Following a review by Australian regulator ASIC, five Australian banks have informed that they will improve their compliance measures and controls for deposit accounts that can be operated by a third party, such as a financial adviser.
ASIC’s industry-wide review was prompted by concerns raised through an investigation of the conduct of persons involved in Sherwin Financial Planners Pty Ltd (in liquidation) and Wickham Securities Pty Ltd (in liquidation). By the time the Sherwin group of companies collapsed in January 2013 they owed nearly $60 million to approximately 400 clients.
ASIC’s review looked at the policies, procedures and controls that banks have in place to prevent fraud and unauthorised transactions for consumers who have deposit accounts that can be operated by their adviser.
ASIC’s review did not identify concerning levels of fraud, but found that banks could do more to manage the risks to customers associated with third party access to money in customers’ accounts.
At the time of review, there were around 455,000 of these accounts open across the banks the regulator reviewed, held by approximately 530,000 customers with balances totalling around $28.6 billion. These accounts are often marketed as ‘cash management accounts’.
The findings of the review, outlined in Report 584, include:
- The amount of control that advisers are provided with over a consumer’s deposit account varies between different banks – from ‘view only’ access to complete control.
- Banks should do more to explain the level of access that customers are providing to their financial adviser, and the potential risk of unauthorised transactions.
- Control measures for protecting customers’ accounts from unauthorised activity should be strengthened, and banks should do more to reduce the risks to customers.
The banks involved in the review have agreed to make improvements to their current practices based on our findings, including:
- Ensuring account application forms adequately explain to customers that they will be giving the adviser authority to operate on their account, and sending follow up communications to customers after the account is opened with details of the authority that has been given;
- Better monitoring of the advisers’ use of these accounts and their transaction requests, and investigating any suspicious requests; and
- Considering the circumstances of any fraud that occurs using these accounts and, where appropriate, remediating a customer who has lost funds due to unauthorised transactions by their adviser.
ASIC Deputy Chair Peter Kell said banks offering these accounts should review the measures they have in place to address the risk of fraud where a third party has authority to withdraw a customer’s money and make improvements where necessary.
Banks and advisers are often entrusted with their customers’ life savings. They must be clear in communicating to their customers about any authority the customer’s adviser has over their money.
Moreover, banks must also have robust systems in place that ensure their customers’ funds are protected from the risk of fraud.
The complete report can be seen here.