Regulatory "jazz hands": FASEA's Code of Ethics

Jazz Hands: (noun) a gesture originating in musical theatre, in which the hands are waved rapidly to and fro with the palms facing forward and the fingers splayed, used typically to express or indicate excitement or triumph.
— wikipedia
 

It would be a tragedy if all the media coverage of education, exams and elections distracts you from the looming presence of the FASEA’s Code of Ethics. As you are no doubt aware, all financial advisers must comply with the Code of Ethics from 1 January 2020.

This Code and the supporting Standards comprise additional legal obligations for all financial advisers, irrespective of their structures or employment circumstances.

It seems reasonable and certainly consistent with the professional aspirations of most advisers. The problem is not with the Code’s intent, but with its implications and consequences.

Before we drill down, it’s worthwhile acknowledging that the Code issued by FASEA is more a “set of principles and core values” than detailed rules but it’s a principles based model that provides the parameters for ethical and professional conduct.

In our view, it’s the ambition and inchoate aspirations of the Code of Ethics that threatens the sustainability of the profession it hopes to shape and confirm.

Don’t allow jazz-hands to distract you from the fundamental problems with the choreography.


In return for renouncing the pursuit of self-interest, society often provides members of the professions with a range of formal and informal privileges (such as a ‘monopoly’ right to undertake certain types of work).
— Financial Planners and Advisers Code of Ethics 2019


The devil is in the detail

Principles are fine. Properly drafted, they provide clear guidelines for conduct but, as the Ten Commandments demonstrate, even the simplest guidelines are subjected to interpretation, revisionism and qualification. The challenge for advisers is that the Code will be monitored and enforced by monitoring bodies approved and supervised by ASIC.

While some aspects of the Code simply place a gloss upon the law, some elements provide some problematic additions.

 

You must not advise, refer or act in any other manner where you have a conflict of interest or duty.

The law requires conflicts to be managed but does not prohibit conflicts. The Code, anticipating or reflecting Commissioner Hayne’s trenchant criticism of the industry, states that any “conflict of interest or duty” is a breach of the Code. The obvious impact on conflicted remuneration aside, all commercial activities involve conflicts and their complete prohibition seems quixotic and unreasonable. Even the FASEA directors have been criticised for, and rationalised away, their own conflicts. So how practical is the expectation imposed by the code?

 

You may act for a client only with the client’s free, prior and informed consent.

We’ve long argued that ‘informed consent’ should be one of the core elements of all professional advice - financial, medical or legal - and we have no qualms about insisting that consent is obtained prior to any transaction but we are concerned about the requirement that the consent must be ‘free’.

To be clear, this is not an issue of costs and charges (more on these later) but relates to the quality of the consent an adviser obtains. It suggests an absence of compulsion, urgency and external pressures. In fact, it’s easier to prove the absence of ‘free consent’.

For example, a negative definition might assert that coercion, fraud, undue influence, misrepresentation or mistake mean that any consent obtained as a result is not free. The grey-area for advisers, particularly given the asymmetrical relationship, is their capacity to identify, mitigate or eliminate these factors (or any reasonable suggestion of these factors’ presence).

 

You must satisfy yourself that any fees or charges … are fair and reasonable and represent value for money for the client.

The insertion of a qualitative and subjective measure such as this seems to be particularly troublesome in a profession that prioritises achieving desired outcomes over the costs to do so. The application of this principle, or the rigour with which it will be assessed and enforced, seems to particularly worrisome. While ‘unconscionable’ conduct may be easier to define - “conduct that defies good conscience” - this is a potential minefield for advisers and a new opportunity for industry-fund representatives.