CPD: Ethics and your practice

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The Financial Planners and Advisers Code of Ethics 2019 (Code of Ethics) is a set of standards and core values designed to encourage higher standards of behaviour and professionalism from financial advisers and licensees. This article, proudly sponsored by GSFM, examines that Code and how it serves to support professionalism and ethical practices.

The Code of Ethics was developed by the Financial Adviser Standards and Ethics Authority (FASEA) as part of its professional standards for financial advisers. Although FASEA was wound up at the end of 2021, the Code of Ethics remains in its existing form; likewise, the requirement for financial advisers to abide by the 12 standards that comprise the Code of Ethics remains in place.

On 28 October 2021, the Financial Sector Reform (Hayne Royal Commission Response – Better Advice) Act 2021 (Better Advice Act) transferred functions relating to the reforms from the Financial Adviser Standards and Ethics Authority (FASEA) to the relevant Minister – currently the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume – and ASIC.

The transition provisions in the Better Advice Act preserves the Code of Ethics, by providing that this instrument will continue in force as if it was an instrument made by the Minister. Therefore, financial advisers needs to comply with the Code of Ethics made by FASEA, until such time as the Minister amends these standards or makes new standards.

Irrespective of which entity is responsible for its administration, the Code of Ethics is a legislative instrument, governed by Section 921E of the Corporations Act 2001 (Corporations Act), which requires financial advisers to comply with the Code of Ethics.

That the Code is important is reinforced by daily news alerts, which remind us that although most financial advisers are professional and ethical, there are those who are not. A recent alert from ASIC advised that six of Australia’s biggest banking and financial services institutions have paid or offered over $3 billion in compensation for financial advice related misconduct. Such headlines do not help build trust in the industry, nor do they reflect well on the professionalism of the collective. Accordingly, it’s even more important that advisers and licensees embrace the Code of Ethics and change the narrative.

The Code of Ethics

The Code of Ethics is a set of principles and core values, enshrined in law, that provides a foundation for advice to be seen as a ‘true profession’. Five values (figure one) underpin the twelve standards that comprise the Code of Ethics (figure two). The Code of Ethics is a set of principles and core values in the areas of ethical behaviour, client care, quality process and professional commitment.

Financial advisers are required to act in a way that demonstrates, realises and promotes each of these values and all provisions of the Code must be read and applied in a way that promotes the values.

Each of the five values relates to specific ethical standards that must be applied to all interactions with every client. It is important to note that these values also require advisers to meet their obligations under law in respect to the advice provided to each client. This includes:

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

An ethics centric advice practice

It’s important to note that developing and maintaining an ethics centred advice practice should not start and stop with the adviser. It should extend from the receptionist who greets clients and handles their paperwork, through to the adviser who meets with clients and develops an appropriate strategy. It includes other staff as well; the paraplanners who implement investment decisions, the practice managers who develop staff training, the IT specialists who maintain systems and ensure data is protected.

All staff members need to know how the Code of Ethics impacts their specific role in the advice practice. They also need to understand how they can perform their roles to ensure they meet their obligations and support the advisers and licensees to meet theirs. After all, it’s the licensee and adviser who carry the responsibility (and potential enforcement action) of a breach.

There are a number of strategies that can be implemented to create an ethics-centric practice that can help mitigate the risk of breaching the Code of Ethics.

  1. Checklist: an ethics checklist can be used to safeguard compliance with the Code of Ethics. This checklist could be broken into four sections, in line with the twelve standards that comprise the Code: ethical behaviour, client care, quality process, professional commitment.

The questions in the checklist should be tailored to each standard in the Code of Ethics and each role in the practice. It should include those relevant to dealing with prospective clients, as well as new and existing clients.

  1. Code of conduct: by establishing a practice-wide code of conduct, one which encapsulates your business’s values as well as the Code of Ethics, your team should have a clear understanding of their role and the expectations that go with it. Any code of conduct should set clear expectations about employee behaviour when performing their role and, an ethics-centric practice, how each of the twelve standards may specifically intersect their role.
  2. Communication: It’s really important to communicate clearly, openly and honestly with your clients. In all client meetings, don’t simply tell them what you will do for them, but detail how you will work with them to achieve their objectives. Establish ongoing channels of communication and explain how you will communicate with them. It’s important to detail the method and frequency.

