The client driven ethical breach

09 Apr 2020

From AdviserVoice - This Ethics article is proudly brought to you by GSFM

Is your advice in line with an adviser’s duty of care under law and the new FASEA standards?

The 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) highlighted numerous situations in which an absence of ethical behaviour was apparent. However, what happens when a financial adviser is instructed to perform an action by their client and cannot act on that instruction without breaching an ethical standard?

This article, sponsored by GSFM Pty Ltd, will examine this issue in line with an adviser’s duty of care under law and the new FASEA standards, as well as good business practice.

Most people reading this article will consider themselves ‘ethical’. However, it’s important to note that different value systems mean that one person’s moral code, and their notion of ethics, are not necessarily another’s.

Financial advisers now have an ethical framework within which to work, with five values and twelve standards, which came into law on 1 January 2020. And while you may understand the framework and understand its importance when providing financial advice, your clients may think differently.

It’s not unusual for advisers to encounter ethical dilemmas when working with clients. Each person has a different values system and it’s important to try and understand your clients’ attitudes and beliefs. While having aligned values and beliefs is not a prerequisite of working with a specific client, how you deal with significant differences is important to ensure you do not find yourself in breach of FASEA’s ethical standards.

As outlined in FASEA’s Financial Planners and Advisers Code of Ethics 2019 Guidance, the standards are not intended to provide definitive guidance. In practice, individual circumstances will differ and FASEA’s ethical code ethics allows for differences of professional opinion on how the ethical rules of the profession apply in individual cases. Ultimately: –

“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.”

The values underpinning FASEA’s standards

Five values (Figure one) underpin FASEA’s ethical standards (Figure two). Financial advisers are required to act in a way that demonstrates, realises and promotes each of them.

Importantly, the values require that you meet your obligations in the law in respect of the advice you provide to each client including:

best interests’ duty
appropriateness of advice
prioritisation of client’s interests
additional requirements for product replacement recommendations
Australian Taxation laws.

Each of the five values relates to specific ethical standards that must be applied to all interactions with every client.

What if the client’s directive would result in unethical behaviour?

Ethics can be defined as:

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

In 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 like ourselves and our family members and friends to be treated by any professional service provider.

When a client asks you to do something unethical, which might also be illegal, you may face one of the most challenging dilemmas in your advice career. This can be an extremely difficult situation, one which could have serious consequences for both individual advisers and their licensees (and potentially, other advisers working under that licence). Repercussions of acting on an unethical client request might include:

A breach of one or more ethical standards
A breach of the law
Losing your right to practice, your reputation and credibility – and, if independently licenced, your AFSL
The potential for your licensee to lose their AFSL
The risk of being charged and incurring a fine or imprisonment.

These repercussions may not only impact you – they can impact:

Your colleagues, who may need to find a new licensee and whose reputations may be damaged by your actions
Your family, as they lose an income and have to deal with the added impact of financial penalties and possibly your incarceration
Your other clients, who will need to transition to a new financial adviser/licensee.

Five way to respond to a client’s unethical directive

Not everything is black and white – it’s in the many shades of grey that difficulties might arise.

Some client directives may immediately ring alarm bells. The director of the ASX-listed company wanting to set up a managed account in another name so he can trade the shares of his company and affiliates should immediately raise suspicions. Other directives may not be so clear.

Before throwing your hands up and walking away from the client – or worse, undertaking something that may see you breach FASEA’s ethical standards (and maybe the law), work through the following checklist.

1. Clarify their request

Make sure you understand exactly what the client is asking you to do. What is their desired outcome from this action? How exactly do they want this to play out and what is their role?

Examining the client’s intent with probing questions is sometimes enough for a client to recognise they have asked you to do something unethical.

2. Reaffirm their request

Once you are clear on what they are asking you to do, why and to what end – and if there’s no sign the client sees anything wrong with the request, summarise and clearly repeat it back to the client. This does not have to be immediate – if you’ve been blindsided by a request, you might need some time to cogitate and formulate a response.

When you’re ready, present a succinct statement of fact to the client.

“You are asking me to do X and Y, because of Z with the goal of A, B and C”.

By articulating it out loud, in clear and concise terms, the client may realise what they have asked you to do is not ethical and, in some cases, a breach of the law.

3. Consider the big picture

You’re clear on what the client has asked you to do, the client is clear that you understand what they want to do, but the client has not had a ‘light bulb’ moment and recognised they have put you a position that could range from difficult through to untenable.

