‘Nobody wants ASIC on their doorstep’

'Nobody wants ASIC on their doorstep'

Brokerages adding ARs to their ranks must keep a watchful eye on increasing compliance obligations

By Wendy Pugh

Two completely different trends in insurance – the proliferation of authorised representatives (ARs) and new directions in financial services regulation – have created a scenario where expanding brokerages can find themselves facing issues they didn’t see coming.

The Hayne royal commission has spurred financial services scrutiny, with new requirements continuing to come into effect even as the COVID-19 outbreak adds another complicating element into the mix.

Kiersten Lethbridge, the Principal Consultant at broker software consultancy Consolidated Business Solutions (CBS), says many brokerages are on the AR acquisition trail, but Australian financial services licences can easily be put at risk if compliance systems don’t keep pace with changes in the business and regulatory environment.

“There is not a desire to do the wrong thing, but it can easily happen,” she tells Insurance News. “We have all been working remotely and there’s not the regular contact we might have had, and regulations have tightened over time.”

Remote risks: Kiersten Lethbridge says flexible working has added to compliance pitfalls

A joint venture between compliance management firm Guildfords and CBS is offering to assist licensees with regular independent reviews to detect and remedy potential problems to avoid AR-associated issues slipping between the cracks.

While large broking groups will typically have internal compliance monitoring arrangements, Guildfords is targeting the growing number of firms that take on anywhere from a handful to 20 ARs.

Ms Lethbridge, who was previously at Ebix Australia as manager of its Heart and WinBEAT broker systems teams, says broker licensees can no longer afford to give ARs the level of free rein that may once have been possible. At the same time ARs that have decided to work under someone else’s licence have to adjust their mindset.

“We are dealing with small business operators who may have had their own brokerage acquired but still tend to behave independently,” she says. “They actually have to act within the authorisations of the licensee, not the way they might have once under their own licence.”

Guildfords Managing Director Robert Payne says changes coming into effect this year that add to the compliance load include strengthened breach reporting obligations that take effect from October 1.

Such obligations link back to the monitoring and supervising of authorised representatives and documentation requirements, as well as training obligations that have broadly been in place for some time but which must keep pace with regulatory changes.

Dr Payne says the effect of COVID-19 on compliance has also been profound, given implications for supervision and training, as personnel have switched to webcasts, conference calls and different ways of working that are remote from the licensee.

“That has to be wound into a monitoring policy that takes into account these issues that are brand new,” he says. “That is the new world.”

ASIC has emphasised the need for licensees to provide authorised representatives with around the clock access via remote compliance management systems for the policies under which they operate.

“Some ARs don’t understand that they might be undertaking certain functions within their company that are not covered by the authorisations, or the licensee might not have the authorisations on its licence that allows the AR to undertake a new area of business,” Dr Payne says.

“They should know that, and the licensee should be always monitoring the AR in relation to their business and their day-today financial activities.”

Dr Payne says the industry should expect trends that have driven a more challenging regulatory environment in the wholesale and retail space will continue to develop. Examples include the increased emphasis being placed on the integrity of licensees and those who hold responsible and controlling positions.

ASIC has released an information sheet on “fit and proper persons”, and it is becoming more important for licensees to really know who their ARs are and to have full information on their backgrounds.

“That is directly as a result of the Hayne royal commission, and I don’t think that is going to just stabilise,” he says. “I think that is going to be constantly enforced upon licensees to be more vigilant.”

Brokerages with a relatively small number of ARs face particular challenges in keeping pace with changes and ensuring they undertake required responsibilities, while Guildfords-CBS notes that for any organisation there are advantages to be gained from an independent external review.

Dr Payne and Ms Lethbridge recommend a compliance review every six months, following a set system for completing their process.

Ms Lethbridge, who is an expert in software and broking systems, says in addition to digging down into the systems the reviews also provide the opportunity to assist with education.

“Brokers don’t necessarily have the time to be buried in software training or how to use the document management system and that’s where we can assist with some extra service,” she says. “We tend to try and guide and train as part of the process.”

Reviews also look at website compliance and whether businesses have disaster recovery and business continuity plans, with licensees required to have adequate risk management systems in place.

The review process involves randomly selecting invoices covering transactions including new business, renewals, endorsements and cancellations. Each type of transaction has a different set of activities associated with it, and there are checks to ascertain if those have been completed.

“It is a pretty thorough process because they don’t know what we are going to look at and we dig deep down into their software systems,” Ms Lethbridge says. “We are not just asking questions, we are actually looking to see what they have done.”

Even when required tasks have been undertaken correctly, there’s often issues surrounding document storage, which risks leaving an inadequate audit trail when it comes to proving that everything that someone says was done actually was done.

More often than not oversights and deficiencies can be highlighted and attended to through straight-forward conversations and solutions, but the reviews also ensure more concerning matters can be brought to light.

Regulatory burden: Robert Payne warns the compliance load increases from October

“Our licensees want to make sure that if we find something that is serious that has to be reported back to the compliance committee, that we have the autonomy to make sure that it is exposed, which is why an independent review is really important,” Dr Payne says.

The stakes are high, as ASIC has been given a clear mandate to step up its scrutiny, and its announcements regarding various actions taken on AR and licensee breaches highlight the fact that there’s no room for complacency.

If licensees get it wrong they are answerable to the regulator, and Ms Lethbridge says it’s up to them to ensure they maintain high compliance standards.

“Nobody wants ASIC on their doorstep.”