CPD: Ethics and your practice

13 Mar 2024

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

An ethics-centric practice can be of benefit to advisers, your licensee and most importantly, your clients.

It’s been five years since the Hayne Royal Commission handed down its final report. That same year, the Financial Planners and Advisers Code of Ethics was introduced (but not yet law). This article, proudly sponsored by GSFM, will explore the ongoing importance of a strong ethical focus in your practice.

Although design and implementation of the Financial Planners and Advisers Code of Ethics (Code) wasn’t a direct result of the Hayne Royal Commission, the timing of its release coincided with the myriad of recommendations that resulted from it.

Professional standards reforms for financial advisers were introduced to the Corporations Act 2001 in March 2017 to raise the education, training and ethical standards of those providing personal advice to retail clients on more complex financial products^[1]. Those reforms required FASEA to develop the Code, which came into effect in January 2020.

The introduction of the Code of Ethics came with an expectation from ASIC that Australian Financial Services licensees would take a number of reasonable steps to ensure that their authorised representatives comply with the Code. For example, licensees must:

Ensure their authorised representatives were aware of the need for compliance with the Code from 1 January 2020 and that this compliance is ongoing.
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, ongoing monitoring of adviser conduct.
Make any necessary changes to systems and processes to ensure compliance with the Code and other regulatory requirements.

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.

The Code of Ethics addresses five core values: trustworthiness, competence, honesty, fairness and diligence. It requires that financial advisers must act at all times and in all cases, in a manner that is demonstrably consistent with Code’s twelve ethical standards, summarised in figure one. These standards are regulated and monitored by ASIC’s approved compliance schemes.

An ethics centric practice

Adopting an ethics-centred approach in advisory practices should encompass more than just the adviser. This perspective extends from the receptionist responsible for welcoming clients and managing data, to the adviser who engages with clients and formulates appropriate financial planning strategies. It also involves other staff: paraplanners executing investment decisions, practice managers overseeing staff training and administrators handling paperwork.

All team members have both a theoretical and practical understanding of the many ways the Code will influence their role within the practice. Each team members needs to perform their duties in a manner that aligns with their responsibilities, supporting advisers and licensees to fulfil theirs. Ultimately, it is the licensee and adviser who bear the responsibility (and potential enforcement action) in the event of a breach.

To establish an ethics-centric practice and minimise the risk of violating the Code, various strategies can be implemented.

Code of conduct: by establishing a practice-wide code of conduct, one which encapsulates your firm’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, in an ethics-centric practice, how each of the twelve standards may specifically intersect their role. This should be a concise and accessible document that is distributed to all staff members, and which is readily available for reference.

Communication: establish clear communication channels within your practice to convey the importance of ethics. Regularly discuss ethical considerations during team meetings, emphasising the relevance of the Code to each staff member’s role. A collaborative environment where colleagues can monitor and support each other in upholding ethical standards is important to create and maintain an ethical practice. Encourage open discussions about ethical dilemmas and provide guidance on navigating challenging situations.

It’s also important to communicate clearly, openly and honestly with your clients. In the initial 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, it will reflect badly on the practice.

Set key performance indicators (KPI): 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 each team member’s work will support the creation of an ethical practice. Although a values driven KPI 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.

The implementation of accountability measures will ensure that all staff members integrate ethical considerations into their daily responsibilities. Further, to recognise and reward ethical behaviour will reinforce a positive ethical culture.

Checklist: a checklist can be used to safeguard compliance with the Code. The questions in the checklist should be tailored to each role in the practice and include those relevant to dealing with prospective clients, new clients and existing clients.
Workplace training: this is essential to ensure all staff understand both the practice’s values and the obligations of the Code. Using workshops to promote ethics 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.

Importantly, ethics training should not be a once off. 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. It can be used to emphasise your firm’s commitment to continuous improvement in ethical practices. It also provides an opportunity to seek feedback from staff as to how the practice can better support ethical decision-making and incorporate this input into ongoing improvements.

Ideally, this workplace 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 should also be incorporated into the onboarding process for new employees; this will ensure they receive the necessary information and guidance to understand and comply with the Code from the beginning of their tenure.

Feedback loop: by encouraging staff to provide honest feedback about 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 be useful tools.
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 embody the Code in all they say and do.
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.

Why is an ethics-centric practice important?

Aside from the legal obligations the Code place on licensees and advisers, ethics play a crucial role in running a successful financial advice practice for a number of reasons:

Client trust: Ethical behaviour builds trust and clients are more likely to trust a financial adviser who demonstrates a commitment to ethical conduct. Trust is fundamental in establishing and maintaining long-term client relationships.

