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FASEA Code of Ethics sets a new bar

Financial advisers, supported by their AFS licensees, need to review their current processes, client documentation and any existing referral arrangements to ensure they comply with the FASEA Code of Ethics.

Keddie Waller | February 2020

Stringent independence requirements are the hallmark of the new statutory Code of Ethics now in force for all financial advisers.

The Code, set by the Financial Adviser Standards and Ethics Authority (FASEA), applies to all relevant providers, including provisional relevant providers once authorised and registered on the ASIC Financial Advisers Register.

While AFS licensees have a responsibility to monitor their financial advisers and enforce compliance, the ultimate responsibility for complying and upholding the principles of the Code rests with the individual financial adviser and cannot be outsourced under any circumstances.

Conduct may breach more than one standard

Based on a set of core values and standards, the Code is designed to operate holistically rather than as standalone obligations, meaning it is possible that the same conduct may breach more than one standard.

Yet, the Code has a few black and white standards that appear to prohibit the provision of advice in specific circumstances, such as Standard 3, which states that “you must not advise, refer or act in any other manner where you have a conflict of interest or duty”.

This has caused significant concern from the sector as to how a financial adviser could comply with the code and continue to provide advisory services to their clients given the new bar and expectations of behaviour the Code now sets.

To address these concerns and to help understand how the code should be applied in practice, FASEA issued FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance (FG002).

Importantly, FASEA states that FG002 is illustrative rather than conclusive and, as a living document, subject to change. However, it clearly also states that just because a conflict may be permitted under the law does not mean that it will also be permitted under the Code.

Example: Referral fees

An important example of this is the receipt of referral fees.

Example 1: Inbound advice in FG002 explains that the prospect of a direct payment to the financial adviser by a third party is a benefit under the Code and would create a conflict between the financial adviser’s best interest duty to the clients and the interests of the third party. The receipt of such payments would therefore breach Standard 3 of the Code.

This is a significant change that will impact many existing referral relationships that may have been in place for many years.

Example: Non-conflicted referral arrangement provides further guidance that a referral arrangement can be established provided there is no benefit, financial or otherwise, in relation to either the receipt of or making client referrals.

Rather, FASEA states the financial adviser can refer to the accountant provided the referral would be of benefit to the client and it is a referral without making a personal recommendation.

Are wholesale investors financially literate?

The treatment of wholesale investors is another area that must be addressed.

Example: Wholesale investor explains that even though a client may hold a wholesale client’s certificate, the financial adviser has an ethical obligation to consider the client’s financial literacy. Where the client lacks the financial competence to be treated as a wholesale investor, even if they have the certificate, they must be treated as a retail client.

In such circumstances, if the client was still treated as a wholesale client, this may be a breach of Standard 1 as it ignores the client’s financial competence. Further, FASEA also states that it would constitute a breach of Standard 2, as the financial adviser benefits by not having to comply with the retail client disclosure laws, the best interests duty and related obligations.

It is clear from these examples alone that financial advisers, supported by their AFS licensees, will need to review their current processes, client documentation and any existing referral arrangements to ensure they promote and facilitate compliance with the Code.

This includes ensuring appropriate systems and processes are in place to document compliance with the Code, as required by FASEA, to demonstrate, if needed, their compliance with their obligations under the Code.  

New disciplinary body in the offing

While compliance was going to be monitored and enforced by ASIC-approved Code Monitoring Schemes, in 2019 the government announced that instead it will work towards establishing a new single disciplinary body in early 2021, which aligns with recommendation 2.10 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

In the interim, ASIC has been tasked with oversight and has stated that it will take a facilitative approach to compliance with Standards 3 and 7 of the Code until the new single disciplinary body is operational.

AFS licensees must also take reasonable steps to ensure that their financial advisers comply with the Code, noting ASIC will continue to take action where there are breaches of the law by financial advisers or their AFS licensees. This may also include enforcement action where it receives breach reports in respect of the Code.

Keddie Waller is CPA Australia’s head of public practice.