“First, do no harm”
— Hippocratic Oath (popular attribution)
“Do the right thing”
— Google, since 2015
“The Code brings together expectations of the Australian community for the provision of professional financial advice. It comprises five (5) values and twelve (12) standards. ”
— FASEA, Financial Planners and Advisers Code of Ethics 2019 Guidance (FG002)
Expectations and Standards
From 1 January 2020, until the establishment of the Monitoring Body, Licensees are responsible for ensuring their representatives comply with the Code of Ethics.
That’s not as simple as you might imagine.
To be clear from the outset, I’m not convinced that the publication and enforcement of a Code of Ethics will substantively assist an independent advice profession emerge from industrial, product distribution framework.
I admire the Government’s optimism. I appreciate that, given the manifest limitations of disclosure and the complexity of financial services, consumers are necessarily reliant on those who, by virtue of their experience, education and competency, are capable of advising them. But, as the Royal Commission highlighted, capacity exercised without the foundation of an appropriate ethical framework, leads to systemic misconduct and significant consumer detriment.
If reliance on advisers is unavoidable, the Government’s duty to protect consumers’ interests requires them to mandate professional standards. This is why a professionalism framework is essential. These changes may be exclusionary, discriminatory and disruptive, but they’re essential and long-overdue.
Whether you consider them to have been “landmark reforms” or “ill-formed, illogical and untested” changes, the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 and the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 ultimately led to the creation of FASEA and their publication of a Code of Ethics. The Code, which becomes mandatory from 1 January 2020, is presented as a “powerful framework to shape and reinforce ethical conduct and encourage deeper engagement by the individual with their duties to their client as well as wider society.”
Although introduced with the florid prose and mixed metaphors so beloved of consultants and frustrated academics, the Code is presented as providing the foundation for a professional service. I agree with the intent, but I also acknowledge the consequences and implications of these reforms.
In my view, the law is sufficient. I appreciate the moral signalling that a public commitment to ethical standards provides, but I’m not oblivious to the common refrain repeated within the industry that ‘ethics can not be taught”. Ethics may be the contextualised extension of a person’s conscience and moral conduct, and therefore an innate and internal value system but there is, in fact, compelling research to suggest that ethics can be taught (and ethical conduct learnt and modelled) by instruction and the practical application of principles to experiences.
But Values and Standards, in and of themselves, are unlikely to change behaviour or nudge a commercial service to evolve into a profession.
FASEA’s intent is commendable but their execution problematic for a number of reasons.
Complexity, confusion and conflicts
“it is the law, and not codes of ethics, that are the proper repositories for basic norms of conduct”
— royal commission into misconduct in the banking, superannuation and financial services industry interim report, 28/09/2018 page 154
The compulsory Code of Ethics published by FASEA, and the illustrative guidance belatedly released to explain its application, was intended to
“impose ethical standards that go above the requirements of the law and .. encourage and embed higher standards of behaviour and professionalism in the financial advice industry”.
This is a fine aspiration and a laudable aim, but reference to an industry (rather than a profession or an emerging profession) exposes the inherent tension at the heart of these reforms. Groups defined by business activities (industries) and groups defined by prolonged training, formal qualifications and adherence to ethical standards have very different needs.
In my opinion, the Code (and Guidance) offered by FASEA is at least partially compromised by their attempt to reconcile these irreconcilable perspectives instead of claiming uncontested ground.
Remember that the intention of the Code was to “go above the requirements of the law”. FASEA have failed because, unsurprisingly for a Board dominated by lawyers, the Code simply restates legal requirements without any real effort to contextualise them to the realities of practice.
This is clear when you consider the examples offered to illustrate the standards, but it’s also obvious in the creation of a list of values that are repetitive, self-referential and unclear.
For example, Standard 1 declares that advisers “must act in accordance with the applicable laws, including this Code, and not try to avoid or circumvent their intent”.
Complying with ‘applicable laws’ is already a social norm.
The Code is a legislative instrument.
There are already clear and established consequences for contravening or circumventing applicable laws, so how does this Standard break new ground, or even improve on Commissioner Hayne’s admonishment to the industry to “obey the law”, act in clients’ best interests and prioritise clients’ interests.