Each of the Code’s standards is trust building. A failure in any one area can erode trust and derail the adviser/client relationship.

Integrity and professionalism: An adherence to ethical practices upholds the integrity of the financial advice profession. It demonstrates both professionalism and a dedication to acting in the best interests of clients. This, in turn, enhances the credibility and reputation of the individual financial adviser, his or her practice and the industry as a whole.

While integrity underpins a number of the Code’s standards, it is a specific requirement of standard two, which requires advisers to always act with integrity.

Client’s best interests: Financial advisers have a fiduciary responsibility to act in the best interests of their clients. Ethical behaviour ensures that financial advisers prioritise their clients’ needs and goals over their own, thereby avoiding conflicts of interest that could compromise the quality of advice provided.

Acting in each client’s best interests is aligned with several standards, notably standards two and five that specifically reference client best interests. Other standards also align with the need to act in a client’s best interests, including standard three (avoiding conflicts of interest), standard four (acting with informed consent) and standard six (consider the long term effects of advice).

Legal and compliance: Ethical behaviour aligns with the legal requirements and regulations governing the Australian financial advice industry. Financial advisers who act ethically are more likely to comply with legal standards and have a reduced risk of encountering legal issues or regulatory scrutiny. Unethical behaviour can result in legal consequences, damaging both your career and the practice’s reputation.

Standard one of the Code requires that advisers act in accordance with all applicable laws (including the Code).

Risk management: Ethical decision-making contributes to effective risk management. By considering all advice through an ethical lens, advisers can identify and mitigate potential risks, protecting both clients and the reputation of the advice practice.

This also comes back to standard two, the requirement to act with integrity, for this is a quality that enables advisers to identify and manage risks.

Long-term success: Ethical behaviour will contribute to the long-term success of your practice. Clients who feel well-served and believe that you have always acted in their best interests are more likely to remain loyal to you and provide referrals, contributing to the ongoing growth and success of your business.
Industry reputation: Ethical conduct by financial advisers collectively enhances the reputation of the entire financial services industry. Unethical practices can lead to negative perceptions and erode public trust, affecting not only individual advisers but the industry as a whole.

The reputational damage possible to the industry is the subject of standard twelve and its requirement that individually and in cooperation with peers, advisers must uphold and promote the ethical standards of the profession.

Personal satisfaction: Knowing you are making a positive impact on your clients’ lives, acting in clients’ best interests and adhering to a strong ethical framework is likely to enhance the sense of purpose and professional satisfaction in your work. Replicate this across your practice and it’s a recipe for success.

Case studies

The following case studies are loosely based on ASIC’s enforcement activities or AFCA cases; however names and other details have been changed for privacy reasons.

Case study one – poor SMSF advice

The complainant in this case study is a corporate trustee of a self-managed superannuation fund (SMSF) and was a client of the financial firm from 10 July 2012 to 2 September 2019.

The complainant says that the financial firm’s advice was not appropriate for the SMSF during this period for several reasons:

the recommended asset allocation was too aggressive for its members
it was unnecessary to take on the recommended degree of risk to achieve their goals and objectives
the financial firm was conflicted in making its recommendations.

The financial firm says its recommendations were appropriate for the complainant and that it managed any potential conflicts of interest in accordance with its obligations.

However, an AFCA investigation found that the financial firm did not provide appropriate advice nor act in the complainant’s best interests. It’s findings included that the financial firm:

failed to provide advice within the risk parameters it set
failed to diversify the portfolio’s growth assets, with the portfolio too heavily weighted towards property
recommended an overly high proportion of related entity investments without justification.

As a result of the financial firm’s failure to provide appropriate advice and act in the complainant’s best interests, the SMSF would have been $254,312.72 better off. Consequently, AFCA’s determination was in favour of the complainant and the financial firm had to pay the complainants $254,312.72 compensation plus interest.

By not disclosing required information and misleading the client by omission, the financial firm potentially breached the following standards in the Code of Ethics:

Case study two – inappropriate advice

Alex and Sarah obtained advice from Elizabeth, an authorised representative of the financial firm ACME Financial Planning. Her advice recommended an investment of $145,000 into a single growth oriented managed investment scheme. Several years later the scheme entered into liquidation and was wound up with nil return to investors.

Alex and Sarah made a complaint that the investment was inappropriate. It did not match their ‘balanced’ risk profile and Elizabeth’s advice did not include appropriate diversification in their overall strategy.

