CPD: An ethical framework for the remote practice

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A less equipped home office, distraught clients or personal concerns resulting from the situation are no excuse for not abiding by the Code of Ethics and other regulations.

At the beginning of 2020, few would have imagined having to implement business continuity plans and establish remote offices before the first quarter was out. In this article, sponsored by GSFM, we examine the processes you need to implement to ensure your remote practice abides by FASEA’s ethical framework and specifically, its Code of Ethics.

As the fireworks ended and 2019 rolled into 2020, no one would have anticipated the landscape at the end of the first quarter. It would already be an uncertain year for many Australians who grappled with an unprecedented bushfire season that extended for nearly six months. At the same time, advisers around the country had prepared their businesses to comply with Financial Adviser Standards and Ethics Authority’s (FASEA) Code of Ethics, which came into effect from 1 January 2020.

While news trickled out of China about a new form of coronavirus, the need to take action to mitigate the impact and spread of COVID-19 among Australians was relatively sudden. Most advisers have had to pivot their service delivery from an office-based practice to a remote – and often geographically dispersed – offering.

While financial planning practices should have a business continuity plan (BCP), many of these were probably developed at the licensee level, rather than for each individual practice. Within that, while some individual practices may have had individual BCPs, they may not have considered the need for each individual within a practice to be operating in isolation.

For most, the need to close the doors to their business and work from home came surprisingly fast. Despite the speed of change that was necessary, the need to maintain compliant with regulatory requirements, including FASEA’s Code of Ethics, remains.

Ethics can be defined as:

‘moral principles that govern a person’s behaviour or the conducting of an activity’

When it comes to financial advice, it can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In short, the way any one of us would expect ourselves, family members and friends to be treated by any professional service provider.

Business continuity planning and the ethical practice

A BCP is an important part of your business governance. It involves creating a detailed plan outlining how your business can prepare for, and continue to operate, after an incident or crisis. According to the Australian government’s business website[1]:

A business continuity plan will help you to:

  • identify and reduce risks where possible
  • prepare your business for risks that you can’t control
  • respond and recover if an incident or crisis occurs.

When creating and implementing a BCP for your advice practice, it’s important to ensure you remain compliant with all laws and regulations.

FASEA’s Code of Ethics imposes ethical duties on financial advisers and has been designed to encourage higher standards of behaviour and professionalism in the financial services industry, irrespective of where your business is operating from.

The Code of Ethics addresses five core values, each of which should encapsulate your service delivery, again, irrespective of your office location. When your business is dispersed over a range of sites, as required by social isolation, it’s critically important to ensure each member of your team can continue to embrace each of these five core values:

  1. Trustworthiness
  2. Competence
  3. Honesty
  4. Fairness
  5. Diligence

Financial advisers are expected to meet the code’s high standards and licensees are required to ensure their authorised representatives comply with the code. Where advisers or licensees fail to meet the code’s standards, ASIC can and will take enforcement action.

While FASEA’s Code of Ethics is designed to raise standards of professional and ethical behaviour, it does not replace or override the laws governing the provision of financial advice. It doesn’t matter whether you’re operating from your business office or home office, those expectations remain the same.

Update your processes within an ethical framework

According to FASEA’s Guidance[2] to its Code of Ethics, responsibility for applying the tenets of the Code falls on individual advisers and each must be able to explain their interpretation and application of the Code in every single individual situation.

Most of the business processes you may need to update while working remotely will relate to service delivery; that’s the biggest change for you and your client, particularly while social distancing remains an imperative. In other circumstances where social distancing was not required, but your remote office was in operation, you’d be able to arrange to meet your clients face to face; at your remote office, in their home or at another site.

It’s important to note that the approach to running an ethical financial planning practice relies on all of your staff doing the right thing, irrespective of where they’re based. From your administration staff who may speak to clients on the phone, respond to emails and handle their paperwork, through to advisers, paraplanners and practice managers…all staff need to understand and abide by the Code of Ethics.

The responsibility for any breach will be carried by the licensee as well as the individual adviser. By implementing the following strategies in your remote practice, you can help mitigate the risk of a breach of FASEA’s standards.

Code of conduct

Update your code of conduct to reflect the changed working environment. Your practice’s code of conduct should encapsulate both your business’s values and FASEA’s Code of Ethics. Update it to be clear about the expectations of your employees when carrying out their duties in their remote/home office. Consider each of the twelve standards in the Code of Ethics and how each standard may be impacted by the new work arrangements.

Figure one shows FASEA’s Code of Ethics, as well as some of the process adjustments you could make to ensure your operations continue to adhere to the Code of Ethics. It’s important that all remote sites that comprise your business also adhere to the code.

