CPD: A deep dive into FASEA’s Code of Ethics – Part two

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FASEA’s Code of Ethics is principles based and is intended to apply to a wide range of situations that require the exercise of professional judgement.

FASEAS’s Code of Ethics with its twelve standards, became law on 1 January 2020. Its aim, to ensure best practice and positive client outcomes from Australia’s financial advice providers. In this article, proudly sponsored by GSFM Pty Ltd, we take a close look at standards seven to twelve. (Part one examined standards one to six.)

FASEA’s Code of Ethics is principles based and is intended to apply to a wide range of situations that require the exercise of professional judgement. As has been discussed industry-wide, over a number years, professionalism is integral to the future of the financial advice industry.

The Code of Ethics provides twelve standards which aren’t intended to be a compliance checklist; rather, the intent underpinning the standards is to ensure that relevant providers of financial services act ethically and prioritise each and every client’s best interests.

Section 961B of the Corporations Act 2001 (as amended) lists the steps an adviser must take to satisfy the ‘best interests’ standard, which is central to the Code of Ethics. In brief, these steps are:

  1. To identify the client’s financial situation, objectives and needs.
  2. To identify the subject matter of the advice sought by the client (whether explicitly or implicitly).
  3. To identify the client’s relevant circumstances – the objectives, financial situation and needs that would reasonably be considered as relevant to advice sought on that subject matter.
  4. To ensure this information is complete and correct; enquiries should be made if gaps or inconsistencies are apparent.
  5. When considering the advice sought, whether it would be reasonable to consider recommending a financial product; if it is deemed relevant, they should only recommend a product after thoroughly investigating the most appropriate products relevant to the client’s circumstances.
  6. When advising the client, the financial adviser must base all judgements on the client’s relevant circumstances.
  7. Take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

This last and catch all statement encapsulates the spirit of the legislation; regardless of the client’s requirements, the advice must be underpinned by knowledge of the client, their circumstances, and any financial product recommended as part of the advice process. While the best interest duty applies to retail clients, a similar fiduciary duty is required for dealings with wholesale clients. To meet obligations under section 961B of the Corporations Act 2001 is to act ethically in all dealings with clients.

Relevant providers

FASEA’s Code of Ethics identifies ‘relevant providers’, those who must abide by the Code. Those relevant providers are defined by FASEA as an individual who is one of the following:

  • a financial services licensee
  • an authorised representative, an employee or director of a financial services licensee
  • an employee or director of a related body corporate of a financial services licensee

Any individual listed on ASIC’s Financial Adviser Register as authorised to provide personal advice to retail clients, as the licensee or on behalf of the licensee, in relation to relevant financial products is a designated provider.

The Code of Ethics is compulsory for all relevant providers, those who provide personal advice to retail clients in relation to relevant financial products. Responsibility for applying the principles of the Code of Ethics falls on individual financial advisers; all advisers must be prepared to provide details of their interpretation and application of the Code of Ethics in specific situations.

Financial services licensees also have a role under the Corporations Act (2001) in monitoring and enforcing compliance with the Code of Ethics. Licensees must structure their business operations in a manner that facilitates their authorised representatives being able to operate ethically and comply with each standard in the Code of Ethics.

Code of Ethics

FASEA’s Code of Ethics contains twelve standards that are grouped under four ethical competencies:

  • Ethical Behaviour (standards one to three)
  • Client Care (standards four to six)
  • Quality Process (standards seven to nine)
  • Professional Commitment (standards ten to twelve)

Each of these ethical competencies contains three standards; these, in turn, contain ethical principles. In applying these principles, advisers are expected to exercise professional judgement according to the specific circumstances of each individual client. Importantly, the standards are not a compliance checklist; rather a set of guidelines to ensure your advice is in the best interests of each client, steered by the values and standards of the Code of Ethics.

According to FASEA:

The Code brings together and gives effect to the expectations of the Australian community for the provision of professional financial advice[1].