Remember that it’s important not to make promises you know you cannot (or may not be able to) keep. As well as potentially being a breach of the Code of Ethics, it will reflect badly on the practice.

  1. Set key performance indicators (KPIs): by reinforcing your company’s values, adhering to your practice’s code of conduct and behaving in a way that makes ethical behaviour central to your team’s work will support an ethical practice. Although a values driven KPIs may sometimes be more challenging to quantify than one with specific and measurable outcomes, it will highlight the importance of values and ethics to your practice.
  2. Workplace training: it’s essential to make sure all staff understand both the practice’s values and the obligations of the Code of Ethics. Discussions and workshops that promote ethical behaviour in your workplace will reinforce the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your own code of conduct – and within the Code of Ethics.

Importantly, ethics training should not be a once off. Ideally, training should be practical as far as possible, and teach team members to make good decisions that are compliant with the law and consistent with your practice’s values.

Ethics training could be incorporated as part of a regular team meeting; for example, by using a variety of case studies that address common ethical dilemmas across the financial planning industry. An ethics training unit should form part of your staff onboarding process.

  1. Feedback loop: by encouraging staff to provide honest feedback about the processes, conversations and client interactions, you are better placed to make sure you’re aware of issues that may arise that could potentially compromise your business. A feedback loop can help you identify gaps in relation to processes and procedures, and where a checklist or workplace training may
  2. Lead by example: regardless of your position in a practice, it’s important to set a good example. For those who are senior in the practice, it’s more important to demonstrate those behaviours that are and are not acceptable. Senior advisers and personnel will set the tone for ethics in the practice; as such, they need to demonstrate the Code of Ethics in all they say and do.
  3. Regular audit: These or similar strategies may have already been implemented in your practice. If so, it’s important to review the effectiveness of each. What’s working well and what’s not? If you can identify gaps in processes that may lead to a breach of the Code, it’s better to identify them ahead of time than when ASIC comes knocking on your door.

ASIC expects Australian Financial Services licensees to take reasonable steps to ensure their authorised representatives comply with the Code of Ethics. For example, licensees must:

  • Ensure their authorised representatives are aware of the need for ongoing compliance with the Code of Ethics
  • Provide training and/or guidance to their authorised representatives about the types of conduct that is consistent/inconsistent with the code
  • Facilitate individual advisers’ ability to raise concerns with the AFS licensee about how the licensee’s systems and controls may be hindering their ability to comply with the code, and acting on those concerns where appropriate
  • Consider whether advisers are complying with the code as part of their regular monitoring of adviser conduct
  • Make any necessary changes to systems and processes to ensure compliance with the Code of Ethics (and the Corporations Act).

ASIC may suspend or cancel an AFS licence if it is no longer satisfied that the licensee or the licensee’s representatives are of good fame or character.

Case studies

The following case studies are based on real events; however, the names of people and organisations have been changed, and some details altered. The case studies have been drawn from ASIC and the Australian Financial Complaints Authority (AFCA) or its predecessor organisation. For each, potential breaches of the Code of Ethics are identified.

Case study one: Super switch

Married couple Bridie and Michael sought advice on improving the performance of their superannuation funds. They were about 10-12 years from their preferred retirement age and wanted to maximise their retirement savings. The adviser, Margaret, is an authorised representative of ABC Financial Planning.

Margaret advises Bridie and Michael to roll over their superannuation benefits from their current funds – one an industry fund, the other a corporate fund – to a superannuation fund managed by ABC Financial Planning, accessed via an in-house platform. As a result, ABC Financial Planning received fees from the couple for both the investment in the in-house super fund and use of the in-house platform.

Margaret did not provide a comparison of the likely returns Bridie or Michael would receive if they remained with their respective existing funds, nor did she provide a comparison of fees, charges or insurances of their current funds versus ABC Financial Planning’s offering.

