CPD: Ethics and criminality

Ethical considerations lie at the heart of financial advice, shaping the relationship between advisers and their clients and underpinning the trust upon which this relationship is built. Despite this, a small number in the industry act with criminal intent. This article, proudly sponsored by GSFM, delves into the intricate interplay of ethics and criminality within the realm of financial advice.

Financial advice plays an important role, one that empowers individuals and organisations to make informed decisions about their financial future. In an increasingly complex and volatile financial landscape, the guidance of knowledgeable and experienced advisers can make the difference between financial success and failure.

From retirement planning to investment strategies, debt management to estate planning, the expertise of financial advisers helps individuals navigate the intricacies of financial markets, mitigate risk and maximise growth opportunities. By providing personalised advice and fostering long-term trust-based relationships, financial advisers offer invaluable support to help their clients achieve their financial aspirations and objectives and secure a more stable and prosperous future.

Ethical considerations lie at the heart of financial advice. They shape the relationship between advisers and clients and underpin the trust upon which this relationship is built. Central to ethical conduct in financial advice is the principle of fiduciary duty, which mandates that advisers act in their clients’ best interests with undivided loyalty and utmost good faith.

This duty encompasses the obligation to provide accurate and unbiased advice, disclose potential conflicts of interest, and prioritise clients’ needs above personal gain. Transparency, integrity, and professionalism are essential pillars of ethical advice and are clearly encapsulated in the values upon which the Financial Planners and Advisers Code of Ethics 2019 (Code) is centred on. The Code ensures that every client is fully informed and empowered to make decisions that align with their financial goals, risk profile and values.

The Code also requires that to meet its rigorous standards, advisers must adhere to industry standards and regulatory requirements, continuously update their knowledge and skills to provide the highest level of service, and finally, uphold the trust and confidence of their clients. By embracing ethical principles, financial advisers not only uphold the integrity of their profession but also foster stronger, more enduring relationships with their clients built on mutual respect and trust.

Ethical framework for advice

In Australia, the financial advice profession operates under a robust framework of twelve ethical standards (figure one) designed to uphold integrity, transparency, and accountability in the provision of financial advice.

These standards set forth the expectations and obligations of financial advisers, outlining principles that promote the best interests of clients, the integrity of the profession, and the trust of the broader community. The Code serves as a comprehensive blueprint for ethical behaviour and decision-making and by adhering to these standards, financial advisers demonstrate their commitment to maintaining the highest level of ethical conduct and ensure the interests and well-being of their clients remain paramount in all aspects of their practice.

There are two types of ethics relevant to financial advice: deontological ethics and virtue ethics.

Deontological ethics

Deontological ethics has its roots in Greek philosophy and places importance on the relationship between duty and the morality of human actions. The term deontology is derived from the Greek deon, “duty,” and logos, “science.”

Deontological ethics holds significant relevance to the field of financial advice. Within this ethical framework, actions are judged based on their adherence to moral principles and rules, rather than their outcomes. In the context of financial advice, deontological ethics emphasises the importance of adhering to ethical principles and professional standards regardless of the potential financial benefits or outcomes.

Financial advisers that operate under this framework of the Code are guided by moral imperatives such as honesty, integrity and transparency in their interactions with clients. They recognise their duty to act in the best interests of clients, maintain confidentiality and avoid conflicts of interest.

By prioritising ethical duties over personal gain or the pursuit of profit, advisers who practice deontological ethics contribute to the cultivation of trust, credibility and integrity within the financial advice profession and foster enduring relationships built on principles of honesty and ethical conduct.

Virtue ethics

Virtue ethics is rooted in the cultivation of character and moral virtues. Within a ‘virtue ethics’ framework, the focus shifts from adhering to specific rules or duties to embodying virtuous qualities such as integrity, honesty, prudence and fairness.

For financial advisers, virtue ethics emphasises the importance of developing a virtuous character and cultivating ethical virtues that guide decision-making and behaviour. Advisers practicing virtue ethics prioritise building trust and fostering meaningful relationships with clients based on mutual respect and empathy. They strive to demonstrate moral excellence in all aspects of their practice, from providing sound and unbiased advice to acting with integrity and transparency in their dealings.