 

 

Keep up with changes

There’s been a raft of announcements from FASEA, ASIC and industry bodies since the requirement for most individuals to work remotely came into effect. There will be, no doubt, many more before this situation is resolved. It’s important to keep up with changes, even those which are temporary, that may impact your work practices, your team and your clients. You need to communicate them quickly and efficiently to other members of your team.

Communicate with your team

Communications are more important than ever when working remotely. Your team is geographically dispersed and there’s no more stopping by someone’s desk to give them an update, or holding regular morning meetings to review the day ahead.

However, technology is a great enabler.

A regular morning meeting via Zoom, Google Hangouts or another video platform is the ideal way to start the day. It not only enables you to make sure your team is across any key announcements from regulatory or industry bodies, it gives you the opportunity to check in with your team and make sure they are coping.

Working remotely can be isolating. In the current situation, team members will be worried a range of things outside of their working day – the health of their family members and friends, their own health, home schooling children, the possible loss of an income and the financial stress that brings. For your staff to be productive in their remote office, you need to demonstrate you care and keep up morale as much as possible.

Regular catch ups also help manage the practice’s workflow and ensure all clients are being managed appropriately. It’s also an opportunity to ensure compliance obligations, including adherence to FASEA’s Code of Ethics, are being met.

Communicate with your clients

Communication will take up more of your time working remotely. Understandably, your clients are likely to experience heightened anxiety – their health, the health of their loved ones, the stresses that come from isolation. At the same time they may be losing income or cashflow, temporarily or permanently, and in financial stress. Many will be worried about their investments.

Again, there are good tools to communicate with clients en-masse or one on one. You need to let them know that your practice remains operational, how to contact you or others in the practice, how business will be conducted during this time.

Email programs such as Campaign Monitor or Mail Chimp are low cost and easy to use; you can send professional emails or create newsletters to keep connected with your clients.

One on one communication can be facilitated by video platforms. While there’s always the telephone, a face to face communication can often be more reassuring for your clients and allows you see their expressions and gauge how they’re feeling. Their words may not always provide the full story. Keeping your clients fully informed, helping them through this time is not only the right thing to do, but will cement your relationship for years to come.

Continue to lead by example

It’s important to lead by example; now more than ever, employees will look to the key individuals in the practice to understand how the business will operate. Senior advisers and personnel will set the tone. It is important to be honest with your staff – if you’re finding certain aspects of isolation and working in this environment challenging, say so. However find the positives and remain as upbeat as possible. They’ll take their cues – including emotional cues – from you.

Don’t forget to set other examples, such as reinforcing the importance of ethical practices at each step of their work; irrespective of their location, all staff need to demonstrate your firm’s code of conduct in all they say and do.

Workplace training

Where possible, workplace training to ensure all staff understand both the practice’s values and the obligations of the FASEA Code should continue, albeit in a different form. For the duration of the remote practice, case studies could be used to discuss behaviours and practices that do and don’t work within your code of conduct and work through case studies that address common ethical dilemmas.

Maintain KPIs (including ethics)

Irrespective of the changed working environment, ethics should remain a key performance indicator (KPI). You could create several short term KPIs for the period during which your team is working remotely and reward staff for embodying your values and adhering to your practice’s code of conduct during a challenging time.

Client records

It’s important to secure important client records at this time, when information can be dispersed across multiple sites. Any records, paper or electronic, held at your usual place of business need to be secured. Home offices need to be protected against cyber threats and any paper records should be secured in a locked filing cabinet. After all, working in your clients’ best interests includes keeping their personal information safe and secure.

Case studies

The following case studies are loosely based on real events; however the names of people and organisations have been changed, and details altered to reflect a ‘remote office’ scenario. The underlying case studies have been drawn from the Australian Financial Complaints Authority (AFCA). For each, potential breaches of FASEA’s Code of Ethics are identified.

Case study one – inappropriate trading

June and her husband Michael had been clients of Oz Financial Advice for 15 years. They are in their late 50s, both work, and had planned their retirement for when Michael reached age 65 and June age 63. In 2016, their adviser retired and was replaced by Graham, a new graduate with an impressive set of academic qualifications.

June and Michael were advised to establish a Managed Discretionary Account (MDA) for their investments. Graham explained the benefits of an MDA to their financial situation and life stage, and they agreed to take his advice.

They saw that markets were down during the COVID-19 pandemic and were not too concerned. While they had a significant equity portfolio, they were confident it would gain ground before they retired. However, they kept an eye on it and were in regular telephone and email contact with Graham. Michael expressed mild concern that the portfolio might not recover before they retired and needed to draw on the capital.

Several days later, Michael looked at the account and saw some trades – and a significant deficit – that concerned him. In an attempt to build up the portfolio, without consulting with his clients, licensee or fellow advisers, Graham conducted trades in breach of the MDA’s investment policy, namely:

  • Trades in naked options (naked trades); and
  • Trades which exceed 5% of the complainant’s trading capital in any one trade (excess capital trades).

