It starts with governance
Russell Hutchinson discusses the importance of governance in achieving a compliant FAP business.
Wednesday, August 5th 2020, 10:14AM 
11 Comments
by Russell Hutchinson
Russell Hutchinson
Financial advice provider compliance, arguably, starts with governance.
Yet the focus of recent years has been mainly on education, or Code.
Education has been an easy place to look.
The regulators set a standard. It has been talked about it, written about, and is a clear, defined milestone on the way to achieving a compliant business: get the qualification.
But arguably, it is the least urgent of all mandatory requirements. After all, the new regime commences in March next year with a two-year window to achieve the required educational standard.
Code comes next – it is also a good focus, also critical to operating a compliant business.
It is the standard that must be hit in the new regime.
I am probably doing it a disservice when I say it is "only" about financial advice. Of course, as a financial advice provider this is the heart of what you do. It is also not descriptive of everything that you do.
Each quarter we track all the legal and regulatory issues that directly affect the provision of financial advice. That includes non-advice legal and regulatory requirements.
To pick a topical one, consider privacy. As new privacy law creates changed requirements for all businesses, these include financial advice providers.
They must be met. But your review must also include all non-law or regulatory requirements of your business – these are contractual commitments that you make.
For example, agency agreements with product providers include a list of commitments that you must maintain in order to retain your agency. These must also be managed.
As a business grows managing all the different requirements takes more time and effort – because your services are more complex, reach more people, and are delivered by employees rather than an owner-operator.
Hence, the importance of governance.
Good governance is a process that enables effective compliance by the business.
It is the operating system that ensures the business conforms to its plans and commitments (the rules we choose for ourselves) and the relevant laws and regulation (the rules chosen by others in our society).
If you have ever come back from a conference with a bright new idea, tried to make it happen, and then realised six months later that you haven’t been able to make that change … it is a good sign that a governance gap may exist.
In practice, most small businesses already have a goal to achieve better governance.
It is a lot like the saying about planting trees. The best time to plant one was twenty years ago. The second-best time is now. But definitely before March next year.
If you were in any doubt about whether this is a requirement – just like the Code, the standard conditions, or the educational standards, then please read the FMA’s guide to governance.
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Comments from our readers
If it is an A license and as a sole adviser it is acceptable to the industry and regulator that peer review is ok, then that sets a lower bar than is potentially ideal. This will likely create a gap between the peer review and the regulatory review of a problem.
As an industry peer review, no matter how experienced, needs to be more robust than that.
As a sole adviser, I like the peer review idea, at the same time it is likely to fail the requirements required for review and it has the optics of cronisim which we need to get away from.
Operating from 15 March 2015 is going to come at an increased cost and it is technically quite different to how many operate today.
One thing that hasn't sunk in yet is from March 15 2021, all advisers, regardless of license class, have to be compliant with the new rules.
Yes, they have the exemption for education, but the rest applies.
Which is a different understanding to what is being expressed by a number of advisers.
The new rules start 2021 not 2023. So if you are not already at the stage required by full licensing, you need to get you butt in gear!
Governance does not have to be a big 10-page document. AFA’s will have a little bit of a head start as their ABS will contain some aspects of a Governance approach which can be transferred and tweaked into the new requirements. Governance and Compliance are two separate subjects that are often confused. How do you govern your business? Governance can be simply defined asr the way people, or a person do things within that Business. Governance is also how decision-making affects people in that business and how that flows through to consumers. Good governance has 8 major characteristics. It is participatory, consensus oriented, accountable, transparent, responsive, effective, and efficient, equitable and inclusive, and follows the rule of law. (definition from 3rd party via web -Governancepro.com and amended by me to be applicable to small business). In a Governance policy there will be a number of references to a Compliance Program which includes a number of different compliance requirements for different Acts that regulate how a business operates not just as a Financial Adviser but also as a business with compliance requirements for Health and Safety, Employment Relation, Tax, etc. JP is right that there will be additional costs going forward. The price of the ticket to the game has gone up. To Quote a very respected Business guru Peter Drucker “Do what you do best – Outsource the Rest”. I hope this is of some value to advisers out there wandering what this “Governance” thing is all about.
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