FASEAs Latest Guidance is No Help At All
Last week FASEA released another explanatory guide to try and address some of the feedback in public media and specifically to FASEA about the Code of Ethics.
Compared to the previous explanatory guides from October 2019 which contained extensive examples in relation to each standard, this version contains generalised observations and one or two examples in relation to each Standard.
A few things to remember about the Code:
It applies to individual advisers not to organisations
FASEA have said in public forums and in writing that the Code is intended to set a higher standard than is required under the existing law, The Corporations Act in particular. Simply complying with the law will not be sufficient to achieve compliance with the Code.
However, the Code has the force of law and each Standard is black letter law and must be complied with separately from each other Standard. FASEA’s narrative around this has been to ignore this fact with statements such as “You should not consider each of the values and standards in the Code in isolation. They are intended to operate in combination…”
The pivotal Standard is Standard 3. To refresh your memory
“You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”
The law around conflicts of interest is well defined in a number of areas of law – for example the duty a lawyer owes their client. FASEA are trying to rewrite this to cover up the fact that Standard 3 as it is written today effectively makes it impossible to operate as an AFSL where the business owners are also advisers.
But it does nothing to impede the salaried or institutionally owned advice model where the adviser is not directly affected by business success.
Apologies for quoting at some length from the Explanatory Guide, but it’s important to understand how contorted FASEA has become in trying to pretend that this Standard is not quicksand for any adviser who owns a planning practice and provides more than time charged advice.
“The Code relates to actual conflicts of interest.”[1]
“Standard 3 of the Code is concerned with an actual conflict between duties advisers owe their client and any personal interest they have or an actual conflict between duties they owe their client and duties they owe another individual or organisation.”[2]
“In order to aid you in assessing whether you have a conflict of interest or duty, FASEA has developed a ‘standard for judgement’ that is familiar in law and is consistent with that applied in other professions.
The ‘standard for judgement’ for determining if an arrangement is conflicted and therefore prohibited is that if:
A disinterested person (an unbiased third party with nothing to gain or lose from how the question of conflicts is resolved),
Who knows all of the facts,
Could reasonably conclude (that is, has good reasons that other reasonable people would find convincing),
That the arrangement could induce the adviser to act other than in the best interests of the client then, that arrangement gives rise to a conflict and is prohibited.”[3]
So, whereas the Corporations Act is quite clear that conflicts of interest may arise in the provision of financial services and must be managed, and other professions such as the legal profession have well developed mechanisms for addressing and managing conflicts, FASEA is creating wholly new ground with a blanket ban on conflicts based on an assumption that “could” equals “actual”.
It is irrelevant whether an adviser has complied with
Standard 1 – obey the law, and
Standard 2 – act with integrity and in the best interests of your clients, and
Standard 4 – free, prior and informed consent, and etc through
Standard 10 – maintain a high level of relevant skills and finally to
Standard 12 – hold each other to account
An adviser will be liable for disciplinary action if “a disinterested person ..could reasonably conclude…that the arrangement could induce the adviser to act..”
This problem for advisers cuts across all aspects of an advice practice including ongoing advice fees SMSF administration and quite a number of other areas for advisers who own their practice or have an interest in their license.
ASIC says it believes that advice is important – remembering that ASIC is not responsible for FASEA or the Code – James Shipton, Chair of ASIC in response to a question from Bert van Manen MP about advice about withdrawing from Super and how to make advice affordable said:
“That work is under way... We certainly see the incredibly valuable role of financial advisers and financial planners right now.[4]” .
Could an adviser receiving ongoing advice fees, who recommended their client not make a $20,000 withdrawal from Super, despite it being legal to do so, be deemed to have a conflict of interest?
That will depend on what the disinterested person – or, more to the point – the single disciplinary body when we get one – could conclude.
[1] Financial Planners & Advisers Code of Ethics 2019 Guide October 2020 Page 7 (my bold emphasis)
[2] Page 17
[3] Page 18
[4] PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES Wednesday, 15 July 2020 p21