It doesn’t, and because FASEA chose to mimic Standards that the Association who created them struggled, and sometimes failed, to apply, the FASEA Code doesn’t make any substantive progress beyond proposing broader application and more substantial penalties for contravention.
To be fair, there are small tweaks designed to reframe advisers’ relationships with the Regulator, the Community and their developing Profession, but the Values and the Standards are of limited utility. The explicit references to integrity and to duties of confidentiality are worthy inclusions, but these inclusions would have been better addressed as specific values.
In my view, FASEA took a legalistic and procedural approach to identifying values – Trustworthiness, Competence, Honesty, Fairness and Diligence – and therefore missed the opportunity to define a broader and more reflective set of practical and aspirational values – Integrity, Competence, Diligence, Objectivity and Service.
Worse than duplicative and derivative, the Code is dull and uninspiring. Like most consultants’ products, it’s generic, inorganic and could be amended to any other industry with very little effort.
For example, where is the recognition that financial advice has value and that Australians would significantly benefit from accessing advice that improves and enriches their life?
Instead of the laundry list of generic values, the Code should have been drafted to properly reflect the values and aspirations of an emerging independent advice profession.
What do you mean?
“Ain’t about the uh cha-ching cha-ching
Ain’t about the yeah b-bling b-bling”
— Jessie J, Price Tag
Standard Seven seems clear and reasonable on first pass.
Clients must give “free, prior and informed consent” to all benefits you (and your Principal) will receive for acting for them, including any fees.
Except where expressly permitted, you can’t receive benefits from a third party.
This is relatively clear, but it becomes less so when the Standard elaborates that you are responsible for ensuring that
“any fees and charges that the client must pay to you or your principal, and any benefits that you or your principal receive, in connection for acting for the client are fair and reasonable, and represent value for money for the client.”
Surprisingly, given the contentious nature of this element, FASEA offer no guidance on what is “fair and reasonable” or how “value for money” is to be assessed. Their examples, and the guidance they offer, is instead limited to simple process issues.
In my opinion, FASEA overstep given their obvious unwillingness to provide the parameters for what is a subjective and judgemental assessment. Advisers should therefore be legitimately concerned about how Code Monitoring bodies may interpret these terms.
In fact, it may have been better for FASEA to have avoided any assessment of price and value in favour of a focus on costs and benefits and the proportionality of those elements.
“Doing what’s right isn’t the problem. It’s knowing what’s right.”
— Lyndon B Johnson, 36th US President
If the complications and implications of applying Standard 7 don’t worry you, consider the practical application of Standard 12’s exhortation to you to protect the “public interest”.
Without labouring the point, defining the ‘public interest’ is problematic because it’s a phrase “as rich and variable as the legal imagination can make it”.
Apart from defining it in contrast to private interests, the amorphous and hierarchical concept can “not usefully be defined”. So expecting advisers to consistently and correctly divine the public interest in their consideration of private interests, is unrealistic.
Assessing, and enforcing, compliance with Standard 12 is fraught with complexity.
I appreciate advisers’ concerns with Standard Three but it’s is so problematic that I’ll address it separately in another article.
Real, often problematic, examples
FG002 offers 32 examples to explain, in qualified terms, the application of the Standards to real world examples.
The problem is that the examples they offer are too simplistic to offer any real benefit.
Simple solutions might provide reassurance to some commentators, but competent professionals appreciate that situations – especially those that involve ethical dilemmas – are seldom clear and often appear insoluble.
Personally, advisers might have benefitted more from FASEA addressing examples like:
Example 1: Your new client, Augustus Frump, has a broad portfolio of managed funds held on a retail platform. He’s still quite worked up about the Royal Commission (which is why he’s left his previous adviser) and you think that he’d benefit from the efficiencies your MDA Service offers. Even considering your advice fee, and the separate portfolio management fee charged by the Investment Consultant, the MDA is cheaper and you’ll be able to effect purchases and redemptions much quicker.
Example 2: Your new client, Augustus Frump, has a broad portfolio of managed funds held on a retail platform. He’s still quite worked up about the Royal Commission (which is why he’s left his previous adviser) and you think that he’d benefit from the efficiencies your MDA Service offers. Even considering your advice fee, and the separate portfolio management fee charged by the Investment Consultant, the MDA is cheaper and you’ll be able to effect purchases and redemptions much quicker. You’re not a shareholder in the company your Principal set up and appointed as the Investment Consultant, so you have no financial interest in that related entity.
