Most people know that there is a naughty corner that professionals get sent to when they have broken their codes of conduct. Even if you’re not sure of specifics, you know that somewhere there is a person who has the job of playing Sherlock Holmes and finding out whether an accountant, lawyer or doctor has wronged their client.
There are statutory authorities such as the Tax Practitioners Board, which can remove the registration of a practitioner who has failed to behave in accordance with the code of professional conduct, and private sector associations such as CPA Australia and the Institute of Public Accountants. The latter type has disciplinary rules and committees that enforce them where a complaint from a member of the public is valid.
Royal Commissioner Kenneth Hayne has just proposed adding another one of these bodies to the regulatory framework by recommending a single, central disciplinary system for financial advisers. This followed a litany of cases in which internal disciplinary systems within banks appeared to deal inadequately with advisers doing the wrong thing.
Case in point: the royal commission found that financial adviser Sam Henderson’s advisory firm gave advice that would have cost its client, Fair Work Commissioner Donna McKenna, $500,000 if she was not adequately switched on. McKenna complained to the firm as well as the corporate regulator, the Australian Securities and Investments Commission. Nether took action.
Henderson’s professional association at the time, the Financial Planning Association, received a complaint from McKenna but the association dealt with the matter confidentially. In the end, a $50,000 fine was imposed on Henderson by the FPA in October 2018 but, as Hayne noted in his final report, Henderson had sold his share of the advisory practice, left the industry and “it is not clear whether or how the penalty would be recovered”.
Hayne’s disciplinary system would seek to correct this by reflecting the structure of other regimes that currently operate. Every financial adviser would need to be individually registered. This is not just to monitor or keep track of them, but also to create a barrier for entry. Registering individuals means that they will need to ensure they meet criteria for registration. In other circumstances this means someone must satisfy minimum education and experience criteria. Registered company auditors, for example, must have practiced in audit for some time and a supervising auditor needs to vouch for that experience. The same is true for registration as a tax agent.
Your registration — and your regulatory obligations — follow you wherever you end up as a registered auditor or registered tax agent and the same will happen for financial advisers.
Individual registration also means that the disciplinary panel can directly deal with the person that created the problem for a client. A financial institution would not be able to bury a problem within its own system and protect a rogue adviser that might be a “rainmaker” with capacity to earn them decent coin.
Employers holding a financial services license would also be required to report certain types of behaviour, and clients and other stakeholders would be in a position to complain about an adviser’s conduct.
A disciplinary process such as the one proposed by Hayne would have greater consequences for an adviser than the processes that currently exist in professional bodies. The worst a professional body can do to a professional that goes seriously rogue is expel a person from being a member. A statutory disciplinary process can neuter an adviser’s career by cancelling their meal ticket: the individual registration that they would need to hold under the new regime.
This is, however, a gaping hole in the Hayne recommendation that needs to be highlighted: Hayne has left the final form of the registration and discipline model for the government to nut out with industry.
Hayne did not specify the structure of the regime, instead providing key features he wanted to see. Funding is not mentioned in the recommendation, but it should be a no-brainer that industry should not fund the regime. It should be funded by taxpayers and treated as a serious quasi-judicial forum; the registration of an adviser is a matter of law rather than an industry body membership.
Industry contributions to funding such a structure would conjure up images of “financial adviser discipline brought to you by the CBA, NAB, ANZ”. You may as well give them billboards outside the offices housing the disciplinary system because industry funding would kill the credibility of the process before it even begins.