The excess capital trades caused a loss of $130,000. The portfolio also suffered a loss of $65,000 because of the trades in naked options.

Breaches of FASEA’s code of ethics

June and Michael stated they would not have approved the investment strategy implemented by Graham. From the details provided in the case study, Graham potentially would have breached the following standards in the Code of Ethics.

 

 

Case study two – bad advice and poor record keeping in a home office

In this case, the complainants Samara and Robert are directors of the corporate trustee of their self-managed superannuation fund (SMSF). They saw an adviser who worked from a home office and was an authorised representative of a large national practice.

He advised the couple to set up an SMSF and borrow to purchase a property, referring them to a ‘friend’ at a local bank branch. He did not disclose whether he received any benefit from the referral. He also recommended a property development for them to invest in, again directing them to a specific individual. No referral fee was discussed.

Samara and Robert claim the strategy caused them loss of superannuation.

The complaints authority found that the complainants had small super balances and did not have enough to support an SMSF and buy the property the adviser presented to them. As a result, the advice to establish an SMSF and invest in property caused Samara and Robert to suffer loss and the licensee was ordered to pay a substantial settlement to the complainants’ SMSF, plus interest.

The authority also found the adviser failed to establish proper business practices in his home office. He did not keep proper records with respect to his advice and recommendations, nor did he maintain records about the property development and the referrals fees he received. It also found that the licensee failed to appropriately monitor his business practices.

Breaches of FASEA’s code of ethics

Samara and Robert stated they would not have set up the SMSF and borrowed to invest in the property if they fully understood the risks and costs associated with the strategy. From the details provided in the case study, the adviser potentially would have breached the following standards in the Code of Ethics.

 

 

Case study three – general advice only

A Sydney-based advice practice with a client base comprised of professionals was in regular communication with its clients during a period of self-isolation and lock down, and face to face meetings were not possible. One of the advisers decided to be proactive and send an email to each of the business’s clients, offering advice and assistance for clients wanting to withdraw the $10,000 from superannuation, as announced by the government as a measure to alleviate financial stress.

The email did not contain personalised advice, but made recommendations for clients to withdraw from superannuation and reinvest in a selection of other financial products.

Breaches of FASEA’s code of ethics

This adviser made recommendations that were broad and not personal. While those clients who responded to the email may have been taken through an appropriate and legal advice process, the email was inappropriate and potentially would have breached the following standards in the Code of Ethics.

 

 

Case study four – insurance churn

Matt decided a pandemic was a good time to ensure his clients had adequate risk insurance cover; after all, there’s nothing like a health scare to underpin the need for good insurance. For many years his practice had used a particular insurer, Insurer A but more recently, they’d moved to Insurer B. The legacy policies with Insurer A were perfectly fine, but recent changes had instigated the move.

Matt decided however, that he could generate some business by encouraging clients to increase their policies and move them across to Insurer B. While the other advisers in his practice frowned upon unnecessary change of policy, because he was working remotely, Matt figured they wouldn’t notice – everyone was busy with their own clients.

Moving clients to Insurer B was financially beneficial to him and the policies were just as good and similarly priced, so Matt figured the clients were no worse off; after all, it would only cost the client the time to complete the paperwork.

A number of Matt’s clients did switch insurers and some took out additional policies, or increased the amount for which they were insured. Matt took the time to make sure each client understood what they were getting and the costs of each policy. He made sure they understood the inclusions and exclusions. He did all the right things, although he didn’t mention the financial benefits he received for the policy change. By undertaking this churn from his remote office, without oversight from his peers and practice manager, it was evident Matt knew he was doing the wrong thing (policy churn) for the wrong reasons (financial gain).

Breaches of FASEA’s code of ethics

In most cases, Matt’s risk advice was unnecessary. While he did the right things in terms of keeping the client informed and ensuring they understood the terms of each policy, the end goal for him was personal gain. As a result, Matt potentially breached the following standards in the Code of Ethics.

 

 

Financial advisers are required to act ethically and in the best interests of their clients at all times, irrespective of the location of their operations. A less equipped home office, distraught clients or personal concerns resulting from the situation are no excuse for not abiding by the Code of Ethics and other regulations.

The best interest duty underpins both the operations and provision of advice by financial planning practices and enshrines it in law. FASEA’s Code of Ethics makes ethical practice a legally binding requirement, which can only be viewed as a positive step towards financial advice being recognised as a true profession.

 

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[1] https://www.business.gov.au/New-to-business-essentials/When-things-dont-go-to-plan
[2] https://www.fasea.gov.au/wp-content/uploads/2019/10/FASEA-Financial-Planners-and-Advisers-Code-of-Ethics-2019-Guidance-1.pdf

 

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