Ethics has many definitions; however it can be distilled as a system of moral principles,  concerned with what is good for individuals and society. Some describe it as a moral philosophy. The term is derived from the Greek word ethos, which can mean custom, habit, character or disposition.

In the world of financial advice, it means treating your clients fairly, acting in their best interests always and acting with honesty, integrity and competence. In short, embodying the values upon which the Code of Ethics is based.

Quality process

Quality processes encompasses standards seven to nine and while these standards encapsulate all the values upon which the standards are based, those of honesty, integrity and competency are highlighted.

Figure one highlights each of the standards that fall under the competency ‘Quality Process’.

Standard seven

The purpose of Standard seven is to ensure clients freely give ‘informed consent’ to benefits the adviser (or licensee) will receive, and that this consent is obtained before the client receives advice. Importantly, benefits are not limited to just fees and charges.

As well as disclosing – and receiving consent for – charges to the client and benefits to the adviser or licensee, standard seven requires that:

  • Unless expressly permitted by the Corporations Act 2001, advisers may not receive any benefits, in connection with acting for a client, that derive from a third party other than that adviser’s principal
  • Fees should reflect the benefit to clients over the long term balanced by the costs in providing the advice
  • Advisers must be satisfied that any benefits received in connection with acting for the client are fair and reasonable and represent value for money.

For existing clients, the standard requires that relevant consents be obtained as soon as is practicable from the date of implementation, 1 January 2020. Advisers have twelve months in which to do this. When obtaining consent, whether from a new or existing client, it needs to be in the form of a signed consent from their clients. It’s acceptable to use existing forms, such as an Initial Service Agreement or Ongoing Service Agreement.

The requirement to limit the benefits an adviser may derive from a third party is intended to reduce the likelihood of third party influence on the advice given. Many of the examples of poor advice presented at the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry would have been in breach of standard seven, for many involved cases where clients did not consent to the charges they incurred, or those charges were unreasonable and did not represent value for money.

As regularly highlighted by the trade media, such instances continue to pepper the financial advice industry, which reflects poorly on everyone (which in itself is a breach of standard 12, as you will read later in this article).

Case study – what’s right or wrong for the client over the long term

John and Trish had been receiving financial advice from Peter at ACME Financial Planners for several years. They had a strategic financial plan in place and, as they were in their mid-50s, were focused on increasing their retirement savings both within and outside superannuation. Peter kept them informed and they were comfortable that his advice was sound.

After several years they received a letter informing them that Peter was moving to another practice. It provided details of his new licensee and focused on the benefits of him moving to that organisation. As clients, they would have access to a broader product suite, administration services and if required, stockbroking services. It also outlined a change to fee arrangements to be implemented some months into the future.

The mid-year review was held at Peter’s new offices, where he enthusiastically described his new firm and how John and Trish could benefit from the broader range of financial products on offer. He recommended that they switch their superannuation accounts from their existing default arrangements (one, an industry fund, the other a corporate fund) and invest in a superannuation wrap. He extolled the benefits, primarily the ability to access a range of listed and unlisted investments. He discussed the fees and ensured the couple understood the fees and charges, as well as insurance options that were available.

John and Trish accepted his advice and signed the paperwork to switch their funds to the superannuation wrap. This was a badged product, for which Phil’s licensee received financial benefits. This fact was not disclosed to Trish and John.

Although he ensured the couple understood the fees and charges relating to the new structure, Phil recommended his clients should replace one product with another, without disclosing the benefits his licensee would receive. As a result, Phil is in breach of both standard seven and section 947D of the Corporations Act (2001), the requirements when a financial adviser recommends replacement of one financial product with another.

Standard eight

Standard eight requires financial advisers keep complete and accurate records of advice and services provided to clients. It also requires that:

  • Advisers meet legislative requirements relating to the secure storage of client records
  • Client records must be both complete and accurate for both current and former clients
  • Records should include file notes of discussions
  • Client records must be easily accessible.

