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 (includes direct costs and proportion of dealer fees). 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. It takes real passion to set up a “one-person” business (Cohort A) 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? According to our research2, the current compliance model was designed in a different time, wherein teams would outline regulation in an advisory capacity. 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 limited 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 all with a low impact on actual employee behaviour.
However, there is agreement in the research literature that the tone at the top is a strong predictor of organisational compliance affinity. Alan Greenspan 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.”
So, we need to ask ourselves, how do we embed compliance in the DNA of an organisation?
Customer as the compliance officer – a new paradigm
What if financial advisers made the process, including compliance, obvious and easy to understand for their clients? In its simplest form the adviser should outline the exact process, responsibilities, timelines and documentation, including those necessary for regulatory compliance, to the client & other stakeholders. 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. With reduced manual labour, standardised processes, and a higher degree of automation, costs should come down drastically – probably shaving 25% off today’s compliance costs.
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 will help corporate compliance become an integral part of the business.
– Sandeep Rao
CEO, Bondle Australia
Source:
- https://data.gov.au/dataset/asic-financial-adviser
- Joseph E. Murphy, Policies in conflict: Undermining corporate selfpolicing, 69 Rutgers U.L. Rev. 2 (forthcoming 2017).
- https://www.mckinsey.com/business-functions/risk/our-insights/a-best-practice-model-for-bank-compliance
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