CPD: 10 tips for ethical advice

From

AFCA’s top 10 tips for providing adequate or appropriate financial advice to avoid breaching standards.

As well as investigating complaints, AFCA provides tools to help financial advisers meet their legal and ethical obligations when providing advice. This article, proudly sponsored by GSFM, examines some of this guidance and explains how it can help advisers consistently meet their ethical obligations.

When the Australian Financial Complaints Authority (AFCA) released its statistics for the 2023 financial year, you’d be forgiven for thinking that nothing much has changed since the Hayne Royal Commission in 2018. Consumers lodged a record 96,987 complaints with AFCA during the last financial year, a rise of 34 percent on the previous financial year.

One of the responses to 2018’s Royal Commission was the establishment of the Financial Planners and Advisers Code of Ethics 2019 (Code of Ethics), a set of standards and core values designed to encourage higher standards of behaviour and professionalism for financial advisers (figure one). The Code of Ethics is a legislative instrument; section 921E of the Corporations Act 2001 (Corporations Act) requires financial advisers to comply with the Code of Ethics.

Ethics play a pivotal role in financial planning, serving as the moral compass that guides professionals in their interactions with clients and decision-making processes. The essence of financial advice lies in helping individuals and organisations secure their financial future, make informed choices and achieve their aspirational and financial goals.

AFCA – consumer complaints

In its first two years of operation, AFCA received more than 153,000 complaints and resolved approximately 135,000 disputes; from this, more than $474.5 million was awarded in compensation and refunds to Australian consumers and small businesses.

Fast forward to the 2023 financial year, and, as highlighted earlier, a record number of complaints were received. Of the 96,987 complaints received (which equates to 266 per day), 86,185 complaints were closed and $253.81 million was paid in compensation to consumers through AFCA’s dispute resolution processes.

The top issue in complaints to AFCA in 2022-23 was the delay in insurance claim handling (up 76 percent). Delay in insurance claim handling was also a significant issue in superannuation; super complaints rose 32 percent overall, but within this was a 136 percent rise in complaints about claim delays, including payments from life insurance and total and permanent disability insurance claims.

It is noteworthy that the total number of complaints in the investments and advice segment includes a significant number of complaints in relation to just two firms: without these, the total would have been 2,458, a decrease of 23 percent on the previous year.

While AFCA’s headline results have been released, the more granular detail for financial year 2023 is not yet available; the following analysis is based on AFCA’s 2022 data.

Each of the complaints outlined in figure three could potentially breach one or more standards in the Code of Ethics. While the specifics of each complaint may result in the breach of different standards, in general terms, it’s likely that those advisers who have been the subject of these complaint areas will have breached common standards as follows.

Interpretation of product terms and conditions

Complaints in this category have increased year on year and relate to situations where the complainant does not agree with the financial firm’s interpretation of the terms and conditions of a product or service. Advisers subject to complaints in this category may potentially breach the following standards:

Service quality

Service quality is a somewhat subjective form of complaint and could arise from many different facets of advice. It could potentially breach each standard, depending on the nature of the complaint.

For example, it may have been a failure to disclose a conflict of interest (standard three) or obtain informed consent (standard four). Alternatively, it could arise from fees and charges that are not reasonable and do not represent value for money for the client (standard 7) or maintain complete and accurate records of advice (standard 8). 

Failure to follow instructions/agreement

Where an adviser has failed to follow instructions or an agreement they have made with a client, that adviser may have breached the following standards: 

Failure to act in a client’s best interests

Acting in a client’s best interests is a tenet that underpins the Code of Ethics. Where advisers are found to have failed to act in a client’s best interests, they will have likely breached a number of ethical standards, including:

Inappropriate advice

Advisers subject to complaints about providing inappropriate advice will have likely breached the following standards:

Tips for ethical advice

Acting with integrity and in a client’s best interests, ensuring their understanding of all elements of your advice and taking into account the broader, long term effects of your advice is central to acting ethically and doing the right thing by your clients.

Despite your best endeavours, some clients may choose to complain about advice they have received. The Australian Financial Complaints Authority (AFCA) has compiled a checklist of tips to getting financial advice right. As well as positioning yourself positively in the event of a complaint, this checklist can also help you meet your ethical obligations. 

1. Take detailed file notes

AFCA relies on evidence provided by the parties to a dispute. Documents created at the same time as the activity or advice in question are usually given more weight than later recollections of what was said or done. This means contemporaneous file notes of conversations and actions are invaluable when a dispute comes before AFCA. There have been numerous cases where a complaint has been resolved in favour of the adviser and licensee thanks to contemporaneous file notes.

Whenever possible, confirm verbal instructions from a client in writing; for example, send them an email after a telephone conversation to confirm what was said and any agreements made.