Note down the issues you have with their directive:

How does it sit within your personal ethical code as well as the code and standards you’re obliged to follow?
Consider each of FASEA’s ethical standards and how actioning your clients request might beach them.
Give thought to the Corporations Law and potential breaches of that too.
How might this impact your licensee, colleagues and family – and how might it reflect on the broader advice profession?

4. Articulate your concerns to your client

Such a scenario presents a tricky situation. You want to do the best for your clients and help them achieve their financial objectives.

However, where a request is antithetical to the principles and standards you’re obliged to uphold, and in conflict with your personal moral code and values, you need to clearly articulate those issues to your client. Your conversation could cover:

How what he or she have asked you to do would mean contravening your personal ethical and moral boundaries
How what he or she have asked you to do would mean contravening the ethical code and legal boundaries of your profession
The potential ramifications for both of you in terms of reputation, job loss, the broader ripple effects on family and others.

Importantly, you want to feel comfortable that you can live with your actions, even if it means losing a client.

5. Offer an alternative solution

If you can find an alternative that does not result in you having to compromise your ethical principles or the ethical standards that underpin financial advice, explain that to your client as tactfully as you can.

Let your client know that you’re uncomfortable with the request by articulating your concerns (step four), but if possible, offer an alternative solution. If your alternative approach is rejected, the best thing for you and your practice is to walk away.

The next section of this article will examine several ethical dilemmas – plus a case study for each – where an adviser may be asked by a client to behave in a way that would see them in breach of FASEA’s ethical standards.

Ethical dilemma one – the desire for financial gain

Most advice clients will have goals and objectives around building wealth. What, however, if they’ve found a ‘get rich quick’ scheme or come into information they want you to act upon?

The first, the get rich quick type scheme is often a little easier to deal with. The adage ‘if it seems too good to be true, it probably is’ has held up well over the years. Unfortunately, the number of Australians falling prey to financial scams on the promise of a quick buck continues to rise every year.

The offer of you doing some research gives your client the opportunity to cool their heels and you to explore the so called opportunity. The ACCC’s Scamwatch website is a good place to start your research. If you do everything you can to demonstrate to your client it’s not in their best interests to act, you have likely met your obligations.

To consider it outside your remit and ignore it, even though it’s not necessarily part of your advice, may be a breach of your ethical obligations. Once you have knowledge of the plan, you should do your best to provide appropriate advice and direction.

The harder of the two scenarios is information.

Your client has information. It might be about a listed company he or she works for, or a related entity. Perhaps a smaller listed company has won a major contract and, once announced, is expected to experience a jump in its share price. Conversely, a company may have a major lawsuit brewing, one likely to push its price down. The client shares this information and wants to act on it, although it is something you didn’t need or want to know. This creates a dilemma. Does your duty to provide client confidentiality override your duty to report wrongdoing?

It may or may not be valid information, but to act on it could be in contravention of the Corporations Act 2001 – Sect 1043A (insider trading), as well as several ethical standards.

Case study: Insider trading

Mick is the Chief Financial Officer of ACME Limited, a medium sized listed company in the technology sector. It had ticked along quite successfully for a number of years and Mick drew a reasonable salary and benefits package, including an Employee Share Option Plan (ESOP). On a sunny autumnal day in April 2018, Mick made an appointment with Jeff from JJ Financial Planning, who had been looking after his financial advice needs for some years.

Jeff was curious. Mick was a busy man and only came into the office twice a year; this appointment was out of cycle and was one he’d requested quickly.

When the two sat down, Jeff could see Mick was excited. He leaned forward and said, “We’ve hit the big time.” Mick went on to explain how ACME had been awarded two large government contracts worth many millions each. As soon as the contracts were signed, the stock exchange would be advised and the market would respond accordingly. Mick and his executive team expected a significant jump in the company’s share price.

Mick wanted in on that share price jump and asked Jeff how he could structure things so Mick, and his family, could invest and benefit. Although Mick had the ESOP, he wanted to benefit more directly.

“I’ve put in hundreds of hours on these contracts, I’m owed it.”

Jeff has two choices.

He explains to Mick that this is insider trading and in contravention of both the law and his ethical standards (and in doing so, risks losing a client), or
He finds a way to help Mick buy shares in the company and works out a plan for a quick sale after the announcement, to realise the anticipated profit.

Breaches of FASEA’s code of ethics

If Jeff chooses the second option and helps Mick purchase the shares prior to the official announcement to the stock exchange, as well as having breached the Corporations Act 2001 – Sect 1043A, he will have potentially violated the following standards in FASEA’s Code of Ethics.

