CPD: Ethics and financial control

14 Dec 2020

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

If you suspect a client may be a victim of financial abuse, there are several steps to take.

Financial control, a form of financial or economic abuse, is unfortunately an increasingly common occurrence across a range of age and socio-economic groups. During financially and emotionally challenging times, such as those experienced by many during the COVID-19 pandemic, financial abuse tends to rise. Whether it’s in the form of financial control in a relationship, or financial abuse of elders, it’s something all financial advisers need to be aware of. In this ethics article, proudly sponsored by GSFM Pty Ltd, financial control, the elements that comprise it, and ethical ramifications for advisers are explored.

Ethics is a very broad area. As covered in other articles in this series, sometimes ethical conundrums are driven by client requests or behaviours, at other times there’s no clear black and white to guide you.

While there’s been controversy surrounding some elements of FASEA’s Code of Ethics, it’s undeniable that the core values which underpin the Code are sound. Arguably, they’re values that would be reasonably expected from any professional providing a service, whether it’s medical, legal or financial advice. These values are:

Trustworthiness
Competence
Honesty
Fairness
Diligence

When faced with situations involving financial control and financial abuse, it’s challenging. In some instances you’ll have two clients, one who’s a victim and one who’s a perpetrator. In others, you may have a client who is one or the other. Either way, you need to consider how you will deal with each individual – and each situation – through the prism of each of these values.

Chances are you’ll encounter episodes of financial control and abuse. Research found nearly 16 percent of Australian women^[1] experience economic abuse, which is generally in the form of financially controlling behaviour.

However, it’s not just women. In 2017, researchers from RMIT found the life-time prevalence of economic abuse for women is 15.7 percent and is 7.1 percent for men and is spread across all age groups^[2]. This means more than two million Australians have or will experience economic abuse in their lifetimes.

While financial or economic abuse may not leave physical scars, its ramifications can have long-term effects on the victim. Sadly, financial exploitation is not new; it’s an increasing form of domestic violence and, according to the Australian Institute of Family Studies, it’s the most common form of elder abuse.

What is financial control?

Financial control is a form of financial or economic abuse and occurs when someone uses money as a means to gain power or control their partner, or use their relationship to otherwise control a family member or close friend’s finances. Financial control occurs in a wide variety of situations and among a variety of people across the socio-economic spectrum. It can be divided into two broad categories: financial abuse in a relationship as a form of domestic violence and the financial abuse of elders. Financial control can be hard to identify but, as will be outlined later in this article, there are warning signs for advisers to monitor.

Financial abuse is an ethical minefield. You may have a client who’s a perpetrator or victim of financial abuse – although it can sometimes be hard to identify, and you may risk upsetting a client, it’s important to act where you have suspicions. After all, it’s hard to meet the basic ethical requirement – to always act in a client’s best interests – if you don’t act to protect your clients from abuse.

Financial abuse

Financial abuse is increasingly recognised as a serious form of domestic and family violence. Tasmania is currently the only Australian state where financial abuse is recognised as a crime; elsewhere, it falls under the umbrella of ‘family violence’ in the Family Law Act.

Financial abuse has been identified as one of the most powerful ways a person may be trapped in an abusive relationship. Up to 90 percent of people who seek help for domestic and family violence are also affected by financial abuse^[3].

In this context, financial abuse occurs when a trusted person uses a relationship to gain access to money or property. While often perpetrated by a partner, sometimes the people pressuring a person for money or abusing their trust are children, close friends or caregivers.

There’s a myriad of ways in which an abuser may exercise financial control. Some signs of financial abuse are when a person:

Controls access to money:
- Restricts access to cash, bank accounts, benefits or pensions.
- Does not allow their partner to view bills or financial statements.
- Does not grant their partner access to adequate funds.
- Hides investments and assets from their partner.
- Requires a partner’s wages be used for household expenses, while not contributing from their own earnings.
- Forces their partner to work in a family business without being paid.
Uses another party’s money without knowledge or consent:
- Forges their signature on financial documents
Withdraws or transfers large amounts of money from a person’s bank account
Uses their credit card without permission
Sells or transfers a person’s property
Legal documents:
- Forges a signature on legal documents
- Forces another party to sign documents that you don’t understand
- Takes out loans, credit cards or debts in a person’s name without permission
- Coerces another party into taking out loans or credit cards in their name, or forces them into taking on debt, including business or tax debts
- Pressures another party to act as guarantor for a loan
- Forces or pressures a person to change their will
- Forces or pressures a person to appoint them as enduring power of attorney
- Doesn’t act in the person’s best interests as your power of attorney.

As a side note, where a person is authorised to manage money for a person and does not act in their best interest, or uses their money for themselves, it’s also classed as financial abuse.

