A former partner wonders whether it is appropriate to approach former clients to become potential investors.
Syndicate needs disclosure
Dilemma: You have been a partner in an accounting firm for over 10 years and have recently retired and handed over your clients to a new partner. You have, however, remained as a consultant. You have a substantial interest in a property syndicate that is seeking additional investors. You know many clients of your former practice who may have available capital to invest in this syndicate. Is it appropriate for you to access this capital from your previous client base?
There are two main issues that need to be considered in this situation: first are the requirements under the Corporations Act 2001 (as amended by the Financial Services Reform Act 2001) in relation to providing a financial service; and second the ethical issues.
First, it is important to understand the difference between 'referring' and 'arranging'. Generally, 'arranging' refers to negotiating or bringing into effect dealing in a financial product.
Significant involvement in the events leading up to the dealing often indicates that someone is 'arranging'. Other indicators include someone receiving a benefit as a result of the client's decision, or where the dealing would not have taken place had it not been for their involvement.
Someone engaged in 'arranging' is providing financial product advice and therefore must be a licensed financial adviser. Any referral arrangement needs to be closely examined to ensure that it is a mere referral and not in fact providing financial services advice.
In this case the partner needs to consider whether the means of accessing the additional capital from former clients does amount to 'arranging' and therefore requires the partner to be a licensed adviser under the Act.
Furthermore, an activity may be permitted under the legislation but may not be permitted by APES 110 Code of professional conduct for accountants; for example verbal disclosure of referral fees and commissions allowed under the legislation are not allowed under the code. The code requires all referral fees to be disclosed to the client in writing. Members engaged in the provision of financial advisory services are also obliged to comply with APS 12 Statement of financial advisory services.
Important ethical issues also need to be considered. As the partner has a substantial interest in the property syndicate, there is a potential conflict of interest. Conflicts generally arise when members' personal or professional relationships or interests potentially influence their objective professional judgement. It is therefore important to avoid apparent and potential as well as actual conflicts of interest.
An apparent conflict of interest is one that a reasonable person would think is likely to compromise the professional's judgement. A potential conflict of interest involves a situation that may develop into an actual conflict of interest.
There is an actual conflict of interest where, for example, someone has a pecuniary interest in the matter at hand, or a member of their immediate family has a pecuniary interest in the matter at hand.
The principle for defining conflicts of interest is objectivity. Section 120 of APES 110 states that the principle of objectivity imposes an obligation on all members not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others.
Relationships that bias or unduly influence the professional judgement of the member should be avoided.
In this situation, the minimum the partner should do, is disclose his interest in the syndicate to his former clients and advise them to seek independent professional advice before investing their capital.
He should also discuss this matter with the new partner, as any dealings could potentially impact on the relationship the clients have with the new partner, particularly if the investment proves unsuccessful.
Dilemma solved by Tiina-Liisa Sexton, CPA Australia's ethical adviser.