By embracing virtue ethics, financial advisers not only uphold the highest ethical standards but also contribute to the cultivation of a culture of integrity and trust within the profession, thereby enhancing the overall wellbeing and trust of not only their clients, but also the broader community.

Both deontological and virtue ethics are relevant to financial advisers. Both are enshrined in the values upon which the twelve ethical standards are based (figure two). Financial advisers are required to act in a way that demonstrates, realises and promotes each of these values. Further, the law intends that all provisions of the Code are to be read and applied in a way that promotes the following values. While the values detailed in figure two can be said to enshrine value ethics, the standards themselves are an example of deontological ethics.

Each of the five values relates to specific ethical standards that must be applied to all interactions with every client. As such, to meet the spirit and legal obligations of the Code, advisers must embrace both deontological ethics and virtue ethics.

Ethics and criminality

The ethical landscape of financial advice is not straightforward. Unanticipated conflicts of interest can arise, fiduciary duties may clash and regulatory loopholes might contribute to an ethical ‘grey’ area. These are issues that financial advisers must navigate daily.

The first quarter of 2024 saw ASIC take enforcement action against eight individuals or organisations in the advice industry^[2]. These activities ranged from corporate matters such as ‘not providing financial services despite being licensed to do so’ and insolvency, through to the more criminal: cases of fraud, providing unlicensed financial advice and dishonest conduct.

Although the regular headlines in the trade press would suggest otherwise, cases of criminality in financial advice are not common. Unfortunately, when they do arise, they can gain notoriety. Consider the example of Melissa Caddick; as well as coverage in the mainstream media, the story also became the subject of both a podcast and television mini-series. Through the lens of traditional and trade media, it can sometimes seem that the spectre of criminal behaviour looms large and casts a shadow of doubt on an industry built on trust and integrity. This reinforces the importance of standard 12, the requirement to uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest.

ASIC’s regulatory powers

ASIC’s primary objectives are to facilitate markets, promote trust and confidence in the financial system, and take action to enforce the laws it administers, which includes the Code of Ethics. Consequently, ASIC is empowered to take a range of criminal, civil and administrative action to address alleged misconduct within its jurisdiction.

ASIC investigates and takes enforcement action to detect, disrupt and respond to unlawful conduct. It aims to prevent and deter actual and future misconduct, improve standards and behaviours within its regulated population and importantly, reduce the risk of harm to Australian consumers and investors.

When deciding whether to investigate and take enforcement action, ASIC considers a range of factors that vary according to the nature and circumstances of the suspected misconduct. However, ASIC typically considers the following four factors when selecting matters for formal investigation and possible enforcement action:

1. Areas of significant harm.
2. Broader public benefit.
3. Issues specific to the case.
4. Alternatives to formal investigation^[2].

ASIC focuses its enforcement actions on preventing and addressing significant harm to consumers, markets and our financial system and prioritise those that involve:

• actual or potential harm to vulnerable consumers or investors, particularly if the behaviour is predatory
• misconduct that has caused or may cause widespread public harm
• misconduct that is likely to have a significant market impact, which includes its impact on Market integrity and the confidence of investors and consumers
• misconduct that is systemic or widespread
• misconduct that has recently emerged or is part of a growing trend.

There are three types of enforcement action ASIC may pursue and it may take one or more of these to address a contravention of the law:

• criminal proceedings
• civil proceedings
• administrative and other enforcement action.

The type of action taken is subject to what the laws governing the particular misconduct allow.

In the case of criminal proceedings, the laws administered by ASIC permit the courts to impose criminal sanctions for conduct ranging from minor regulatory offences to serious offences involving dishonesty. Examples of the sanctions that may be imposed are prison terms, criminal fines and court orders such as community service. ASIC is most likely to pursue criminal proceedings in cases of serious and harmful wrongdoing, with the view to deter similar misconduct in the future. It generally considers criminal proceedings for offences that involve serious misconduct that is dishonest, intentional or highly reckless, even when civil action is also available.

Criminality and advice

So, what sort of action could result in ASIC instigating criminal proceedings? Here are just a few examples.