Whether using a paper or online record system, client records should be kept in one place, with appropriate security measures in place.

According to FASEA’s guide, in the case where an adviser moves to a new licensee, that adviser must ensure all client records are complete before they leave.

Case study – complete records

Bob Brown has been in practice for more than twenty years. He works with two paraplanners and has recently hired an office manager. Part of this role is to help the practice transition client files from paper based to electronic files.

Giles, the office manager, is tasked with finding an appropriate document management system, one with a strong focus on data security to be compliant with relevant legal obligations and to reassure Bob that his clients’ data will be kept safe from cyber-attacks.

Giles develops a data management plan, as well as processes for keying data to the system, to ensure completeness of records and consistency across all clients. This way, he is confident that records can be retrieved as necessary.

Starting with the most recently active clients, Giles and a temp worker set up client files as Giles had specified. Because of the longevity of the business, it was quite an arduous task. Some clients had a large number of file notes, which were scanned and attached to the electronic file.

As files were digitised, the paper copies were shredded and put in the recycling bin. As Giles came across files where there had been no action for ten or more years, he shredded those files but did not digitise them. Is that acceptable?

Giles’ actions were in fact a breach of standard eight – client records must be retained, in complete and accurate form, for all current and past clients. He could have taken one of two courses of action – either, he could have digitised those files, or kept them securely in paper form.

Standard nine

Standard nine requires that any financial product advice, and all financial products covered by that advice, are offered to each client in good faith. It also requires that:

  • Advisers offering financial product advice and recommendations must have the knowledge and competency to provide the advice
  • The advice and product recommendations must be in the best interests of each client
  • The advice and product recommendations must be delivered in a way the client can easily understand and take at ‘face value’
  • Advisers identify any risks to the client and discuss them openly and honestly.

Importantly, it’s expected that advisers will investigate each financial product they will recommend to clients. Advisers must exhibit sufficient knowledge, skill and understanding of the financial product to be able recommend it to clients – this includes clear understanding of each financial products’ benefits, risks and costs. Without this understanding, it’s difficult to be sure that a financial product is in a client’s best interest.

Case study – Inappropriate financial product advice

Ged received an inheritance of just over $200,000 and sought advice about investing some of it. He intended to use $85,000 to clear his mortgage and invest the remainder.

Mitch of Advisers ‘R’ Us, his local financial planning practice, convinced him to invest the whole sum. His rationale was that with mortgage rates so low, Ged would be better off ‘putting the money into the market’ and would earn higher returns from that. He could then pay out the mortgage with the proceeds.

Mitch’s licensee has informed its authorised representatives that its in-house product suite is in the best interests of the ‘most’ clients; further, the licensee expects that a high proportion of product recommendations are directed to the in-house product.

Because Ged was keen to pay of his mortgage within a three year period, Mitch recommended a ‘cash like’ product that was likely to return 7-8 percent per annum. He didn’t go into detail of what was, in fact, a high risk credit fund in which defaulting securities could cause capital loss. Ged did not understand the investments in the fund, nor the risks he was exposed to. He understood ‘cash like’ to mean safe and protected from capital loss. Mitch also did not tell Ged that the recommended product was an in-house product.

In assessing whether an adviser has adequately considered the requirements of standard nine, they should reflect on the following questions:

  • Have I undertaken sufficient research and investigation of the product that I am considering for the client?
  • Do I understand the risk, benefits, cost and customer implications of the product that I’m recommending?
  • Do I have the knowledge, skills and experience to give the advice or should I seek assistance from a specialist?
  • Have I acted at all times in good faith in the interests of the client?
  • Have I identified risks to the client and discussed these openly and honestly with the client?

Mitch’s failure to disclose and explain investment risks to Ged is suggestive of a lack of understanding on Mitch’s behalf. Given the lack of explanation and the risk profile of the product, he could not have been satisfied that the product recommendation was in Ged’s best interests. In light of the investment risk associated with the product and given Ged’s medium term objective to pay out his mortgage, it was not appropriate financial product advice. As such, it was in breach of standard nine.

