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ASIC cracks down on financial advisers and licensees – Financial Services


Financial advisers and their licensees, take note! ASIC is
following up on advisers who haven’t yet completed the
financial adviser exam.

For most advisers, the thought of the financial adviser exam is
likely to be a distant memory. Some advisers may even look back
with rose-coloured glasses and think – it wasn’t all that
bad.

But spare a thought for those advisers who haven’t yet
completed the exam. What does it mean for them and, more
importantly, what do they and their licensees need to do to stay
out of ASIC’s crosshairs?

Before discussing these issues, let’s first recap on the new
Professional Standards.

The Professional Standards

As financial advisers are aware, 2019 saw the commencement of
the new Professional Standards regime for advisers who provide
personal advice to retail clients.

Advisers are now required to:

  • have an approved qualification

  • complete 40 hours of CPD each year

  • comply with the Code of Ethics

  • and, what’s presently drawing ASIC’s attention, pass
    the financial adviser exam.

New advisers are also required to complete a full-time
supervised professional year before becoming a fully-fledged
financial adviser (a bit like being on your “P’s”
when getting your driver licence).

While new advisers must meet the new requirements before
providing personal advice to retail clients, existing advisers
(financial advisers who were operating before the new regime) were
given more time to meet the requirements.

Completing the financial adviser exam was the first
“milestone deadline” of the new reforms for existing
advisers. Despite Government extending the cut-off date for reasons
associated with the COVID-19 pandemic, the final date existing
advisers had to complete the exam was 1 January 2022, unless they
can come within one of the limited exceptions.

Which advisers did not need to meet the 1 January 2022 exam
deadline?

Advisers that had attempted the exam twice

In 2021, the Government granted an extension for those advisers
who had unsuccessfully attempted the exam twice before 1 January
2022. These advisers have until 1 October 2022 to pass the
exam.

The Government was clear in its messaging that only those who
had made a genuine attempt at the exam were eligible for the
extension, meaning, if you hadn’t attempted the exam twice, no
leniency was likely to be given.

Advisers on a career break

The Government also granted an extension to existing advisers
that were not financial advisers as at 31 December 2021 because
they were on a career break. To be eligible for this exemption, the
adviser must not have been authorised to provide personal advice to
retail clients on 31 December 2021.

In short, these advisers can continue to be treated as existing
advisers and can again be authorised to provide personal advice to
retail clients once they have passed the exam.

What happened on 1 January 2022 if you hadn’t passed the
exam?

What caught some in the industry by surprise was the blunt way
the law operated for existing advisers who hadn’t passed the
exam or hadn’t attempted the exam at least twice before 1
January 2022.

In short, the law operated to automatically revoke, effective
from 1 January 2022, the adviser’s authorisation to provide
personal advice to retail clients. Even though the adviser may
still have appeared on the Financial Advisers Register after this
date, they were no longer authorised as a financial adviser.

Can these advisers still provide personal advice to retail
clients?

In short – no.

Where an existing adviser has had their authorisation revoked
because they didn’t pass the financial adviser exam before 1
January 2022, the road ahead is long.

They will essentially need to meet all the new Professional
Standards before a licensee can re-authorise them again to provide
personal advice to retail clients.

This means, not only passing the exam, but they must also meet
the new degree qualification requirement as well as undertake the
professional year before they can again become a financial
adviser.

The only exception is financial advisers that had unsuccessfully
attempted the exam on at least two occasions before 1 January 2022.
These advisers can continue to provide personal advice to retail
clients. However, if such an adviser fails to pass the exam before
1 October 2022, they must cease to provide personal advice to
retail clients from 1 October 2022.

What if the adviser was also a Responsible Manager?

This is tricky.

If the adviser who didn’t pass the exam by 1 January 2022 is
also a Responsible Manager (RM), not
passing the exam could affect their role as an RM.

Remember, the RMs are the people nominated by a licensee to
demonstrate its competence to provide the licensed financial
services. These persons must meet certain qualification and skill
requirements to be RMs.

ASIC outlines these requirements in RG 105 – AFS licensing: Organisational
competence
. At present, the requirement to complete the
financial adviser exam is not part of the qualifications or skills
ASIC requires of RMs nominated by advice licensees.

However, even though it’s not specifically specified in RG
105, it’s not hard to see ASIC questioning the competence of an
advice licensee if none of its RMs have passed the financial
adviser exam.

What do licensees need to do if an adviser didn’t pass the
exam?