Although ACME Financial Planning claimed the advice was appropriate given the information available to the adviser at the time, AFCA’s findings concluded that:

The investment strategy was totally weighted towards a single managed investment scheme and lacked critical diversification.
The managed investment scheme was not an appropriate investment to recommend to the complainants because of its high risk nature.
Risk profiling found the complainants to be ‘balanced’ investors.
While it may have been appropriate for a balanced, growth or high growth investor to have some exposure to the managed investment scheme, the complainants entirely invested in this single financial product with minimal basis for this being appropriate for their needs and objectives.
There was no discussion about other investment options to deliver a diversified portfolio.

AFCA’s determination was made in favour of the complainants and, within 28 days of Alex and Sarah accepting this determination, ACME Financial Planning was to pay the complainants $157,224 plus interest.

By not disclosing required information and misleading the client by omission, the adviser potentially breached the following standards in the Code of Ethics:

Case study three – unscrupulous practices

Fiona and Gerry had been clients of their local financial planning practice in regional Victoria for many years. Their initial financial adviser had retired some years back, and for the past seven years they had worked with his replacement, Maggie. She looked after their retirement funding and, between the income generated by super and investments, as well as a part Age Pension, Fiona and Gerry lived comfortably.

Despite his good health, Gerry died unexpectedly. Maggie attended his funeral and told Fiona she could call her at any time. A few months later Fiona called in to see Maggie. She was flustered and looked upset. She advised Maggie that her son had found a new financial adviser who would look after her affairs. She was very apologetic and gave Maggie a letter from the new adviser.

Maggie was aware of the advisory practice that had recently opened across the river. She’d heard some comments about this new firm’s high-risk approach to investing and their involvement in some speculative property developments on the outskirts of town. Maggie was concerned this new group was not a good fit for an elderly widow.

Maggie contacted Fiona’s son Charles, but he refused to take or return her calls.

A few months later Maggie noticed Fiona’s house was for sale. She was incredibly surprised, knowing how much she loved her home and garden. Maggie decided to visit and check in on her. She knocked on the door and was surprised at Fiona’s appearance when she answered. She’d lost weight, had clearly been crying and looked unkempt.

Over a cup of tea Maggie gently teased the story from her. Charles had taken her to see the new adviser, Ben. Between them, they convinced her to withdraw her superannuation and cash in her investments, placing the proceeds into a property development being managed by the financial firm Ben worked for. They had also convinced her to sell her home of 32 years. Charles was to use some of the proceeds to build her a granny flat at the back of his home, pay off his mortgage and put the rest into the property development.

Fiona explained she didn’t want to sell her home. She didn’t want to move, but she felt she needed to for Charles’ sake. He and Ben had made her feel that if she didn’t support the property development, it might not go ahead and that would be bad for both of them. Fiona had paid a substantial fee to Ben for the advice but could not say what it was for, nor did she understand what ongoing services would be provided.

Maggie believed Patricia had been coerced by both Ben and Charles, a victim of elder abuse; she helped her lodge a complaint against Ben with the Australian Financial Complaints Authority (AFCA).

AFCA found that Ben:

had not acted in Fiona’s best interests in recommending she divest her investments and her home
had also not acted in Fiona’s best interests by recommending an investment well outside of her risk profile
had not acted to protect her from financial coercion by her son
had failed to adequately document the advice in an SOA
had a clear conflict of interest in his investment recommendation as both his firm and he personally had funds tied up in the development.

As a result, Ben potentially breached the following standards in the Code:

Case study four: Dishonesty

Former financial adviser Dennis was a sole practitioner whose financial advice practice focused on dealing in securities and advising on self-managed superannuation funds (SMSFs). He was investigated by ASIC after clients Colin and Sandy grew concerned about unauthorised funds being withdrawn from their SMSF.

Although Dennis did not initially cooperate with ASIC’s investigation, the investigation eventually uncovered his dealings and found Dennis had:

made 167 unauthorised transfers, impacting 13 clients, totalling nearly $3 million
used these stolen funds for personal reasons, primarily gambling
made false representations to clients and other third parties about those unauthorised transfers with the intent to conceal his dishonest conduct.

Dennis was convicted of 18 dishonesty offences and sentenced to seven years’ imprisonment with a non-parole period of four years. He was also permanently banned from providing financial services or from controlling an entity carrying on a financial services business.

ASIC found Dennis took advantage of the trust placed in him by his clients and determined a permanent banning of Dennis was appropriate because of the seriousness of the misconduct and the need to prevent future harm to consumers.

Ethics are integral to the foundation and success of a financial advice practice. They provide a framework for building trust, they support integrity and ensure that financial advisers consistently act in the best interests of their clients. Ethical conduct is not only a legal and professional obligation but also a key factor in fostering a positive and successful financial advice practice.