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What is a license and do advisers need more protection?

Click here to buy - A How To Book of SMSF's by Tony Negline
Tony Negline

You've no doubt heard about the various submissions made by people and organizations to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into Financial Products and Services in Australia.

One could spend a lot of time trawling through the 400 or so submissions and supplementary submissions.

Of major interest has been the submissions from the Commonwealth Treasury and ASIC particularly the perceived differences in their thoughts about possible changes to the licensing regime.

Treasury make the point that an AFSL "is not an endorsement by ASIC of a licensee's business model, its quality of service, or of the products sold or services offered by the licensee."

This is indeed true based on what the Corps Act requires of ASIC when assessing an AFSL application and subsequently supervising AFSL holders.

But I'm not so sure the community has this view of AFSLs because of the way the word 'license' is used in Australia and that it's issued by a government authority.

The most common use of the word 'license' in Australia involves vehicular driving. One could successfully argue that the tests one must pass to get a driver's license remain substandard (although the bar has been belatedly raised in the last 10 years). One might even have problems with the "once tested always competent" concept of our drivers licensing regime.

But the quality of initial and lack of ongoing testing is beside the point. The fact that such a license has been issued and remains current is generally accepted as demonstrating a certain minimum level of competency. It doesn't mean a license holder won't make mistakes but it does mean sufficient knowledge to avoid most problems that arise. Compliance is largely achieved because certain actions mean loss of license and even jail.

In short if the government wants to persist with its current licensing model it will have to either find a different word to describe a financial services license and it will have to change the legislative requirements and functions of how ASIC performs license issuance and supervision.

ASIC said that in its view the legislative environment needs to change. Advisers must take on some sort of "statutory fiduciary-style duty" to ensure they operate in the best interests of the client.

Many advisers of my acquaintance do this already subconsciously and personally I think this is a good idea.

That said, if the government accepts this concept it should also address the issue of client ownership. At this point in time an investor is considered a client of their licensee and the only way an authorised representative can enforce their ownership rights is normal commercial dispute resolution processes which are horrendously time consuming that costly.

To date ASIC has not wanted to get involved in disputes between ARs and their AFSLs. Why would it want to get involved in an ordinary commercial dispute? Most licensees have tended to behave with commonsense, decency and basic business ethics in relation to client ownership. Some have behaved very very badly.

It is surprising that the government would legislate to permit this type of behaviour and it's equally surprising that no one seems to be talking about this issue.

The fiduciary-style requirement will only work if it's made an AR obligation. ARs need some legislative protection from their actions or inactions of their AFS Licensee.

One could argue that ARs are similar to franchisees and they need the same level of protection offered to them under the Trade Practises law.

Last week the Parliamentary Joint Committee held a hearing in Canberra at which the Commonwealth Treasury, FPA and other to appear. At the time of writing the hansard for this hearing hadn't been held. It will no doubt make interesting reading

ASIC has already made one appearance and will make another on 16 September.


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