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Regtech gives advisers a way out of a tight spot

Growing regulatory pressure combined with increased client expectations can put the squeeze on financial advisers. Embracing regtech can provide space to grow a thriving business, says Moneysoft’s Jon Shaw.

For both regulation and client expectations, the only way is up. That creates a conundrum for financial advisers, who are caught in a difficult situation trying to meet what appear to be conflicting demands. “The reality is regulation often lags behind innovation,” Bill Maris has said. He knows what he’s talking about. Maris is a tech maven and entrepreneur who founded Google Ventures, the internet giant’s venture capital investment vehicle. Regtech pairs innovation with regulation to deliver outcomes which challenge that reality. New solutions help advisers navigate an increasingly complex regulatory environment while also cutting the cost and time-consuming nature of compliance. That gives advisers more time to spend with clients, as well as a set of tools to engage and educate them. Regtech has two sides: it can improve the quality of advice as it is being formulated, and it can confirm the quality of that advice once it has been delivered.

Better data via regtech can improve the quality of financial advice

As advisers know too well, identifying clients’ goals and relevant circumstances is a key part of delivering advice, but all too often, its quality is limited by inaccurate information. As ASIC warns in its recently updated Regulatory Guide 175 (Licensing: Financial product advisers – conduct and disclosure), advice providers must consider whether the information clients initially disclose to them is enough to give an adequate picture of their circumstances. “We expect that, often, it will not be sufficient,” the guide says. “In this situation, advice providers will need to make further inquiries to identify the client’s relevant circumstances.” The ‘safe harbour’ aspect of the best interests duty also rests on how thoroughly an adviser makes inquiries into a client’s relevant circumstances. Satisfying increased requirements to maintain an audit trail demonstrating care and diligence has the potential to be fraught with frustration and administration. Fortunately, our financial lives are now increasingly electronic with digital payments rising at almost 10 per cent a year, according to data from consultancy Capgemini. This makes it relatively simple for advisers to use regtech to learn more about their clients than they consciously know about themselves. Great advisers will always be adept at uncovering clients’ values, attitudes, expectations, financial experience and literacy. But technology, which is more efficient and accurate, can replace multiple aspects of the traditional manual ‘fact find’ process, and so cut through many behavioural biases that distort clients’ thoughts and actions.

Finding and eliminating financial errors – before it’s too late

Advice scandals have unfortunately become synonymous with the advice industry. Millions of dollars in remediation has already been paid to clients. Regtech can lift the quality of advice, making it easier to comply with the best interests duty, but it can also correct mistakes before they cause harm. This aspect of regtech is still in its infancy but, over the long-term, will radically reduce the number of regulatory breaches. At the moment, only a small percentage of case files are thoroughly reviewed before advice is handed out. The situation will change as paper files are consigned to the dustpan of history and replaced with digital files that regtech – specifically artificial intelligence – can quickly scan and analyse. These processes can easily be scaled across organisations and improve real-time risk controls. And it’s processes that offer the greatest protection against potential regulatory sanctions. That’s been demonstrated with the first civil penalty imposed for breaching the best interests duty. In October, the Federal Court ordered Melbourne financial planning practice Golden Financial Group (formerly NSG Services) to pay $1 million for a total of 20 contraventions. Some of NSG’s control weaknesses included lack of regular checks over the accuracy of client fact find forms, and forms being completed by staff after client meetings. That contributed to NSG providing advice “in the absence of proper, sufficient and complete instructions and information about the client’s objectives, financial situation and needs.” Regtech can automate the Know Your Client process using robust solutions that drawn on clients’ real financial situation and behaviour. Those solutions make life easier, not harder, for staff to comply with internal controls and discharge their professional responsibilities. Culture is central to the success of both compliance and innovation. Regtech offers a path to help advisers bring that culture to life and grow a stronger and more profitable business. This article was originally published in Professional Planner on Thursday, November 9th, 2017.