Example 3: You’ve noticed that ‘wellness’ is a key interest for many consumers looking for personal risk insurance and, after undertaking a thorough assessment of the market, you’ve developed a preference for one provider and a willingness to use others in certain conditions. You would never recommend your preferred provider unless it is appropriate for your client and in their best interests. As an ancillary benefit, clients that purchase that product also have the opportunity to sign up to a related health and wellness service that looks to their broader non-financial needs. It’s incredibly popular with your clients. You receive $200 for every client that signs up for that service, but it isn’t a financial service and you’re not involved in their decision to commit.
Example 4: Ms Edestein has been a client of yours for many years. You knew her before her husband died and you helped her correct her financial affairs after his death. You consider her to be one of your most valued clients and you meet regularly to consider her needs and situation. She values your ongoing service, but she’s worried that increasing compliance costs and declining margins are putting pressure on your business (and your family). She’s offered to invest in your business so that you’ll have the capital you need to endure now and grow in the future. She’s confident enough about her financial situation to be comfortable with the loan and she’s suggested that the lawyer you both know can draft the Loan Agreement. You have, of course, insisted on commercial terms.
Example 5: Your SMSF clients often express an interest in diversifying their portfolios through an investment in direct property. You’ve long been concerned about the predatory and opportunistic nature of some ‘advisers’ in this space, and you’re reluctant to expose your clients to accountants and developers who might not properly explain the risks of investing in direct property (particularly off-the-plan investments). So you’ve applied your Research methodology to the direct property sector and, after extensive due diligence, have identified a small number of developers/promoters that meet your exacting standards. You know that this is only the first step, and every project (and proposed investment) needs to be closely assessed to ensure it’s appropriate for the client considering it.
Unfortunately, this process requires significant time, and the cost of your research and analysis is expensive. Although your clients value the service, they don’t like bearing its cost.
One of the developer/promoters you like to recommend has a strong and consistent history of performance. As a consequence, they routinely rebate part of their profits to clients that commit to projects before they become publicly available. The developer/promoter understands your position and has suggested that, if they’re instructed to do so by your clients, they will pay your fees directly from the rebate that would have otherwise have been paid to your client. The balance, if any, would be paid to the client.
Example 6: Your SMSF clients often express an interest in diversifying their portfolios through an investment in direct property. You’ve long been concerned about the predatory and opportunistic nature of some ‘advisers’ in this space, and you’re reluctant to expose your clients to accountants and developers who might not properly explain the risks of investing in direct property (particularly off-the-plan investments).
Thankfully, your Licensee applied their Research methodology to the direct property sector and, after extensive due diligence, identified a small number of developers/promoters that they are happy for you to recommend, where appropriate to do so. You’ve been reassured by your Licensee that their relationship with the developer/promoter is entirely consistent with the law.
Implementation: The bigger issue
“.. the most useful thing about a principle is that it can always be sacrificed to expediency.”
— W. Somerset Maugham, The Circle, Act 3
For a variety of reasons, there is no Monitoring Body responsible for ensuring that advisers comply with the Code of Ethics.
From 1 January 2020, until the establishment of the Monitoring Body, Licensees are responsible for ensuring their representatives comply with the Code.
You’re no doubt aware of your responsibility, but
- Have you considered how the reviews will be done and by whom?
- Have you considered how you’ll measure and enforce a Code without ensuring that your representatives understand its requirements (and your expectations)?
- How will you educate and prepare your advisers?
- Will this be an additional review or incorporated in your standard adviser reviews?
- Is your Consequence Management framework capable of handling contraventions of the Code?
- How will your compliance framework manage identified issues that comply with the law BUT contravene the Code?
- Have your governance documents been amended to explicitly consider the Code’s Standards and Values?
- Have your advice processes been updated to reflect the Standards?
The 1 January commencement of the Code requires more significant changes than FASEA seem to anticipate and the complexity and complications they have introduced will have a material impact. There will be a range of consequences, both anticipated and unanticipated, and the imposition of this confused, unclear and complicated framework will be a challenge for advisers and Licensees.
Our review methodology has considered compliance with ethical standards since 2013, so if you’d like help incorporating the Code into your activities, please reach out.