Somewhat lost amongst industry discussion of the impending increase in adviser education requirements has been the Financial Adviser Standards and Ethics Authority’s (FASEA) consultation on a new code of ethics. The consultation paper and code can be accessed here and submissions are able to be made up until June 1.
Sticking to the code
All financial advisers will be required to abide by the code from January 1, 2020 and will need to choose a body to monitor their adherence to the code. This monitoring body will have the ability to apply sanctions to an advice provider for breaches of the code.
Until monitoring bodies begin to be approved by ASIC, the scope of the sanctions they can apply will not be clear. ASIC has released a consultation paper on how monitoring bodies should be overseen.
Codes of ethics and conduct have floated around the financial advice industry for years without garnering much interest from advisers. Aside from the potential for industry associations to impose sanctions on members for breaches of their code, codes have had little practical impact. Unless an adviser is on the disciplinary committee of an industry body, or has just completed ethics training, they would probably be hard pressed to recall much of any of the codes.
The difficulty with industry associations monitoring the industry codes was highlighted during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Conflicts will invariably arise when the only arbiter of the code, and the authority behind the code, is funded by those who are supposed to adhere to it. As one witness wrote in an email to an industry association, in response to being investigated by that association:
“(The investigating officer) appears to have his own agenda and there is zero support for members. I am very disappointed with this process and the (industry association)’s treatment of members…”
“My peers would be interested in the workings of this process and what it means to be a member of the (industry association).”
As it turned out, according to the Royal Commission, that witness’s peers on the industry association’s conduct review panel didn’t think the investigating officer’s recommended sanctions went far enough. While it might be heartening that some of that industry association’s disciplinary processes seem to have held up against pressure from a high-profile member, their difficult position is still obvious. That industry association still attempted to reach an agreement with the witness on the necessary steps to remediate his behaviour and didn’t want his identity disclosed at the Royal Commission.
The universal industry code will move the goalposts as enforcement will be ultimately overseen by ASIC.
An independent code
The code of ethics on which FASEA is consulting will be enforceable under the Corporations Act. While a professional association may be registered as a monitoring body, they will have more authority to enforce the code than just their membership requirements. In fact, code monitoring bodies may face penalties if they fail to adequately monitor the new FASEA-authored code of ethics.
This increased impetus is why the new code of ethics should matter to every financial adviser. Not only will advisers need to adhere to the best interests duty, disclosure requirements and other black-and-white legal obligations, they will also have no way to avoid acting in accordance with the less prescriptive code of ethics. So, what is in FASEA’s draft code of ethics?
Cracking the code
The full draft code of ethics can be found on FASEA’s website. It splits adviser obligations into four classes of standards:
- Standards of ethical behaviour
- Standards of client care
- Standards of quality process, and
- Standards of professional commitment.
It is when you delve into the individual standards that the broad scope of the code becomes clear.
Ethical behaviour is broken down into three standards:
- Acting in accordance with the spirit of all relevant laws and regulations
- Never advising or acting in a manner where inappropriate personal advantage is derived.
- Acting with personal integrity and as an independently minded professional for the benefit of each client.
Invoking the “spirit” of any set of rules opens much subjective interpretation. How is the spirit of a law determined? Is it revealed by the words of the politicians and review panels that may have recommended that law? Is it revealed by the explanatory memorandum that accompanied the bill? Is it identified by guidance from the regulatory body charged with enforcing that law?
This is far from the first time that the spirit of the law has arisen as a concept when considering professional conduct. One example is that the ATO cites the spirit of the law as being something to which tax planners should adhere to, in order to ensure they aren’t crossing the line from tax planning to tax avoidance. Nonetheless, it is a far-reaching concept for the first standard in FASEA’s draft code of ethics.
This broadness of language extends to the second standard. When does personal advantage become “inappropriate”? When FoFA, and specifically the conflicted remuneration restrictions, was introduced, exceptions were regulated to allow “grandfathered” commission-paying clients to be transferred between advisers. From the testimony of the Royal Commission, it is clear that the judicial arm of Australia’s legal system does not view those arrangements to be “appropriate”, so would they fall foul of the draft code?
The last standard, while seemingly broad, can also be viewed as the clearest. While not universal, it is reasonable to say that integrity and professionalism build the reputation of the individual, and profession, respectively. If the actions of the individual detract from either of those reputations in the eyes of the public, those actions cannot be said to display those qualities.
Client care is also divided into three standards:
- Act only on the basis of the free, prior and informed consent of a client.
- Ensure all advice and products are in the client’s best interests’, appropriate to their circumstances and presented in terms easily understood by the client.
- Take into account the broad effects arising from a client acting on the advice.
The client care standards appear more in line with current adviser practices and obligations and large parts are already covered in the Corporations Act. There are still some areas of uncertainty however.
The concepts of “informed consent” and “terms easily understood by the client” may limit the type of advice that can be provided to a client. Most, if not all, advisers would hope to achieve these standards however, having them codified, may mean greater caution will need to be exercised.
For example, if an adviser has a client who has not been equipped by experience or training to understand the full responsibilities of a SMSF trustee, how can the adviser believe the client has “easily understood” a recommendation to commence an SMSF, even if the client’s other circumstances indicate it is a good idea? Whether consent is informed will depend on the client’s personal experience and background.
The standards of quality process under the draft code are:
- Obtain informed consent to act and receive agreed fees and payments for agreed services.
- Obtain informed consent, and agree, to maintain records relevant to the advice provided, in accordance with relevant privacy, regulatory and confidentiality obligations.
- Ensure that all advice and products are offered in good faith and with competence and based on information that is neither misleading nor deceptive.
The quality process standards largely reinforce existing laws and obligations to which advisers are already required to adhere. That said, there are issues, particularly around fees, that may arise. Can a client on a grandfathered commission arrangement be said to have agreed to the fees and be receiving an agreed service without scheduled reviews? It seems unlikely. Insurance commission arrangements may raise similar concerns under the code.
The draft code’s standards of professional commitment are:
- Develop and maintain a high level of relevant knowledge and skills.
- Accept that potential breaches of this Code will be subject to investigation and discipline from the responsible Code Monitoring Body, undertaken in accordance with ASIC’s approval and oversight of that body.
- Individually, and in cooperation with peers, uphold and promote the ethical standards of the profession, and hold each other accountable for the protection of the public interest.
The first professional commitment standard will largely be met by the existing, and incoming, education standards. The second standard is a self-strengthening commitment required of all advisers under the code. It is the third professional commitment standard that introduces a new enforceable concept to the industry.
The third professional commitment standard of FASEA’s draft code of ethics reads like an enforceable bystander law. In essence, if an adviser sees a colleague, or fellow industry participant, doing something questionable, they are required to report their suspicions to an appropriate authority. If they fail to do so, they may fall foul of their code of ethics and be penalised.
This requirement raises a great many conflicting questions around its potential benefit, or detriment. Will it prevent evil prevailing, as noted by Edmund Burke, by requiring good people to say something, or will it engender mistrust between industry colleagues? It is a point worthy of further examination.
Have your say
The upshot of all this analysis is that FASEA’s draft code of ethics should not be something placed in the “too hard” basket. It certainly should not be considered inconsequential. The impact of the eventual code of ethics will be felt by all financial advisers and the time to help mould this important element of industry governance is now.