Draft Financial Planners & Advisers Code of Ethics 2019 Guide
FASEA have released their Draft Financial Planners & Advisers Code of Ethics 2019 Guide, addressing the intent and application of the Code.
This guide builds on the Preliminary Response and the case study examples contained in FG002 Financial Planners & Advisers Code of Ethics 2019 Guidance, and is designed to equip advisers with the confidence to meet the aspirational standards of the Code.
FASEA has invited feedback.
We need to provide our submission to FASEA by 2 November 2020, so please share your thoughts and opinions with us via email@example.com
Our initial thoughts
We think that the Guidance is generally a good start and, reassuringly, consistent with the obligations of other professionals. Unfortunately, we think that compromises and concessions make the guide less clear than it should be in parts.
Our initial observations are as follows:
- The document reflects the key challenge for FASEA – trying to establish an advice profession while simultaneously asserting it already a profession. We think this is best reflected by the text on page 9 that introduces the challenges involved in moving from “providing commercial services to acting as professionals”.
- The document repeatedly states that “ultimate responsibility for applying the tenets of the Code falls on individual advisers” without properly acknowledging the competing influence of contract and employment law (and offers no substantive strategy for reconciling them). For example, applying the tenets of the Code could, for example, contravene (or cause the adviser to contravene) their contractual obligations and be subject to suspension or termination. Is that just the cost of compliance? How is the conflict managed when only one party is subject to the Code?
- We wonder whether the text for Standard 1 (example 3) will have unanticipated consequences particularly for insurance advisers. Acting with integrity, and in the best interests of a client, as suggested by the Guide might suggest that insurance should be regularly reviewed and replaced.
- The decision to qualify conflicts of interest to “actual conflicts of interest” (page 7) is problematic and inconsistent with Standard 3. The Guide states on page 7 that “The Code relates to actual conflicts of interest” but then cautions advisers to be alert to “potential and perceived conflicts.” The paragraph is an exercise in equivocation that helps no one. It may have been better to state that “The Code relates to material or significant conflicts of interest”. Whether they are actual or perceived conflicts, it’s the materiality of the conflict that’s important. The adviser’s obligation should be to consider whether there are material issues that could influence their conduct or undermine their capacity to act objectively and diligently in their clients’ interests.
- To suggest that the Corporations Act “does not formally allow for conflicts of interest’ (page 7) is correct but disingenuous. The Corporations Act “does not formally prohibit conflicts of interest” either. The law acknowledges that conflicts can, and do, exist and seeks to minimise their adverse impact.
- We think that the reference to making “required disclosures to each client in your Financial Services Guide, Statement of Advice” (page 12) is a retrograde step and out of kilter with the intent and tone of the Code. The Standards should move advisers beyond compliance and this jarring reference to minimum legal requirements should be abandoned in favour of a focus on engagement and understanding.
- The guidelines for Standard 1 seem reasonable except for the repetition of “actual conflicts” (without definition) and reference to the ‘sole purpose’ of business structures. Arguably, based on the text, it’s acceptable to use various business structures if avoidance isn’t the ‘sole purpose’. We’d suggest replacing ‘sole’ with dominant, main or substantive purposes.
- We don’t entirely agree with FASEA’s interpretation (page 16) that s961B is satisfied by complying with s961B and s961C, 961D and 961E. Quite apart from it being circular and obvious – of course complying with s961B will satisfy s961B – but it ignores s961G and s961J. A person cannot contravene these sections, and satisfy s961B, regardless of the scope of their enquiries. We would recommend reframing this to “Advice professionals are expected, consistent with sections 961C, 961D and 961E to – identify the retail client’s objectives ….”
- Standard 3 remains problematic and the focus on ‘actual conflicts’ (without definition) creates more complication. Focusing on material or significant conflicts might be more consistent with the reference to realism, practicality and expectations (page 17).
