Asic goes to war against financial advisers

By Michael Coote

Friday 20th February 2004

In less than three weeks it will be D-day for financial services suppliers across the Tasman.

From March 10, any company or individual in Australia wishing to operate a financial services business or provide advice in relation to a financial product, including insurance brokers, must hold an Australian financial services (AFS) licence.

The licences have become mandatory under Australia's Financial Services Reform Act (FSRA). The policeman for the transition and subsequent regime is the dreaded Australian Securities and Investments Commission (Asic).

Asic is responsible as the national regulatory body supervising Australia's 1.2 million companies.

It has about 1300 staff and offices across Australia's states.

Checking through its website reveals that it is highly active in hauling financial services miscreants before the courts and getting a fair percentage of them jailed.

Its archives of press releases are a veritable roll call of dishonour in listing the numerous prosecutions undertaken.

The climate for doing investment and insurance business in Australia is much more draconian than here, although there appears to be a local upsurge of investment adviser fraud cases reported in the media.

Those who want to hang on in the Australian financial services sector after March 10 have a strong incentive to get their Australian financial services license.

On January 20, Asic reiterated that unlicensed practitioners after the March date are liable to a fine of $A22,000, two years in the slammer or both, plus eerily unspecified "other court actions."

Asic has vowed its firing squads will be working overtime shooting unlicensed offenders to encourage the others. Expect burgeoning press releases on casualties of the latest Australian corporate war zone.

Many may miss out on getting licensed in time. By late January Asic had issued more than 2500 licences, with another 1000 or so in process. However, it was waiting on an extra 900 expected applications and was contacting these parties individually.

A clear warning was given that the AFS regime had been announced two years previously, that there was no excuse for financial businesses not to know about it, and that there would be no extension to deadline.

"If a business misses that deadline, they will need to have alternative arrangements in place to continue operating," Asic executive director of financial services regulation, Ian Johnston said.

The 2000-2003 first great bear market of the 21st century put a lot of pressure on financial services companies and advisers, resulting in widespread rationalisation within the industry, which is still playing itself out. Thus a fair percentage of the 900 missing in action that Asic is hunting may now be phantom outfits or may have thrown in their lot with an already licensed operator.

Accordingly, March 10 should represent an accurate snapshot of what the Australian financial services sector will look like going forward.

Some players will be consolidated, others will have vanished, and others still will be camouflaged by their newly-forged alliances.

Of interest in New Zealand will be how the regulatory reshuffle in Australia affects the operations of financial services here.

Those with Australian connections will need those links to be licensed. Australian companies offering financial services here will be scrutinised locally as to their AFS status.

There are developments afoot to regulate financial services more heavily in New Zealand, with some local industry participants screaming blue murder at the prospect of government regulation and licensing.

A strong body of opinion argues for industry self-regulation. Accordingly the way Asic has gone will deserve close attention as a reference point for our own legislative framework for financial services.

The core question will be: does the AFS licensing system work effectively "to protect the interests of consumers and uphold the integrity of the industry" as Asic insists it will?

The bloodbath documented in its press releases on financial services prosecutions is poor PR for industry integrity and shows previous regulation did not stop crime.

New regulation is hardly likely to prevent any more, although a rise in rates of prosecution as Asic has promised should show that more criminals are being brought to justice.

In respect of the interests of consumers, there will need to be cost/benefit assessment of the greater costs of compliance that a tighter regulatory regime will impose.

It is clear that the rogues do not avoid the industry no matter how many are nailed up by their ears, whereas honest advisers have to charge clients more, detracting from returns, to comply with the edicts of the financial sector's version of the Holy Inquisition.

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