Ethical dilemma two – personal information

The relationship between client and financial adviser is, by its nature, close. The adviser must know a lot about the client, and the client’s family, to provide appropriate advice. There may be times however, when personal information provides an ethical dilemma.

Many advisers have firsthand experience of couples in which one partner is hiding money or financial information from the other, or otherwise not acting in his or her best interests. Advisers can rely on professional ethical standards to navigate these difficult situations.

It might be a married client is having an affair and diverting money from his family. It may be a secret child, a covert trading account or a gambling addiction, each of which has the potential to impact the client’s financial outcomes.

Case study two: the mistress

Finn is a corporate high-flyer and earns an above-average C-suite income. He’s married with three school age children, enjoys driving a luxury car and taking his family on overseas holidays. At a regular meeting with his adviser Ray, Finn informs his adviser that he had acquired a mistress and wished to liquidate investments valued at $50,000 to set her up in an apartment, shower her with gifts and take her away for luxury weekends.

Finn was shocked. He’d recently celebrated his twenty-fifth wedding anniversary and couldn’t imagine doing such a thing. Ethically and morally, he struggled with Finn’s actions.

If it was just Finn as his client, Ray could probably express his concerns and detail the impact such expenses could have on his long term financial situation. To comply with standard six, he’d need to be very clear about the potential financial impacts on his family and the fact that Ray’s actions are not in his, or their, best interests.

In reality, however, both Finn and his wife Karen are Ray’s clients.

Ray faces both a moral and ethical dilemma: tell Karen and he is violating Finn’s confidence. Withhold the information from Karen and he is both violating her trust and a range of ethical standards.

Breaches of FASEA’s code of ethics

Ray decides it’s too hard and too embarrassing to challenge Finn about his secret relationship and related expenditure; likewise, it’s too difficult to tell Karen what her husband is doing. Although Ray’s actions haven’t led to this situation, his decision to ignore it means that he has potentially breached the following standards in FASEA’s Code of Ethics.

Ethical dilemma three – the faltering marriage

Because advisers know a lot about their clients and their varied financial situations, they are likely to be informed when a marriage is on the ropes, and divorce and the related financial settlement is on the cards. What then if one party wants to hide assets or restructure their finances for their own long term gain?

If one party to the marriage is your client, is it ethical to work with them to see them come out of the marriage better off than the other party? Questionable, and likely a beach of standard six as it would have implications for the client’s spouse and children (if any).

If both parties to the marriage are your clients, working with one to the detriment of the other is a clear breach of several ethical standards. This holds even if the adviser began working with one of the individuals before working with them as a couple.

Issues can be circumvented by ensuring all requests for information by either party are sent to both. If financial decisions need to be made, or instructions given by either spouse, the adviser should secure separate statements from both spouses that they understand those decisions, and ensure all paperwork is signed by both parties. As well as protecting you, it ensures that you are acting in the best interests of both clients.

Case study three: hide the assets

Lina and Anthony have been married for 18 years, have one son, and each brought some assets into their marriage. Because Anthony held a senior corporate position and worked long hours, he wanted Lina to be a stay at home wife and mother. Anthony and Lina had a financial adviser, Patrick from B&P Financial Planning, who Anthony knew from his university days. Lina attended some of their meetings, but had little to do with the financial decisions and typically signed what she was asked to.

When it became clear that he and Lina were going to separate, Anthony instructed Patrick to set up a separate account, in his name only. He realised that Lina would be likely to be awarded a larger than 50 percent portion of their family home, so he withdrew $400,000 of equity from the home and deposited it into his ‘secret’ account. He’d earlier had her sign some paperwork which included signing the home across to him, so it was in his name only. He and Patrick then worked out the best way of investing the money so it was beyond Lina’s reach.

Breaches of FASEA’s code of ethics

Friendship does not shield one from breaching a code of ethics. Even though Patrick was following the instructions of the primary client, it does not mean it is acceptable to act in that client’s best interests and to the detriment of the other party. Patrick’s actions mean that he has potentially breached the following standards in FASEA’s Code of Ethics.

Ethical dilemma four – elder abuse

Elder abuse is rising in Australia, particularly financial abuse. Elder abuse can take many different forms; physical, emotional, sexual, financial, social and neglect. Financial abuse, along with neglect, are the two most common forms of elder abuse^[1].

It’s a serious enough issue that the government has embarked on a national study, the Elder Abuse National Research Project, which aims to build on the knowledge around the problem. This study is a part of the National Plan to Respond to the Abuse of Older Australians 2019-2023 currently in progress by the Federal Government.

