One key recommendation outlined in the Parliamentary Joint Committee (PJC) Inquiry into financial products and services report relates to the need for a legislated fiduciary responsibility between financial planner and client. Since the release of the report, the speculation about what this means exactly has run rampant.
The Financial Planning Association (FPA) called for the establishment of a true fiduciary standard in our own submission to the PJC Inquiry, having adopted a fiduciary standard in our revised Code of Ethics. It’s a good thing that people are thinking about what a “fiduciary” responsibility for financial advice really means.
But as with all things, it would be immensely helpful if we applied a sensible framework of reason to the debate before letting the issues run away with us, with an inevitable “it’s just too hard” conclusion. Over the past few weeks, the media has presented an interesting crowd of voices, all of them right in their own way.
It’s for this precise reason that we first need to acknowledge that when it comes to defining “fiduciary”, most people are right – even the ones who disagree with each other. The problem is that each commentator thinks that theirs is the only view about the fiduciary, when there are at least three legitimate and different perspectives that need to be factored into a discussion.
These include: the view of the courts and common law; the view of government and statutory law; the view of the profession and professional “law”, established through structures like the FPA’s Code of Professional Practice. The pundits make the mistake of only seeing the first of those and miss the fact that the other two are powerful sources of advice and expectation, often with far wider ramifications.
Let’s deal with each of them separately: On the first issue of a common law perspective – all of the pundits have been correct about this. When boiled down, the common law view takes a clear and tough stance on the fiduciary that focuses on the concept of “undivided loyalty” to the client.
Simplistically, this seems a challenging position in an industry with licensing and remuneration models that imply “divided loyalties”. However, the courts have also recognised that financial planners work in a world with overlapping contracts and obligations.
When asked to, the courts have confirmed that whilst the relationship is clearly a fiduciary one, where the planner has clearly communicated their “divided loyalties” (or “conflicts”, if you prefer) and sought appropriate consent from their client to allow those loyalties, then the fiduciary obligation is able to be modified.
You would be right in thinking that this sounds a lot like reliance on “disclosure” rather than good practice, and we have all agreed that the current model of disclosure has not served our profession or clients well.
The courts have also acknowledged this; but they have resisted the temptation to rewrite the law and overturn hundreds of years of “informed consent” fiduciary thinking. Instead, they have taken the appropriate path in considering the “facts of each case” brought before them and in so doing have challenged the Government to write new law if they want a more universally applied principle.
This brings us neatly to the statutory issue – and where it seems most of the pundits have missed the point entirely. The reality of life in financial services is that the Corporations Act specifically encourages a divided loyalty from a financial planner by making it a prerequisite for an individual to be authorised by an Australian Financial Services Licensee (AFSL) holder before they can provide advice.
This simple but profound disregard for the individual professional and their obligations to their client embeds a loyalty to the corporate AFSL holder who naturally has obligations to other parties (shareholders, directors, regulators et cetera). This challenge of divided loyalty is daily dealt with through the professional commitment of advisers and licensees in favour of their clients, but it’s the law itself that encourages the conflict.
This is one of the reasons that we argued for the term “financial planner” to be enshrined in the law, and for recognition of “professional membership” in our submission. However, this view was not supported in the Ripoll report that specifically noted (at Recommendation 1) that there will be “a fiduciary duty for financial advisers operating under an AFSL”.
The report didn’t go on to address the issue of what a fiduciary is and how they will operate, despite voicing high hopes that it will change remuneration practices (as suggested by ASIC) or expand the choices of products and price benefits to clients (as suggested by Industry Super Network) .
So, how then will they reconcile their expectations that a “fiduciary” duty will transform the way advice is provided and remunerated for, noting the current divided loyalty embedded in the Corporations Act? The FPA is of the view that the only way to achieve clarity and certainty is to apply a different definition of “fiduciary” obligation in statutory law, than exists in Common Law.
Doing nothing will not create the change we all seek and likely mean that the fiduciary obligation will always be modified in reference to the licensee-adviser-client contract, supported by appropriate disclosure and consent. Finally, and most importantly, the third perspective that deals with professional obligation is too frequently overlooked.
We have thought long and hard about these issues in the development of our own professional regulation through the FPA’s Code of Professional Practice, which now already responds to the ethical scenarios at the heart of the Ripoll committee’s concerns about conflicts in the industry.
Just a few quick examples straight from the Code of Professional Practice illustrate our view on this. First and foremost the Code places a general obligation on members to place the client’s interests first.
This requirement appears as the first principle in the Code of Ethics and is described as: “Placing the client’s interests first is a hallmark of professionalism, requiring the financial planner to act honestly and not place personal and/ or employer gain or advantage before the client’s interests.”
The ethical principle of integrity is also important in this context. In the scenarios considered in the PJC report it is difficult to see how the adviser can comply with the principle of integrity, and knowingly recommend a more expensive product in the absence of any other benefits to their client. This principle is captured as: “Integrity requires honesty and candour in all professional matters.
Financial planners are placed in positions of trust by clients, and the ultimate source of that trust is the financial planner’s personal integrity. Allowance can be made for legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.
Integrity requires the financial planner to observe both the letter and the spirit of the Code of Ethics.” Similarly, the Code of Ethics entreats an FPA member to “provide professional services objectively”, as follows: “Objectivity requires intellectual honesty and impartiality.
Regardless of the services delivered or the capacity in which a financial planner functions, objectivity requires financial planners to ensure the integrity of their work, manage conflicts and exercise sound professional judgment.” These are not just empty words either.
The FPA undertook 115 investigations last year, leading to a number of sanctions and banning orders, and we will continue to enforce the professional expectations in far greater volume than the courts are likely to be able to.
So, in summary, the law has a lot to say about the nature of the fiduciary, but so does the profession. As we move to a legislated response, and then implementation across a broad range of financial advice providers, it is important that the definition be scripted clearly in statutory law; that the industry and Government work together to determine the practical implications; and that we do not overtly add to costs and complexity with little regard for what it is we set out to achieve in the first place.
