particular licensee.

First, a banning order will not be an appropriate response every time a financial adviser fails to adhere to the standards expected of him or her. There is an important role for less serious sanctions in demonstrating that particular conduct is unacceptable, and encouraging or requiring individuals to change their behaviour. But, as discussed above, apart from banning orders, ASIC has few powers that it can use to take action against individual advisers.

Second, because a banning order is a serious sanction, and because ASIC has limited resources, ASIC tends to direct its investigation and enforcement activities to the most obviously serious cases. While this is understandable, it means there may be cases where legitimate complaints warranting some form of disciplinary action are not investigated. A body dedicated to the investigation of matters concerning individual advisers could be expected to consider a broader range of cases than ASIC currently does.

Third, as explained above, the process involved in making a banning order is time-consuming. This is, again, a reflection of the more serious nature of the cases in which banning orders are imposed. It might be expected that most cases dealt with by a new disciplinary body could be dealt with more expeditiously.

In making this recommendation, I do not wish to be overly prescriptive about the form that the new disciplinary body should take, the powers that it should have, or (with the exception of the system of mandatory and voluntary notifications discussed below) the relationships that it should have with other bodies – in particular, ASIC and the code monitoring bodies. It may be that this new body is the most appropriate entity to perform the functions currently planned to be assigned to the code monitoring bodies under the Corporations Act.

However, as will be evident from what I have written, I consider that the body should have available to it a range of sanctions varying in severity, the most serious of which must be the cancellation of the registration of a financial adviser.

4.2.3Mandatory and voluntary notifications

A system of mandatory and voluntary notifications would require AFSL holders to report particular matters to the disciplinary body, and permit other stakeholders to report matters to that body.[7]

The system of mandatory notifications is necessary to overcome the existing issue with licensees failing to share information with ASIC and with professional associations. I have already recommended that licensees should be required to report serious compliance concerns about advisers to ASIC on a regular basis. I consider that, at a minimum, licensees should also be required to report this information to the disciplinary body. Licensees could also be required to report other compliance concerns about advisers to the disciplinary body.

The system of voluntary notifications is necessary to overcome the existing lack of clarity about where consumers should most appropriately direct complaints about financial advisers. Complaints could be directed to, and dealt with by, the disciplinary body. It may be that an early step in dealing with each complaint (other than complaints that are plainly without substance) is to contact the adviser’s licensee and invite a response.

As I have said, the system that I propose is not intended to detract in any way from the existing obligations of AFSL holders in relation to the advisers they employ and authorise. AFSL holders should continue to have primary responsibility for monitoring and disciplining advisers. The aim of the disciplinary system is to ensure that advisers who engage in misconduct face appropriate consequences, and that where appropriate, the consequences imposed on advisers extend beyond their association with a particular licensee. The disciplinary body may decide to take no action in relation to a particular adviser if it considers that the consequences already imposed by the adviser’s licensee are appropriate.

Recommendation 2.10 – A new disciplinary system

The law should be amended to establish a new disciplinary system for financial advisers that:

  • requires all financial advisers who provide personal financial advice to retail clients to be registered;
  • provides for a single, central, disciplinary body;
  • requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and
  • allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body.

[1] See the Health Practitioner Regulation National Law.

[2] See, eg, Legal Profession Uniform Law.

[3] See, eg, Architects Act 1991 (Vic), Pt 3 and Education and Training Reform Act 2006 (Vic), Div 3 of Pt 2.6.

[4] See the Tax Agent Services Act 2009 (Cth).

[5] See Migration Act 1958 (Cth), Pt 3.

[6] ASIC, Module 2 Policy Submission, 18 [92].

[7] Such a system currently exists for health practitioners: see Divs 2 and 3 of Pt 8 of the Health Practitioner Regulation National Law.