Professional commitment

Figure two highlights each of the standards that fall under the competency ‘Professional Commitment’.

Standard ten

Closely linked to standard nine, the focus of standard ten is to ensure that financial advisers have and maintain an appropriate level of relevant knowledge and skill to provide competent financial advice that’s in the best interests of their clients.

Section 921B of the Corporations Act (2001) requires financial advisers to hold a bachelor or higher degree – or equivalent qualification – that’s been approved by FASEA. Where an adviser has been educated overseas, the foreign qualification must also be approved by FASEA.

Subsection 921B(5) of the Corporations Act (2001) requires financial advisers to meet the requirements for continuing professional development set by FASEA; its Continuing Professional Development (CPD) standard provides a framework to help advisers meet this requirement.

Standard ten also requires that:

  • Financial advisers provide advice only in areas where they have the necessary skills and competencies to do so in a professional way
  • Advisers undertake sufficient continuing professional training to maintain competence at an appropriate level for the professional services, including financial product advice, provided
  • Advisers keep up to date with industry, regulatory and product developments relevant to their practice
  • Where an adviser specialises in a particular area, they don’t provide advice outside that area unless they have the necessary skills and competencies to do so in a professional way
  • Where an adviser doesn’t have the skills and competencies to provide advice sought by a client, that client should be referred to an adviser with relevant skills and knowledge.

Ongoing professional development requires advisers to meet the requirements of the CPD standard, which requires completion of a minimum 40 hours of CPD each year across the following mandatory categories:

  1. Technical – 5 hours
  2. Client care and practice – 5 hours
  3. Regulatory competence and consumer practice – 5 hours
  4. Professionalism and ethics – 9 hours

The balance up to 40 hours must consist of qualifying CPD.

Case study – complex financial needs

Mary is a professional with some complex financial advice needs. She has several business interests, around $500,000 in superannuation and three investment properties, all held in a family trust structure. She goes to ABC Wealth seeking to establish an SMSF to prepare for retirement, which she envisages is eight to ten years away.

As a new client to the firm, Mary is allocated to one of ABC Wealth’s newer recruits, Lisa. Lisa has several year’s industry experience and impressive qualifications. She works hard to keep up-to-date on change across the industry: in markets, new financial products, the regulatory environment and best practice management. Although ABC Wealth subscribes to investment research, Mary also undertakes thorough research into the financial products she recommends, to ensure she always recommends the most appropriate products to her clients.

One area in which she has had little experience, however, is with SMSFs. Lisa realises that while she has a basic understanding of SMSFs, she is unsure how to establish a fund to deal with Mary’s complex financial needs. Lisa speaks to Jo, the principle of ABC Wealth, who offers to provide technical supervision for Lisa while she puts together a strategic financial plan to meet Mary’s needs. Jo also oversees the establishment and implementation of Mary’s SMSF.

With this support from her licensee, Lisa provides financial advice to Mary, but with technical supervision from Jo in those areas where she’s less confident. Lisa also decides to enrol in training to improve her competency and skill in relation to SMSFs.

ABC Wealth provides Mary with a letter of engagement that confirms the arrangement and advises that no additional fees are charged for Jo’s involvement.

Mary – and ABC Wealth – have complied with standard ten. By acknowledging an area of weak product knowledge, and lack of experience, Lisa acted properly in seeking additional support to ensure the advice was provided by someone competent and skilled in this area of specialisation. This way, she could be confident that she had acted in her client’s best interests.

Standard eleven

This standard requires financial advisers to cooperate with ASIC and other monitoring bodies in any investigation of a breach or potential breach of FASEA’s Code of Ethics. Standard eleven places personal responsibility onto financial advisers to uphold the ethical values of the Code by proactively cooperating with ASIC and monitoring bodies in any investigation. Standard eleven also requires:

  • Advisers cooperate with the appropriate regulator or disciplinary body when instructed under an investigation
  • Advisers respond to requests for information or documentation in a timely and open manner.

