FASEA’s recent release of an updated guidance document to its code of ethics has been met with a storm of criticism from advisers and industry stakeholders. Of particular concern is a change from the original explanatory statement for standard three, which warns that advisers will in breach if a “disinterested person, in possession of all the facts,” concludes that variable income has induced an adviser to not act in the best interests of a client. Clarity over the interpretation of the code remains opaque.
The Code itself comprises five values and twelve standards. The 12 standards of the code are comprised in 4 sections, relating to various standards of Ethical Behaviour, Client Care, Quality Process and Professional Commitment.
While compliance with the Code will come into effect on 1 January 2020, there is still uncertainty around who will administer monitoring to ensure compliance with the code. ASIC has indicated that where a monitoring body detects, investigates and proves a breach of the code of ethics, there will be a range of sanctions available to it, from issuing warnings and reprimands, to recommending independent audits of advisers, to ultimately even removing the ability of the adviser to practice by revoking their coverage by the compliance scheme.
Thus, the consequences of falling foul of the code of ethics are potentially massive, which means a concise understanding of how the code will be applied would be considered imperative from most advisers. While the updated guidance document is an effort to help advisers understand the application of the code, interpretations of wording persist and could have major implications on the enforcements of the code.
Advisers see much ambiguity in the guidance document, for example in the “Application” section which states “The Code is a living document subject to change. It is principle based and is intended to apply to a wide range of situations. This guide is therefore illustrative rather than conclusive regarding application of the Code." Further along in the same section there is this – “This guide uses case study examples to help illustrate requirements in the Code. They are not intended to provide definitive guidance. As noted previously, individual circumstances will differ in practice and, as with every profession, there is allowance for differences of professional opinion on how the ethical rules of the profession should apply in a particular case. Doing what is right will depend on the particular circumstances and requires you to exercise your professional judgement in the best interests of each of your clients.”
It is perhaps understandable that some of the language in the guide indicates that it is non-binding and illustrative only, but in this brave new world of regulatory change and obligation, advisers are looking for certainty and clarity. What the document does make crystal clear is that advisers themselves will be ultimately responsible for compliance with the code.
”As is the case with all other professions, ultimate responsibility for applying the tenets of the Code falls on individual advisers. Each must be ready to give an account of how they have interpreted and applied the Code in specific situations.”
For practical application, it would seem advisers should act as they see fit, be prepared to defend their decisions and face any consequences. It may take a few precedent decisions to really be able to understand how the code will be policed – which is cold comfort to advisers given the multitude of decisions, circumstances and situations they engage in with their clients.
The AFA has again been vocal in its criticism of the code itself and the process of its introduction. A statement to AFA members signed by chief Phil Kewin criticised in particular Standard 3, which states “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” The AFA’s statement said “We simply do not understand how it is possible, when the Corporations Act only requires conflicts to be managed, and the law specifically permits life insurance commissions and other conflicted arrangements, that FASEA could issue a Code of Ethics, that is binding on all financial advisers that appears to completely ban conflicts of interest”.
It continued… “Any expectation to totally remove conflicts of interest is simply impractical. FASEA clearly do not understand the extent of conflicts in financial services, the impact that their removal would have, or appreciate how conflicts are managed to ensure that advice is provided that is in the best interest of the client. Conflicts exist in many different ways and not just with respect to remuneration.”
Although FASEA is planning on hosting a series of consultation briefing sessions with educational, professional, consumer and industry stakeholders regarding the code, Kewin expressed concerns about the value of this because the code of ethics is due to come into effect on 1 January, next year.