Identifying financial abuse

Despite its prevalence, financial abuse isn’t always readily visible and, as a result, can be difficult to recognise and identify. Many people don’t immediately see that they’re in a financially abusive relationship, and, as with other forms of abuse, it may begin subtly and escalate over time.

Financial advisers are in a unique position, although it’s challenging to recognise whether someone is being impacted by financial abuse or whether they are a perpetrator of it. While identifying financial abuse is not always easy, there are warning signs to be aware of. Some of these include when one party:

Appears distressed or nervous when discussing financial matters while the other dominates the discussion
Remains silent while another does all the talking
Only acts on instruction/s from their partner or other person
Is unaware of their financial position; does not know about investments and assets, or is unaware of transactions or loans in their name
Asks questions about the other party’s behaviour or activities that indicate a level of ignorance about their activities
Has income or Centrelink payments paid into their partner’s account.

Alarm bells should also ring in situations where you might:

Only ever meet with one party of a couple, but that second person is sole or joint signatory to a range of financial products and services
Have a client who consistently criticises their partner’s ignorance of all things financial, yet has some financial products, such as loans, in that person’s name
Have a client with a joint account but who requires all statements and correspondence to be addressed to them only
Have a client who requests to liquidate assets or redeem investments without involvement of the other party.

Case study one: Taking financial control

Brian and Veronica had been married for fifteen years and for most of that time, they had been clients of Fine Financial Planning. Their adviser, Gavin, had been to school with Brian and they met up socially as well as professionally.

Both Veronica and Brian held senior roles and their combined income was upper decile. When they initially set up their financial plan, they had three clear objectives: to pay off their mortgage as quickly as possible, to set up a self-managed superannuation fund that Brian would manage with Gavin’s guidance and to establish an investment portfolio outside superannuation. The latter was partly funded using a margin lending facility.

Veronica attended the annual review meeting, but was unaware that Brian and Gavin met more frequently. She did note that she had less visibility over her husband’s finances and most of her earnings were used to pay the mortgage and household expenses. Brian repeatedly told her she did not need to be concerned about their financial matters and that he had it under control. Statements and other documents were kept in a locked filing cabinet. From time to time, he would ask her to sign documents without providing all information and, if she appeared reluctant, would use coercive tactics, such as refusing to pay the children’s school fees, to get her to sign.

After the marriage broke down, Veronica learned that the documents she had signed gave Brian full control of their investments, including their family home. At the same time, by signing these documents, she had accepted sole liability for two credit cards, with a total debt of $45,000 and the margin lending facility with a debt of $165,000. The SMSF had borrowed to its maximum level to invest in illiquid property assets.

When Veronica sought legal advice as to her financial position, it was found that Brian and Gavin had colluded to build Brian’s financial wealth. While Veronica’s income was used to pay the mortgage on a home she no longer owned, as well as expenses, much of Brian’s income was invested solely in his name. Gavin had facilitated the borrowing within the SMSF and the purchase of property.

As a result of his actions, Gavin potentially breached the following standards in FASEA’s Code of Ethics.

Case study two: A forged signature

Nicole and Anthony had been together for many years. Their children had finished school and they were turning their attention to retirement. Several years earlier they had been introduced to Elouise at Retirement Advice Services and been regularly topping up both their super funds and an investment portfolio outside of super.

The couple had been clients for several years when Anthony requested a meeting, which he attended alone. He wanted to redeem some investments and move others into a more aggressive portfolio. Because these investments were held in join names, Elouise required both Nicole and Anthony to sign the relevant paperwork.

When the paperwork was returned, she felt that Nicole’s signature looked wrong. It was quite shaky and when checked against other documents on file, it did not look consistent with earlier signatures. She questioned Anthony who insisted his wife had simply been rushed and that all was fine.

Elouise felt uncomfortable with the way Anthony wanted these investment changes rushed through. She kept looking at the paperwork, feeling was something was wrong with Nicole’s signature. Elouise tried to call Nicole; however she did not answer her phone, so she left a message. Instead of a return call, she received an email from Nicole, sent from the couple’s joint email address, saying that she had signed the paperwork and was happy with the revised plan.

Elouise decided she would not action the requests until she had spoken to Nicole; she felt uncomfortable with Anthony’s aggressive approach and was concerned that Nicole may have been excluded from the decision making. As it transpired, she was correct – when she finally was able to speak to Nicole, she learned that Anthony had forged Nicole’s signature on the paperwork. Although Nicole was concerned about ‘rocking the boat’ Elouise held her ground that she could not implement the investment changes without meeting with both parties to ensure they understood, and were in favour of, the change. And she required two legal signatures.