Case study – compare the pair

Martin and Robert have their own practice, licensed through a large national dealer group. After several minor complaints lodged about advice they provide, ASIC instigates an investigation into the pair. The AFSL under which they are licensed does not allow either Martin or Robert to provide advice on derivatives or more exotic investment types, such as contracts for difference (CFDs). Based on complaints received, ASIC believed the advisers were providing financial product advice on products they were not licensed to advise on.

Martin and Robert received written notice from ASIC of an upcoming audit of their practice. Both were aware that they had been in breach of their license terms.

Prior to the audit, Martin went through his client files and stripped out all references to derivatives and CFDs. In some cases, where advice was almost totally based on those products, he removed whole client files. When ASIC arrived, he denied his files were incomplete.

On the other hand, Robert left his files complete and granted ASIC full access to them. Unlike his business partner, Robert responded in a timely way to questions and provided all relevant documentation to the investigators.

In terms of standard eleven, Martin was in clear breach as he failed to provide all relevant documentation to ASIC investigators. Robert co-operated in every way and, therefore, did not breach the standard.

Standard twelve

For financial advisers to be broadly perceived as a professional cohort, they need to embody the values that underpin FASEA’s Code of Ethics: trustworthiness, competence, honesty, fairness and diligence.

Standard twelve requires financial advisers, both individually and in cooperation with their peers, meet the values and standards of the Code of Ethics. It also requires that:

  • Advisers promote meeting and maintaining the values that underpin the Code of Ethics in all dealings with the profession and the public
  • Advisers maintain professional relationships with each other and aligned to the profession as a whole
  • Advisers hold one other accountable; it suggests advisers should challenge others who are not upholding the values and standards of the Code of Ethics.

Importantly, standard twelve is looking for financial advisers to support the promotion of financial advice as a trusted profession and not undermine the good work accomplished by the majority of industry participants.

Case study – Misappropriation of funds

If there’s one thing that reflects particularly badly on the financial advice industry, it’s advisers misappropriating client money. Such cases tend to make headlines and tarnish the industry as a whole. They featured in 2018’s Royal Commission, are regularly reported in industry media and sometimes the topic of newspaper or current affair reports. Even if pertaining to a very small proportion of the total number of advisers across the country, there is no doubt that such reports sow the seeds of discontent and mistrust among consumers.

Take for example the recent report of a Sydney adviser who pleaded guilty to misappropriating $2.9 million of client funds; this occurred via 167 unauthorised transactions involving 13 clients.

Following an investigation, ASIC alleged the funds were transferred into the adviser’s personal accounts. It was also alleged that he made attempts to conceal his dishonest conduct and avoid detection.

The adviser was charged with dishonesty offenses and the Commonwealth Director of Public Prosecutions will be prosecuting the matter later this year.

This adviser failed meet the values and standards of FASEA’s Code of Ethics. His actions bring disrepute not only to himself, but to the advice profession. Standard twelve requires advisers’ actions to be aligned to the profession as a whole – acting, and being seen to act, ethically and professionally.

The best interest duty underpins both the operations and provision of advice by financial planning practices and enshrines it in law. If you offer financial advice to clients, abiding by FASEA’s Code of Ethics is a binding requirement.

It is incumbent on financial advisers to regulate their own behaviour to comply with the Code of Ethics; they have a professional obligation to understand and to adhere to their ethical obligations under the Code. This responsibility cannot be outsourced to another, such as employers, employees or licensee. This contributes to building public trust in your profession.

The Code of Ethics brings together and gives effect to the expectations of the Australian community for the provision of professional financial advice. This is a positive step that will firmly establish financial advice as a respected profession.

 

Take the quiz to earn 0.75 CPD hour:

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[1] FASEA Financial Planners & Advisers Code of Ethics Guide, October 2020

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