Fraud

Fraud is possibly the most common criminal offence perpetuated by advisers against their clients. Defined as “wrongful or criminal deception intended to result in financial or personal gain” by the Oxford dictionary, fraud can take a range of forms including:

• Falsifying documents
• Forging signatures on documents to authorise transactions without the client’s knowledge or consent
• Having money paid into personal accounts
• Running Ponzi schemes
• Fraudulent investment schemes
• Elaborate investment ruses (such as that perpetuated by Melissa Caddick).

A case of fraud potentially breaches a number of ethical standards, including:

Money laundering

Financial advisers may knowingly (or unknowingly) facilitate money laundering activities by helping clients disguise the origins of illicit funds through complex financial transactions. This can involve structuring transactions to avoid reporting requirements or knowingly investing proceeds from criminal activities.

The Anti-Money Laundering and Counter-Terrorism Financing Act was introduced in 2006 and was designed to prevent and combat these crimes, which is essential to protect the integrity and stability of financial markets and the global financial system.

Holders of an Australian Financial Services Licence, including financial advisers, need to complete Part B of an AML/CTF program. Part B is focused on identifying clients and beneficial owners, including politically exposed persons.

You must outline how you know your clients and their beneficial owners, and the money laundering/ terrorism financing risk they pose. The program details the client information you collect and verify to make sure they are who they claim to be, or (for companies and organisations) that they exist and how you do this.

An adviser who is sloppy with paperwork may face enforcement action but is unlikely to face criminal proceedings. However, those found to have deliberately flouted the law with nefarious intent would face more serious charges.

In the situation where an adviser has been found to breach AML/CTF requirements, it potentially breaches the following ethical standards:

Insider trading

ASIC’s ongoing enforcement priorities includes maintaining an orderly market, which includes monitoring for potential cases of insider trading. Insider trading breaches Section 1043A of the Corporations Act 2001 and prohibits a person from trading in listed securities while in possession of non-public, price-sensitive information.

The ASX regulatory guide explicitly states that Key Management Personnel, employees and family members are not permitted to trade when there is sensitive information not yet publicly disclosed. Inside information can easily come across an adviser’s path in the daily course of business and there’s nothing wrong with that – as long as they don’t act on it. Examples could include:

• A client who discusses a significant new contract won or issued by their business when either party to that contract is a listed company
• A friend who bemoans a substantial revenue hit for the listed company they work for and the potential ramifications
• Dinner party conversation in which you learn of a major merger between two listed companies
• An event at which a fellow attendee excitedly tells you how close his firm is to a significant innovation that will potentially boost the company’s share price
• An acquaintance working at the local council who happens to mention the reclassification of an area of commercial property to residential zoning.

While being in possession inside information is not against the law, advising a client to act upon it is and would likely breach the following standards:

Dishonest conduct

As with so many acts of criminal behaviour, dishonest conduct can be viewed on a continuum, one where a first or minor misdemeanour may result in a minor enforcement action, through to more serious cases that face a criminal trial. Examples can include:

• misrepresentation of service offering
• misrepresentation of qualifications and abilities of individuals and/or business
• misrepresentation of products
• churning
• ponzi schemes
• pump and dump schemes

Tax evasion

While some tax minimisation strategies may exploit the grey zone between right and wrong, tax evasion is illegal. A small number of advisers may assist clients to evade tax by providing false information for tax returns, hiding income and assets offshore, or using other illegal tax avoidance strategies. Tax evasion is a serious crime that can result in criminal charges and severe penalties from both ASIC and the ATO.

Ethics, criminality and your practice

In a financial advice practice, maintaining ethical standards is not just about your own conduct but also about the actions of your colleagues and referral partners. Regular education and reinforcement of ethical practices are crucial to ensure the integrity of your business and relationships.

Dealing with ethical dilemmas, which often exist in shades of grey, requires time and effort for resolution. However, addressing these challenges can offer valuable insights and contribute to the improvement of your practice, helping to prevent or resolve similar issues in the future. In cases where dilemmas edge on criminality – or are well down that path – quick action is required.

It is easier to take appropriate action when your practice has procedures in place to deal with issues. These could include:

• a code of conduct that embodies the Code of Ethics and ethical practice
• well documented policies and procedures that include an escalation policy in the event of malfeasance or criminal behaviour
• regular training sessions for staff that use real-life examples and case studies to facilitate meaningful training and discussion within your team
• support for team members who raise issues, including whistle-blower protection.

