Efficiently, Honestly, Fairly
In my other life – in IMAP – through its Regulatory Group, we’ve been doing a lot of work on the implications of the FASEA Code of Ethics for advisers. We have found it to be riven with impracticality, internal contradiction and conflict with established law. Working through these issues, and looking for guidance, we have found ourselves reflecting on the places where higher principle and formal regulation meet.
These reflections are given added urgency by a 30% market crash.
This meeting point of higher principle and black letter regulation has no better example in this context than
S912A (1) (a), of the Corporations Act. I.e. the very first, general obligation of a licensee is;
A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly (our emphasis)
“Efficiently, honestly and fairly” as a phrase has generally entered the vernacular of the advice profession and, because the meaning of the words individually are broadly understood, it doesn’t get examined much.
In thinking about this week’s note, I came across an excellent article on this topic written last September by Grant Holley of Holley Nethercote which I recommend you read.[1]
Given the volatility of markets over the past few weeks and the likelihood that this will be repeated a few more times before we return to more normal conditions, what should an adviser do to ensure that they are equipped to provide their services “Efficiently, Honestly and Fairly”? Planning to cope with all adverse situations, begins with preparation.
It is incumbent upon the principals of advice business to ask themselves a set of questions:
How will we be able to meet the needs of all our clients if the circumstances of the GFC, or 1987 crash or any other financial disaster are repeated? This is the “Fairly” element, because it asks how we will equitably serve ALL our clients.
If we don’t think we can provide service at a time when it is most needed, if we can’t pass the Fairly test, is there a risk that we do not pass the “Honestly” test either? Did we create an expectation for each client, not that we could dodge the falling market, but that we would be there to serve them to the best of our ability when the time came?
Which leads us to the “Efficiency” obligation. In the article I mentioned above Grant Holley points out that Efficiently has two meanings – the more generally used one of the “effective use of resources”, but a second one of “competency”. He goes on to say that the courts have generally been involved in cases relating to the second meaning but that the first, more normal meaning broadly underpins the whole development of financial services law and regulation.
In our view, a licensee who proactively plans to meet their Honestly and Fairly obligations will seek to meet the Efficiency test in both dimensions –
setting up your human and technological resources so they can achieve the most possible when called on, and
ensuring that the decisions and processes which the organisation undertakes are performed promptly, competently and equitably.
This level of preparation and planning needs to be undertaken at an organisational level – after all the obligations from s912A are on the licensee.
What they mean is that the old operating model of leaving it to individual advisers to work out the portfolio implications client by client and execute portfolio by portfolio, starting with the surnames that start with A or the biggest portfolios or the ones who missed out last time – or whatever – should be gone forever.
Have a good week.
Toby Potter