Elouise’s actions ensured she did not breach any standards in FASEA’s Code of Ethics. Those standards that might have been impacted had she implemented the investment changes while doubting the veracity of a client’s signature include:

Elder abuse

Elder abuse has been defined by the World Health Organisation as a single, or repeated act, or lack of appropriate action, occurring within any relationship where there is an expectation of trust which causes harm or distress to an older person.

It can take various forms and include financial, physical, psychological, emotional and sexual abuse, or neglect. Abuse of older people is often perpetrated by an individual who is trusted by the older person, such as a family member, friend, professional or paid caregiver.

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.

With around 15 percent of the Australian population aged over 65 (approximately 3.7 million people), a statistic that’s expected to rise to 23 percent of the population by 2055, the prevalence of financial abuse of elders is likely to increase.

Even when there’s an Enduring Power of Attorney (EPoA) in place, the main culprits of financial abuse tend to be the attorneys chosen by the victims themselves; often their own children or someone they have known and trusted for a long time.

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 Enduring Power of Attorney (EPoA) through deception or undue influence
Convincing the older person to sign over the title/s of property they own.

Elder abuse by the numbers

Uniting Care’s 2018-2019 Elder Abuse Prevention Unit Year in Review examined victims and perpetrators of elder abuse in Queensland. Not surprisingly, almost all cases of abuse occurred within family relationships, with children (including in-laws) representing 72.3 percent of cases.

Almost one-third of cases involved victims and perpetrators living together and in nearly 20 percent of cases, perpetrators were reported to be providing care to victims.

The largest group of perpetrators were aged 50-54 years and were slightly more likely to be female than male. Uniting Care’s research found 12.3 percent of perpetrators were reported to have mental illness and 10.7 percent to have substance misuse issues, two red flags for care givers and service providers.

As illustrated in figure three, financial abuse was the second highest form of elder abuse according to the Uniting Care report, consistent with the findings from its earlier report.

Interestingly, psychological abuse has a similar frequency to financial abuse; it’s been found to often occur in tandem with financial abuse and may often facilitate it. For example, the perpetrators may threaten to refuse access to grandchildren if the older person is reluctant to provide the perpetrator with the financial access or assets they desire.

The Uniting Care study found the most common methods of perpetrating financial abuse were undue influence, misuse of an EPoA, and misuse of debit and credit cards which are used to pay the perpetrator’s own expenses (figure four).

As illustrated in figure five, the most commonly reported forms of financial abuse were non-contribution, theft, and failure to repay loans. ‘Non-contribution’ is generally a situation where the perpetrator lives with the victim and fails to contribute to living costs. The second most common form of abuse is where the EPoA has been misused by the perpetrator to withdraw sums of money which are used for perpetrator’s own benefit.

Warning signs

As with other forms of financial abuse, elder financial abuse is not always immediately obvious. The perpetrator will cover their tracks as much as possible, and the victim may be unaware of the abuse or unwilling to address it. As such, it’s critical that financial advisers can identify the warning signs. Sometimes, abuse may occur through innumerable smaller transactions and be hidden in plain sight. Importantly, trust your intuition – if you are suspicious, you should review the situation.

Some warning signs that a client may be experiencing financial abuse include:

They have allowed someone else to control their access to bank accounts, credit and debit cards or other money; if your client isn’t regularly on top of the transaction history, that’s a major red flag
Family members move in, even if to ostensibly ‘care’ for the client, but are not contributing financially; where this is causing the client’s expenses to increase markedly, or negatively impacting their standard of living
Your client’s bills haven’t been paid, even though someone else is supposed to be doing this for them
Your client is pressured to invest in a private business or scheme with returns that sound too good to be true
Your client guarantees or takes out a loan for a family member
You client has to get permission from a third party to spend their own money
Someone is selling (or threatening to sell) your client’s property without their permission
Your client sells their property and uses the funds to ‘buy’ into a child’s property or granny flat on site without any contractual arrangement
Your client makes an EPoA or new will without informing you
The client loses confidence in their ability to make financial decisions and indicates this is a result of being made to feel incompetent by others.

Case study three: The guarantor

Sophie is 74 and lives alone in her own home. She has two children and several grandchildren. She retired with a modest super balance and draws a small pension from this, as well as receiving the Age Pension from Centrelink. She was approached by her son-in-law to act as a guarantor for a business loan of $500,000. He assured her it was above board and took her with him to speak to a financial adviser at ABC Bank.

By her own admission, Sophie does not have a great understanding of financial matters. They saw the financial adviser together; a meeting in which her role as guarantor was downplayed, and where her son-in-law assured her he would refinance within twelve months, which would then remove the need for her role as guarantor. Sophie felt both parties were pressuring her to make a fast decision.

