One of the obvious outcomes from the ongoing Royal Commission enquiry is increased compliance, according to most reports. However, I am yet to meet a financial adviser who craves more compliance or a client who chooses an adviser because of their “compliance based competitive advantage”. It’s time to rethink the role of compliance in financial advice.
A quantitative perspective on the impact of increased compliance costs
We conducted a high-level analysis to assess the impact of a potential increase in compliance costs to advisers. The 1,838 practices in Australia1 were grouped into three cohorts:
Cohort A – 644 single Adviser practices (35%)
Cohort B – 763 practices with 2 to 5 advisers (42%)
Cohort C – 431 practices with 6+ advisers (23%)
Today, these businesses pay between $25k and $100k in compliance related costs. This includes costs borne by the practice as well as a portion of the fees paid to the dealer group. We estimate the cost of compliance to go up by about 30% per practice, given the uproar following the Royal Commission, translating to additional costs of $7.5k to $30k per annum. For practices in Cohorts A and B, this would represent between 1% – 2% of their top line being eroded. I feel for the advisers in Cohort A in particular. It takes real passion to set up a “one-person” business and they are now set to endure the most pain, lacking the economies of scale enjoyed by those in the other cohorts.
The current compliance tools and methods are falling short
This then begs the question – Is there any way we can contain compliance costs while increasing compliance? We researched2 shortcomings as well as best practices in compliance. The current compliance model was designed in a different time and with a different intent, wherein teams would outline regulations and policy in an advisory capacity and monitor enforcement. However, many businesses still struggle with the fundamental issues of the control environment, including compliance literacy, accountability, performance incentives, and risk culture. Sometimes, practices are left on their own to figure out what specific controls are required to address regulatory requirements, typically leading to a build-up of labour intensive controls with either limited or unproven impact on the resulting risk profile.
The most commonly used tools to embed compliance are a combination of policy handbooks, training and some form of corporate statements.
Any realist will explain that the policy handbook, no matter what it contains, is nothing more than a booklet – on its own, it does nothing.
Any realist will explain that the policy handbook, no matter what it contains, is nothing more than a booklet – on its own, it does nothing. While training is more dynamic than a policy handbook, it is also not a program. Boring lectures have little impact, except perhaps as punishment for employees too passive to escape. The same conclusion applies to various forms of value statements, mission statements, and pledges by employees. A regular cycle of well delivered attestations can support a culture of compliance, but it can also run the risk of creating underground reporting channels.
“If the CEO chooses, he or she can by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. But, regrettably human beings come as we are – some with enviable standards, and others who continually seek to cut corners. Rules cannot substitute for character.” – Alan Greenspan
In general, there is agreement in the research literature that the tone at the top is the single biggest influencer of effective compliance within an organisation, in that it helps shape the company culture. Alan Greenspan once said “If the CEO chooses, he or she can by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. But, regrettably human beings come as we are – some with enviable standards, and others who continually seek to cut corners. Rules cannot substitute for character.”
How do we embed ethics and compliance in the DNA of an organisation? The fundamental theory of compliance is that the values behind the law are essential, and that the objective is to have all those in a society adhere to those laws and act in a positive manner. I would like to push this a step further and propose a new compliance paradigm.
Customer as the compliance officer – a new paradigm
Have you ever seen a compliance driven medical practice? Probably not, because the client and their well-being are put front and centre. The client is briefed upfront on the process for complex procedures and the results are pretty obvious to the client as the engagement progresses.
Akin to the medical profession, what if financial advisers made the process, including compliance, obvious and easy to understand for their clients? In its simplest form the adviser shall outline the exact process, tasks, responsibilities and timelines to the client & other stakeholders. They would explain the different documents required and produced along the way, including those necessary for regulatory compliance. All of this as part of a cohesive system that is inclusive of the client and not just verbally stated or on transient documents. This would not only help clients better understand what lay ahead, but also help advisers be accountable to their client – the “compliance officer”. Everybody wins when compliance is baked into the ecosystem and is not an afterthought.
Today, concepts like remote audits and exception-based management are becoming a reality through advanced software platforms. ASIC and internal auditors can inspect the process flows “virtually” at any time without having to rely on periodic physical checks of sample client files. With reduced manual labour, standardised processes, and a higher degree of automation, costs associated with regulatory compliance should come down drastically – probably shaving 25% off today’s compliance costs.
No organisation can comply with rules and regulations overnight. Compliance is a continuous process that requires businesses to understand regulation and work with clients to deliver effective outcomes. Advice businesses are encouraged to leverage technology and provide client centric engagement platforms to ensure customer delight as well as reduced business costs. This process will help corporate compliance become an integral part of the
– Sandeep Rao
CEO, Bondle Australia
2. Joseph E. Murphy, Policies in conflict: Undermining corporate selfpolicing, 69 Rutgers U.L. Rev. 2 (forthcoming 2017).