Statements of Advice and file notes should detail how any conflicts between goals, available resources and willingness to take risk are resolved.

This approach will also help you meet your obligations under standard eight, to keep and maintain complete and accurate records of advice and services provided.

2. Clear goals and strategy – you must have a conversation with the client about their goals

AFCA does not consider client objectives and instructions that are written using industry terms or jargon that few clients would understand to be a reliable record. Instead, AFCA recommends you write down a client’s objectives in the words the client has used in answering your questions about their goals, aspirational and financial, and quantify those objectives.

This demonstrates that you have heard and understood the client’s goals in seeking advice – e.g. ‘to retire at age 67 with an income of $65,000 per year’. You should detail how your recommended financial strategy will assist the client to achieve their goals.

This will also demonstrate that you have met the following ethical standards, particularly those focused on best interests, informed consent, the client’s long term objectives and client comprehension of all facets of your advice.

3. Turn clients away or refer when appropriate

If your services are not suited to a particular client, you must tell them so. It’s important that you don’t try to shape the client to suit your offering or capabilities. An attempt to offer advice that you’re not qualified or authorised to provide could see you in breach of standards nine and/or ten; it’s important to only provide advice and recommendations in areas you have competency.

If a client is seeking a return that does not match their risk profile and you can’t convince them to change their expectations, either send them away (or see point four).

If providing advice that does not suit the client, or advice that does not meet their risk profile (even if it does match their return expectations), there is a risk of breaching standards six. This standard requires you to consider the broad effects of the client taking your advice, the long term impacts on the client and other family members. It also risks breaching those standards that deal with acting in the client’s best interests (two and five).

Further, if you or your licensee would have a conflict of interest or duty by providing advice to the client, you should refer them elsewhere to avoid that conflict.

4. Explain the risks to clients who choose to act against your advice

If a client chooses to act contrary to your advice, you must be very clear in explaining the risks and documenting that the course of action they have chosen is not in line with your advice. It is essential to explain the risks in language the client understands, make a contemporaneous file note, and have the client sign it.

This action can prevent you from potentially breaching a number of ethical standards, including those dealing with acting in a client’s best interests (standards two and five), informed consent (standard four) and taking into account the broad effects of the advice (standard six).

A clear and well documented explanation of the risks for those clients who elect to act against your advice should work in your favour in the event of a complaint.

5. Explain what types of service you are providing

Clients generally don’t understand the difference between information, general advice, personal advice, limited advice and execution-only services.

If you don’t provide appropriate explanations and warnings, or you are unclear about your service offering and what it incudes or excludes, you could be found liable for advice or services that you had not intended to provide.

Standard four requires ‘informed consent’ and a clear explanation of the services and advice you are providing. An inadequate explanation may see you in breach of standard four – as well as liable for advice you hadn’t intended to provide.

6. Use template forms and documents carefully

It’s important to ensure template forms and documents about strategies, products and risks are appropriate to the client you are advising.

According to AFCA, it will be difficult to convince them that you have selected the appropriate strategies and financial products for a client if your documentation:

  • contain errors
  • is missing information
  • uses pro-forma jargon or complex concepts
  • contain copious amounts of irrelevant material.

AFCA’s advice is to tailor documents to each client’s financial literacy. Statements of Advice must be clear, concise and effective. The careful use of appropriate forms and documents will help you support a case that your advice is in your client’s best interests.

7. Use risk profiling tools carefully

AFCA reminds you to remember that risk profiling tools are only tools. They may have inherent flaws that you must recognise and address.

Make sure that the strategy and asset allocation you recommend to a client is consistent with the risk profile generated by the risk profiling tool you use. If there are inconsistencies, or if a client seeks a return that does not match their risk profile, you must clearly explain the risk and impact.

A failure to do so could see you potentially breach several FASEA standards, including:

  • those dealing with acting in a client’s best interests (standards two and five)
  • informed consent (standard four)
  • taking into account the broad effects of the advice (standard six).

8. Don’t give cookie-cutter advice

The best interests duty requires that advice be reasonably likely to achieve the client’s goals and that alternatives have been considered. An example provided by AFCA was a complaint in which the Statement of Advice for a client with taxable income of $42,000 that stated: ‘Your reasonable level of surplus income and high tax rate should make gearing an appropriate option for you’.

A ‘one size fits all’ approach is unlikely to meet the best interests test. That would most likely result in a breach of 961B of the Corporations Act 2001; in turn, this would breach the FASEA requirement to obey all laws (standard one) as well as those standards that deal with acting in a client’s best interests (two and five).

9. Understand and explain the products

AFCA’s recommendation here is simple: understand any products you are recommending and do not advise on products you don’t understand.