The World Health Organisation defines the financial abuse of an older person as:

“The illegal or improper exploitation or use of funds or other resources of the older person.”

The definition includes acts with adverse outcomes committed by people known to and trusted by the victim, as well as acts perpetrated by strangers and by institutions. Older people are particularly vulnerable to financial abuse because they often depend on family and carers for social contact and daily care. Research has repeatedly shown these are the most likely perpetrators of financial elder abuse.

Illegal or improper use of an older person’s funds or resources might include:

Mismanagement of their funds or investments
Theft of money or possessions
Taking control of their finances without permission
Taking control of their finances with permission but misusing the funds
Pressuring relatives for early inheritances
Pressuring the older person to accept lower-cost or lower-quality services, such as aged care, to preserve more financial resources to be available as an inheritance
Carrying out unnecessary work or overcharging for services
Living with the older person and refusing to contribute money for expenses
Forging or forcing an older person’s signature
Promising long-term care in exchange for money or property and not providing the promised care
Convincing an older person to be a guarantor for a loan or business where the benefit of the loan is for someone else
Persuading the older person to change the terms of an existing contract, the clauses in a Will or their EPoA through deception or undue influence
Convincing the older person to sign over the title/s of property they own.

One of the identified triggers for financial elder abuse is longevity, because it strains the notion of intergenerational wealth transfer. Because they are living longer, retirees need to fund more years in retirement, eating into those funds traditionally passed on to children and grandchildren. As a result, inheritances come too late in life for many, past the time they would be most useful; for example, to pay out a mortgage or when grandchildren are trying to enter the property market.

Research by Uniting Care^[2] research shows that adult children are forced to wait an average of 10-12 years longer for an inheritance than fifty years ago, which may lead to ‘inheritance impatience’. This coupled with an expectation of an intergenerational wealth transfer may lead to a sense of entitlement and perceived co-ownership of parental assets. In fact, the chairman of Australia’s National Legal Aid, Dr Graham Hill, has publicly stated that spiralling house prices are fuelling the rising levels of elder financial abuse in Australia^[3].

This is an issue that’s more problematic when the child holds an Enduring Power of Attorney (EPoA) for their parent/s, and further exacerbated if a parent has any form of dementia.

Case study four: undue influence

Peter and Esther are a married couple in their late 80s. They are not separated, but due to differing care requirements, reside in different nursing homes. Esther has dementia and needs a higher level of care. Their retirement funds are held in a joint account, and their financial adviser, Mary, an authorised representative of LLL Advisers, oversees their financial affairs.

Peter and Esther did not have children together, but each had previously been married and had children from their original marriages. In 2017, Peter and Esther signed a power of attorney that provided Peter’s daughter and Esther’s son with an authority to view financial statements online, but not authority to transact.

Later that year, Peter’s daughter rang ABX Financial Planning to report suspected unauthorised transactions on the joint account.

Esther had been taken to see Mary by her son. She instructed Mary to close the joint investment account she held with Peter, redeem the investments and transfer the funds, totalling nearly $165,000, into a bank account in her name only.

Peter said Mary should not have allowed Esther to close their joint investment account and transfer the funds into her name without his knowledge or consent.

The dispute was referred to FOS, which found Mary’s notes had considered whether Esther had capacity to conduct the transaction.

However, it found Mary should have made enquiries of Esther in the absence of her son, before acting on the request. She should also have contacted Peter to ensure he consented to the transaction.

FOS concluded LLL Advisers did not exercise appropriate care and skill in response to the following ‘red flags’:

the unusual nature of the disputed transaction
the wife who conducted the transaction was in her 80s, in a wheelchair and accompanied by a person who the adviser had been notified may have not been acting in his mother’s best interests, or those of his stepfather.

Consequently, FOS determined LLL Advisers did not comply with good industry practice to protect the applicant from potential financial abuse, and Mary was required to transfer half the funds, plus interest, into an account nominated by the applicant.

Ethics in financial advice is an integral part of a complex system. It involves regulation, education, professional bodies and the integrity of each and every financial adviser and licensee working in the industry.

Financial advisers are required to act ethically and in the best interests of their clients at all times; after all, they make decisions and recommendations every day that impact the lives of their clients, now and into the future. Advisers need familiarity with the Code to ensure they do not unintentionally breach it when undertaking client requests, particularly those in ‘grey’ areas.

The best interest duty underpins both the operations and provision of advice by financial planning practices and enshrines it in law. Similarly, FASEA’s code of ethics makes ethical practice a binding requirement for financial advisers. This is a positive step towards true professionalism and building public trust and confidence in the industry.

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