Margaret failed to demonstrate the values of competence and diligence and potentially breached the following standards in the Code of Ethics.

Case study two: A lackadaisical approach

James is a senior financial planner employed by a large financial institution, AAA Finance, and advises a large number of ‘mum and dad’ clients. A complaint to ASIC resulted in a review of his approach, which found that James consistently recommended complex strategies that were too risky for most of his clients’ circumstances and risk profiles.

In most cases, the clients did not really understand the financial strategy or the investments in which they were invested, many of which were products managed by the company for which he worked and for which the company received fees. Further, James took a ‘set and forget’ approach, charging an “ongoing advice fee” without actually providing any ongoing advice.

James failed to demonstrate the values of competence and diligence and potentially breached the following standards in the Code of Ethics.

Case study three: Licensee held to account

The Federal Court ordered ABC Financial Planning to pay a $5.5 million penalty for failing to take reasonable steps to ensure that its authorised representative, Adviser A, provided appropriate financial advice, acted in his clients’ best interests and put clients’ interests ahead of his own.

Adviser A had been a financial adviser and authorised representative of ABC Financial Planning and was ordered to pay an $80,000 penalty after he inappropriately advised clients to invest in complex structured financial products. When those clients questioned whether the products were appropriate, he convinced them to remain invested. Adviser A received upfront and ongoing commissions for each of his clients’ investments in these products.

The Federal Court found that ABC Financial Planning, an Australian financial services licensee, did not have adequate processes to identify when advisers were avoiding internal advice quality checks or were recommending non-approved financial products. Although the licensee’s conduct was not deliberate and it had paid compensation to Adviser A’s clients, the Court said its breaches of the law were serious and sustained, and that the monitoring flaws should have been apparent to the licensee.

Further, the Court found the licensee failed to take reasonable steps to ensure that Adviser A provided appropriate advice to clients, acted in the clients’ best interests and put the clients’ interests ahead of his own.

Adviser A failed to demonstrate the values of competence, trustworthiness, fairness and diligence. In doing so, Adviser A – and the licensee – potentially breached the following standards in the Code of Ethics.

Case study four: Unauthorised early super access

Former financial adviser Bob, sole director of Bob’s Financial Planning, had operated a scheme to provide his clients with illegal early access to their superannuation funds for several years. He submitted applications for one-off advice fees to the super fund trustee, in which he claimed to have provided financial services to his clients when he had not. He would then pay these funds back to clients, facilitating unlawful early release of superannuation.

Bob obtained more than $1.5 million from the super fund trustee on behalf of his clients and then attempted to obtain a further amount. Bob indirectly benefited from the scheme by growing his client base.

This matter was prosecuted by the Commonwealth Director of Public Prosecutions following a referral from ASIC. Bob was convicted of one count of obtaining financial advantage by deception and one count of attempting to obtain financial advantage by deception. He was sentenced to nine months’ imprisonment for the first count and one month’s imprisonment for the second and was also sentenced to an 18-month community correction order, including 100 hours of unpaid community work. In addition, ASIC permanently banned Bob from providing financial services.

An ASIC spokesperson said, “The sentence imposed demonstrates the seriousness of this misconduct. Facilitating the unlawful early release of superannuation can lead to the erosion of people’s super balances, which has the potential to lead to long-term hardship. ASIC will continue to take action to protect the superannuation assets of consumers.”

Bob failed to demonstrate the values of honesty and trustworthiness and, in doing so, potentially breached the following standards in the Code of Ethics.

Financial advisers must act ethically and in the best interests of their clients at all times; only then will the advice industry be viewed as a profession. Headlines – such as that referenced earlier – announcing massive payouts from large financial institutions for poor advice need to be relegated to the past. And while this may seem obvious to many readers, the media continues to publish examples of ongoing unethical behaviour. This demonstrates the importance of a Code of Ethics that is embraced industry wide. Indeed, a binding Code of Ethics is a positive step towards true professionalism for the industry.

 

 

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[1] https://www.legislation.gov.au/Details/F2019L00117

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