The advice from AFCA is to not simply hand over a Product Disclosure Statement (PDS) – you must explain the PDS to your client and record your discussion in the SOA. Further, it suggests that you don’t cut and paste PDS disclosures into a client’s SOA. You need to demonstrate your understanding of each product by using the same words in the SOA that you use when verbally explaining or describing the products to your clients.

Standard five requires you to ensure your client understands the financial product recommendations being made and the rationale for those recommendations, including costs and risks.

To advise on products you don’t understand, or where you lack competence, may result in a breach of standard nine, even if your intent is not to be misleading or deceptive.

10. Be clear about the advice relationship with clients you know

If you are giving advice to a friend, relative, colleague, or employee, it is critical to formalise and document the process as you would for any other client. As with all clients, you want your professional relationships to be that – professional. Ethical behaviour underpins professional behaviour.

Case studies

The case studies have been drawn from ASIC or AFCA (or its predecessor organisation), although names of people, places and financial firms have been changed. For each, potential breaches of the Code of Ethics are identified.

Case study one: Acting in his own best interests

ASIC permanently banned financial adviser CPL from having any future involvement in financial services. The regulator determined a permanent ban was necessary due to concerns that CPL is not a fit and proper person to provide financial services, is not adequately trained or competent to provide financial services and likely to contravene financial services law in the future.

For a six year period until mid-2021, while an authorised representative of AFS licensee ACME Partners, CPL recommended a number of clients invest in a range of international unlisted shares sourced by an offshore brokerage.

In its case against CPL, ASIC found that he:

  • Caused some unlisted shares to be transacted between his clients at a significant price differential and used the price margin for his own benefit, including to pay personal debts
  • Disguised that a related party was the true owner and seller of unlisted shares that he arranged his clients to purchase
  • Made false statements in emails to clients to encourage them to purchase the shares
  • Failed to disclose significant commission payments he received from the overseas brokerage house for the sale of unlisted securities
  • Accepted some commission payments in breach of the conflicted remuneration laws
  • Made false statements to ASIC during an ASIC compulsory examination.

This is an example of an individual acting in his own best interests, an adviser who failed to act professionally or ethically. As a result, CPL likely breached a number of standards in the Code of Ethics, including:

Case study two: Misleading and deceptive conduct

After selling a small business, Angela and Simon had $345,000 to invest. Friends had recommended a local adviser, Tim from ACME Financial Planning. Because Angela and Simon planned to use the money within one-to-two years to start a new business, they specified a short term investment horizon with no risk to their capital.

Tim suggested they invest in ‘Term Deposits’ offered by his licensee. However, these were not term deposits; instead it was an unregistered managed investment scheme in which the licensee borrowed amounts from some clients to loan to other clients.

The Statement of Advice provided by Tim contained misleading or deceptive statements as to the nature and risks associated with the MIS. The investment was positioned as available only to a select number of clients using the services of ACME Financial Planning. Angela and Simon were made a ‘special offer’ because they’d been recommended by a long-term client.

The SOA provided by ACME Financial Planning claimed the ‘term deposit’ would provide clients with a guaranteed return for their investment, as well as guaranteed security of capital. The SOA also stated that the product paid a competitive fixed term interest rate and used the strength of the government guarantee on term deposits as a selling point.

Although a managed investment scheme, there was no PDS, target market determination or other form of product documentation provided to Angela and Simon. The structure of the MIS was not disclosed to Angela and Simon, nor were the benefits received by ACME. Their funds were packaged up and loaned to other clients; the practice earned the difference in the rate at which the money was loaned, less the rate paid to clients. These funds were in no way government guaranteed; further, they could not be guaranteed by the practice if a borrower defaulted.

Following a complaint, it was found the adviser and financial firm had engaged in misleading and deceptive conduct, had issued a defective SOA and had been running an unregistered managed investment scheme.

Tim had exposed his clients to risk while presenting the investment opportunity as risk free or guaranteed. From the details provided in the case study, Tim potentially breached the following standards in the Code of Ethics.

Ethical conduct ensures that financial advisers prioritise their clients’ best interests, maintain transparency and provide accurate and unbiased advice. Upholding ethical principles fosters trust between clients and planners, enhancing long-term relationships built on reliability and integrity.

Moreover, ethical financial planning safeguards against potential conflicts of interest, ensuring that recommendations are untainted by personal gain. In a complex financial landscape, where intricacies abound, ethics serve as the bedrock upon which the foundation of sound financial decisions is built, ultimately contributing to the overall stability and well-being of individuals and the broader financial ecosystem.

As well as being in the best interests of your clients and the profession as a whole, ethical conduct will make you less likely to be the subject of a complaint or the target of an investigation.

 

Take the FAAA accredited quiz to earn 1.0 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 1.0 hour.

Legislated CPD Area: Professionalism & Ethics (1.0 hrs)

ASIC Knowledge Requirements: Financial Planning (1.0 hrs)

You must be logged in to post or view comments.