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Unravelled: Draft code of ethics for financial advisers – in need of much more work

9 April 2018

Written by Senior Regulatory Counsel Michael Mathieson

You would be hard pressed to find a bigger load of nonsense than the draft code of ethics for financial advisers issued recently by the Financial Adviser Standards and Ethics Authority.

Ethical behaviour

The draft code would require affected financial advisers to 'act in accordance with the spirit – and not just the letter – of all relevant laws and regulations'.

A financial adviser might reasonably ask, how do I identify the 'spirit' of the law? The point here is entirely serious. For example, what, precisely, is the 'spirit' of the Future of Financial Advice provisions in Part 7.7A of the Corporations Act? I have written my fair share of FoFA advices over the years but, despite the considerable toil involved, I remain unable to identify the 'spirit' of the FoFA provisions. Consider this question: are some, or all, of the exceptions to conflicted remuneration to be included, or else ignored, in determining the 'spirit' of the ban on conflicted remuneration? How about the grandfathering concessions?

None of this would matter if breaching the code did not have consequences. But that will not be so. A financial adviser will be 'subject to investigation and discipline from the responsible Code Monitoring Body' for 'potential breaches'.

Punishing someone for breaching something that is unknown and unknowable is self-evidently absurd. The idea is also misdirected, in assuming (as it does) that the law is somehow inadequate and, in addition, that all advisers already comply with the 'letter' of the law at all times. The first assumption has not been shown by FASEA to be correct – indeed it is very likely to be wrong – and the second assumption is plainly false.

A better approach would be to enforce the law, or at least to do so more frequently. The liability judgment of Justice Edelman in ASIC v Cassimatis makes it clear that the pre-FoFA law was (notwithstanding earlier suggestions to the contrary) well and truly up to the job. It was just that the existing (adequate) law was not enforced in the case of Storm Financial.

In my view, it would be better to enforce the existing law, rather than leaving it unenforced (and thereby tacitly encouraging risky behaviour). It would also be better than constantly amending the law (witness FoFA) or requiring advisers to comply with its 'spirit' (witness the draft code from FASEA).

Client care

Under the heading 'client care', an adviser would be required to 'act only on the basis of the free, prior and informed consent of a client'.

Consent to what? It must be something other than consent to receiving 'agreed fees and payments for agreed services', as that topic is dealt with in a different standard in a different section of the code. (And, in that case, the consent must be 'informed', but need not be 'free' or 'prior', which begs the obvious question.)

The adviser would also have to ensure that 'all advice and products are … in the best interest [sic] of each client'. This is in the section of the code headed 'client care', not in the section headed 'quality process' – and yet, as most advisers would know, the 'best interests' duty that applies to personal advice given to retail clients is largely about the quality of the advice-giving process. The safe harbour steps in section 961B(2) make this clear. A code of ethics should not jar with the law covering the same area.

The adviser would also be required to ensure that all 'products are … presented in terms easily understood by the client'. This could sound the death knell for many a structured product (or other complex financial product) – noting that the receipt of personal advice has been flagged as a potential distribution condition under the draft financial product design and distribution provisions. Some products are simply not easily understood – some can only be understood if the client is prepared to put some effort into doing so.

Finally, the adviser would also have to 'take into account the broad effects arising from a client acting on their advice'. In other words, an adviser would need to have the prognostic powers of Nostradamus.

Conclusion

Unfortunately, the draft code is a poor piece of work. It would be no answer to the many criticisms that may be levelled at it to say 'it is just a code' or it is a code 'of ethics'. The code will have consequences for individuals and FASEA has a duty to produce something that is tolerably clear, workable and fit for purpose.

Other articles in this edition of Unravelled

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