After the twelve months was up, Sophie asked her son-in-law to remove the guarantee. At this point he admitted his business had gone into liquidation, something neither he nor her daughter had mentioned to her. The bank requested she sign a deed of forbearance and agree to sell her home and waive her legal rights.

Through a support service for the elderly, Sophie contacted her state consumer affairs department. She explained that she did not understand the risks associated with her acting as guarantor because they were not explained and the paperwork was too complex for her to understand. The consumer affairs people were able to negotiate with the bank and have her released from the guarantee and prevent her home from being sold.

The adviser at ABC Bank potentially breached the following standards of FASEA’s Code of Ethics:

Case study four: A cuckoo in the nest

William is a widow in his late 70s. He had lived alone, until his daughter and her new partner moved in to keep him company and help him out around the home. They wanted to save up to buy their own home and convinced William it would be a win-win situation.

William receives a veteran’s pension and a small annuity, which was sufficient to meet his income needs in retirement. William was a client of BBB Financial Advice and enjoyed semi-regular meetings with his adviser John. A couple of months after William’s daughter moved in, he had an appointment with John, at which he said he needed to review his finances to increase his income.

John was surprised – William had been living comfortably and had some savings, so he was curious as to the expenses that necessitated such a change. William told him how his daughter and her partner had moved in. They weren’t paying him rent because they were saving; however, they weren’t contributing financially at all, and even expected that William picks up the tab for their regular Friday night pizza.

With some gentle probing, John also learned that William’s daughter had been trying to convince her father to get a line of credit using his home as collateral, something he had already discussed with his bank. However, the bank had not been keen on the idea and, much to his daughter’s chagrin, it had not proceeded. She had planned to use it toward a house deposit.

After discussing the situation, William agreed that he would make no changes to his income; in fact, he would ask his daughter and her partner to make a reasonable contribution toward the running expenses of his home – and pay for their own takeaway.

Breaches of FASEA’s code of ethics

John from BBB Financial Advice did not fail his elderly client; had he ignored the situation and taken William’s request at face value, John could potentially have breached the following standards in FASEA’s Code of Ethics:

Financial advisers – responsibilities

As identified earlier, financial abuse is an ethical minefield. Whether your client is young or elderly, it’s important to probe where you have suspicions and act on any dubious activity. Your client’s best interests must be first and foremost.

In the case where the perpetrator – and not the victim – is your client, it becomes a moral dilemma.

If you become aware that a client may be perpetrating financial abuse, you still need to report it, even if the victim is not your client. As well as being an ethical imperative, in many cases it may well also be a legal imperative. If you return to the values that underpin the Code of Ethics, it’s clear that enabling someone to financially abuse another is not within the spirit of the Code.

When it comes to financial abuse, ethical considerations include:

Avoid conflicts of interest, particularly in situations where several generations of a family are clients
Avoid contributing to the perpetration of unlawful acts
Ensure all clients are well informed; as clients age, ensure they are aware of elder abuse – what it is and how it might present
Ensure all clients understand your advice and have capacity to act
Your client’s best interests always come first.

Strategies to deal with a client experiencing financial abuse

If you suspect a client may be a victim of financial abuse, there are several steps to take. Firstly, discuss the situation with them and endeavour to learn:

Who is responsible for the abuse?
What is the extent of the abuse?
Which assets have been affected?
Has the client has consented to the actions taken by the perpetrator?
Does the client have any dependencies on the abuser – for example, are they responsible for their care?

Importantly, you need to determine whether your client is fully aware of what’s happening.

Secondly, contact important third parties, such as the victim’s banks or other financial institutions. Flagging potential financial abuse with third parties may enable you to limit the extent of the abuse.

Finally, consider a legal response to the abuse. If you are suspicious that financial abuse has occurred, immediate action to limit any further damage should be taken.

It’s important to reassure your client that help is available.

Adviser liability

According to the Financial Ombudsman Service and its successor organisation the Australian Financial Complaints Authority (AFCA), an adviser may be liable to reimburse losses to a client who has been the victim of financial abuse under a number of legal and equitable principles. These include:

Where a client is unable to read due to blindness or illiteracy
The client’s signature on transaction documents has been forged
An unauthorised electronic transaction has been performed and liability is allocated to the adviser under the ePayments Code
Situations where the adviser is aware of a client’s mental or cognitive incapacity
Situations where the adviser is aware the client may be vulnerable to coercion or under undue influence
Where an adviser has assisted in a breach of trust
Where an adviser has taken advantage of a vulnerable person and engaged in unconscionable conduct for their own benefit, or the benefit of others.

FASEA’s Code of Ethics appropriately places personal responsibility on advisers to understand and apply their professional judgement to their ethical obligations in client engagements. Not only should their professional conduct be focused on providing advice that’s in the best interests of the client, but it should also improve financial outcomes for all.

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