- We think FASEA will get a lot of feedback on the paragraph on page 17 that states that “The Code does not seek to ban particular forms of remuneration, nor does it determine that particular forms of remuneration will always give rise to an actual conflict of interest or duty”. Quite apart from the prohibition on third-party remuneration, we think the statement that “certain forms of remuneration will always fail to meet the requirements of the Code” shows that FASEA is equivocating and not being honest. If there are forms that will always fail, then there are forms that the Code is prohibiting – but you’re not saying what those are to avoid the debate.
- We think the Standard of judgment FASEA outline on page 18 assumes ‘perfect knowledge and perfect rationality’. REP 632 addresses the limitations of disclosure and Hayne focused on adviser’s ability to rationalise inappropriate conduct. We think it should be simplified as whether someone might reasonably think the conflict contributed to, or influenced, your conduct. Direct advice fees (although subject to Standard 7) are excluded from any consideration of Standard 3.
- We think FASEA misrepresent insurance commission. It is not a fee charged by the adviser but a benefit received from the product issuer as a result of the financial product recommendation. In the absence of any contract or construed obligation, there is no ongoing service. This (and the unintended consequences of Standard 1) attempts to reframe the legal relationship in a way that may be too far ahead of the specialist risk advisers. We suggest that FASEA should delete “(including insurance commissions) from the answer for example 2. However, we think it’s reasonable to recommend, consistent with Standards 1 and 2, that advisers should regularly review their clients arrangements to ensure that they remain adequate and appropriate.
- ‘Fair and reasonable‘ will always be a subjective assessment. We think the principles outlined in penultimate paragraph of page 27 are good; but we think FASEA will be pressed for clarity. Perhaps some examples would be useful such as “advice fees greater than 20% of the client’s fund balance or costs that are more than 100% of their SG Contributions are, for example, unlikely to be ‘fair and reasonable’. We also think FASEA will need to link this explicitly to 961B and 961J so that ‘cost’ is seen as an ethical issue and not simply an economic one. It may also be worthwhile focusing on the consistency and predictability of fees and charges. Furthermore, fees may be low and still not ‘fair and reasonable’ if the client doesn’t require the services for which they are paying.
- In particular, we’ve had a lot of conversations with advisers telling them that, despite how the advice is scoped, they have a best interest duty that might require them to move beyond the client’s scope or contradict their instructions and preferences. This aspect of Standard 6 is often overlooked but I think FASEA need to expand on advisers’ obligations and the limits of clients’ preferences. If, for example, I warn a client that their preferred course of action is not in their best interests, is that enough. Can I then advise them on how best achieve their course of action? Can I implement or must I reject the client. The general principle might be fine, but the professional expectation is unclear.
- A general observation, with Standard 7 in particular, is that too often the guidance focuses on ‘benefits, costs and risks’ instead of consequences and implications. By narrowing the scope, we worry that FASEA will distract advisers from their broader obligations.
- We think Standard 8 misses the point. An adviser should maintain accurate and complete client records not because the law requires it but because, as advice professionals, they need to be able to demonstrate the care, diligence and consideration they exercised in serving their clients’ interests. There’s also a risk management component to protect the adviser and the clients’ interests.
- Standard 9 may have the unintended consequence of suggesting that advisers need to consider all products available in the market.
- Another potential issue with Standard 9 is that there’s often no ‘additional fee or remuneration’ that leads an adviser to recommend in-house product; rather, expectation, convenience and habit are key contributors. We think it’s important to emphasise that the general obligation to understand products and strategies should not be interpreted as an obligation to know all products and strategies (or liability for failing to do so). It’s a broad professional obligation to be reasonably informed and to be able to demonstrate that recommendations are the result of analysis and consideration and not simply habit or licensee constraints.
- We think that Standard 12 focuses too much on ‘provider’s professional relationships with each other’ and not enough on their obligation to the public interest. Adviser’s don’t have a legal obligation to provide their client files and, in fact, there may be contractual and other reasons why they cannot. We think you need to first establish that this is a reasonable expectation and provide guidance on managing the risks. We also worry that Answer 2 fails to consider whistleblowing or the real risks and consequences that some advisers face in meeting this standard (particularly when the advice was provided by another representative of the Licensee).