Because the law automatically revoked the authorisation of a
financial adviser on 1 January 2022 if they hadn’t passed the
exam or attempted it at least twice, this raises a number of issues
advice licensees need to think about.

1. Update ASIC’s Registers

If you haven’t already done so, you will need to update the
Financial Adviser Register to reflect the fact
that the financial adviser’s registration ceased on 1 January
2022.

If the financial adviser is also an Authorised Representative,
ASIC’s Authorised Representatives Register will need to be
updated to reflect the adviser’s correct authorisation.

The licensee will need to consider what services, other than
personal advice to retail clients, the adviser will provide (e.g.
general advice only or personal advice to wholesale clients).

Whatever role the adviser continues to have in the business, the
licensee will need to ensure that the new authorisations reflect
the adviser’s new duties and responsibilities.

Also, the licensee should ensure its monitoring and supervision
procedures are checking that these advisers don’t provide
personal advice to retail clients.

2. Assess whether the adviser provided personal advice on
or after 1 January 2022

If personal advice was provided to retail clients after 1
January 2022, this is likely to be a breach of the financial
services laws as the adviser would not have been authorised to
provide these services.

Consider the breach reporting requirements and whether any
client remediation is required.

3. Consider who will continue to service clients

For advice licensees, retail clients will still need to be
provided personal advice.

If there are other advisers in the practice that have completed
the exam, transfer the clients of the ceased adviser to a new
adviser. Remember, if the client has an ongoing fee arrangement
(OFA) in place, the client will be entitled to an
annual review. Make sure this occurs in time so as not to risk the
issue turning into a fee for no advice issue.

Also, any changes to an existing client’s financial adviser
may impact on who the provider of the advice is and what advice
document they will need to be given when the client next obtains
personal advice (e.g. a Statement of Advice or a Record of
Advice).

If you are in the difficult situation that no advisers in the
practice have completed the exam, you need to act fast to avoid
causing harm to clients.

Appointing a financial adviser is a priority. But don’t
overlook the new ASIC Reference Checking and Information-sharing
Protocol. In the interim, make sure you have a contingency plan to
refer clients that need (or are entitled to) personal advice to
another advice practice. If clients are already entitled to an
annual review as part of their OFA, it may mean the advice practice
will have to pay for the advice. Alternatively, the OFA may need to
be terminated and ongoing fees refunded.

Not acting quickly to ensure retail clients are able to be
serviced is likely to come under scrutiny by ASIC. If nothing else,
the licensee may be seen as not acting efficiently, honestly and
fairly.

Finally, you may be considering changing your business to a
general advice model only or to only servicing wholesale clients.
While this is technically possible, you should think carefully
about changing your model as there are many things that can go
wrong. Best to get advice about this option as it could make the
situation worse.

4. Consider whether you need to appoint a new RM

If the adviser is also an RM, and no other RMs under the licence
have passed the exam, it may be worth nominating someone that has
passed the exam. This will help avoid questions about the
licensee’s competence to operate an advice practice.

5. Assess whether you need to notify ASIC

If an adviser of a licensee has been affected by this issue,
their licensee will need to consider if a reportable situation has
occurred.

This might arise if ASIC’s registers weren’t updated in
time or if the adviser gave personal advice when they weren’t
authorised to do so.

Licensees will need to consider not only the financial services
laws the adviser breached if they didn’t complete the exam
before 1 January 2022 but if there are any financial services laws
the licensee breached.

6. Can ASIC grant relief?

Finally, it’s not widely known that ASIC has the power to
grant relief in this situation. This means ASIC can modify the law
to allow an existing adviser to continue to provide personal advice
if they didn’t pass the exam by 1 January 2022 and none of the
limited exceptions apply.

But just because ASIC can give relief doesn’t mean it will.
It’s likely only to be in exceptional circumstances that ASIC
will grant relief. These reforms have been known for a long time,
so it’s hard to see ASIC having much sympathy for advisers who
haven’t passed the exam and don’t come within the limited
exceptions.

Final word

There are significant consequences for financial advisers and
their licensees for not complying with the Financial Adviser Exam
requirement by 1 January 2022. If none of the limited exceptions
apply, advisers and their licensees should act quickly to address
the resulting issues and, most importantly, avoid causing harm to
their clients.

Finally, if you’re holding out hope that the new Government
will provide relief for those advisers that haven’t passed the
exam, we suggest you don’t. While the Government indicated, in
opposition, that it would look at the new qualification
requirements for advisers with 10 years or more blemish-free
experience, it made clear that the Financial Adviser Exam
requirement was non-negotiable.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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