The presence of ethical grey areas underscores the importance of alignment among all employees. You cannot assume that each of your team shares a highly developed ethical sense consistent with your expectations. Therefore, ongoing education, restatement, and reinforcement of integrity, corporate values and ethical behaviour are essential components of your educational efforts.

Case studies

The following case studies are mostly 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 for each, potential breaches of the Code of Ethics are identified.

Case study one: Dishonest conduct

Adelaide-based financial adviser Dan was charged with 15 counts of dishonest conduct in the course of carrying on a financial services business, ACME Financial Planning.

ASIC alleged that Dan acted dishonestly by completing and submitting adviser fee withdrawal forms for 17 of his clients’ accounts for amounts totalling approximately $135,000, knowing that the forms were not genuine. In the first instance, ASIC successfully applied to the court for a freeze order for the adviser’s assets.

Each offence of engaging in dishonest conduct contrary to s1041G(1) of the Corporations Act 2001 (Cth) carries a maximum penalty of 15 years imprisonment. The Court granted Dan conditional bail; the conditions included that he surrendered his passport, remains in Australia and that he cannot communicate with prosecution witnesses other than through his legal representatives.

Dan’s dishonesty would likely see him breach the following standards of the Code of Ethics:

Case study two: A Ponzi scheme unravels

Robyn joined a boutique advice firm after several years working for a larger practice. In the first few weeks, she became aware that it was significantly ‘lighter’ on paperwork that her prior firm.

She was one of a team of four advisers. The other three had worked together for some time and it became apparent that they were running an investment scheme for clients that promised good returns. The clients paid in money and the advisers traded a range of global markets to generate a promised rate of return. A couple of her clients heard about it from other clients and asked if they could get involved.

Initially her colleagues were cagey about her introducing clients. However, after working with her for a couple of months, they decided to allow three of her high net worth clients join for a minimum investment of $250,000 each.

Before allowing her clients to invest, Robyn quizzed her colleagues about the structure of the investment and the types of investments they traded. After persistent questioning and a series of inadequate responses, Robyn suspected her colleagues were running a Ponzi scheme. She contacted the compliance team at the licensee, who conducted a surprise audit. They discovered that the Ponzi scheme had been operating for two years and that the three advisers had personally benefited from the money invested. The licensee referred the case to ASIC.

Each of the advisers was charged with dealing in the proceeds of crime and engaging in dishonest conduct in relation to a financial product or service. By recognising that her colleagues were doing the wrong thing and bringing it to light, Robyn acted ethically and upheld a number of the standards in the Code of Ethics, including:

Case study three: Defrauding SMSFs

The trustees of SMSF ACME Corporation initiated proceedings against their financial adviser Barry White and his business ACME White & Co for unpaid returns and money held in trust.

Although a licensed financial adviser, Barry primarily operated as a private investor and traded complex bank instruments. He invested in private placement programs (PPP) which required capital as proof of funds to trigger a line of credit enabling him to facilitate arbitrage transactions involving bank instruments in the US and Europe. He began to obtain money from investors, primarily SMSFs, to increase his proof of funds to the required levels for his trading activities.

Following an ASIC investigation, it was alleged that Barry defrauded $29 million from 13 SMSFs. The maximum penalty for each offence of fraud in the state where Barry operates is seven years imprisonment, or 10 years if the person deceived is aged 60 years or older.

As well as potentially contravening a number of laws, Barry potentially breached the following standards in the Code of Ethics.

Regulatory bodies, financial institutions, advisers and advice practices all have a role to play in upholding the highest standards of ethics and integrity in financial advice. Only by confronting the ethical (and on occasion, criminal) challenges head-on, can the industry strive towards a future where financial advice is synonymous with trust, transparency and accountability.

 

 

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: Ethics (1.0 hrs)

please log in to start this quiz

 

——–

Notes:
[1] https://www.legislation.gov.au/Details/F2019L00117
[2] https://www.moneymanagement.com.au/news/financial-planning/busy-q1-asic-advice-action
[3] https://asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-s-approach-to-enforcement/