Adapting to FASEA's Code of Ethics
The much-anticipated new ethics regime for financial advisers kicked off this year on 1 January with FASEA requiring all advisers to meet the new standards. But the broad nature of the regulatory guidance means there is more than one interpretation of how best to comply.
The compulsory Code of Ethics, which was recommended by the Banking Royal Commission, asks financial advisers to consider their biases and conflicts of interest, and aims to raise the education, training and ethical standards of financial advisers to promote enhanced consumer trust.
While FASEA’s Code of Ethics may be revised over 2020, the statutory body’s CEO Stephen Glenfield wants the industry to make every effort to implement it before any changes are considered. In this respect, the Code of Ethics is more than a set of rules with which advisers must comply as it is hoped advisers will reflect on its prescriptions and ensure their behaviour and practices align.
Jaime Lumsden, Solicitor Director at The Fold Legal, says the compliance with the Code is not about “ticking a box” but instead, fundamentally asking financial advisers to think like professionals.
Referral arrangements and scaled advice
Lumsden said there are still some questions around some of the standards, such as Standard 3, around referral arrangements.
“It says that ‘you must not advise, refer or act in any manner where you have a conflict of interest’. It appears this standard is likely to have a significant impact on how referral arrangements work,” she says.
“So far the only referral arrangement we’re reasonably sure is allowable is where a third party refers a client to the adviser.”
Lumsden uses the example of a mortgage broker referring a client for life insurance advice – It makes no difference to the service the mortgage broker provides. However, an accountant who provides SMSF administration services and refers a client to an adviser for advice on an SMSF, does have a stake in the outcome of the advice. The accountant won’t be able to provide more services unless the adviser recommends an SMSF.
“The former referral arrangement is okay and the adviser can pay the broker referral fees. The second referral arrangement is not okay and can’t exist, with or without a fee, because the adviser has a conflict she says.
Client versus public interest
Ultimately, this a good opportunity for the financial advice industry to look at other industries and professional codes of practice and how these have fared in an age of increasing regulatory scrutiny.
“There’s actually some principles to what a Code of Ethics should cover for a profession – And a profession is different to an industry. So I don’t think we should be looking to codes of practice for banks or lenders or insurers as these are all product providers,” Lumsden says.
“They are industries not professions, and one of the remarks levelled at financial advisers is that they are an industry but need to be a profession.”
“One thing that tends to distinguish a profession from an industry is a duty to act in the public interest. This duty exists in the accountants’ Code (which references the public interest), the doctors’ Code (which references duties to the wider community) and for lawyers (who owe duties to the court and justice).”
All professionals rely on experience, expertise and intellect to guide them through potentially tricky ethical situations with clients. It is this shift in thinking and behaviour that the Code hopes to underpin.
“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,” FASEA’s guidance says. “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.”
While Standard 12 refers to ‘public interest’, Lumsden describes it as an obligation for the industry to work together to promote the ethical standards of the profession.
“The examples in the FASEA guidance still appears to be centred around duties owed to the client, whereas a genuine public interest obligation overrides the obligation to the client, requiring a professional to act to a higher standard in the wider interests of the community, even though it is not in the client’s best interests,” she says.
“For example, a lawyer’s duty to the court and justice is supposed to come before the duty to the client, and a lawyer can in some cases be limited in what action they can take for a client because of that duty. The FASEA public interest duty does not appear to contemplate the possibility of a wider and higher duty to the public in the same way.”