The word “ethics” appears only a handful of times in the 347 pages of the first volume of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, not including its footnotes and list of abbreviations.

It appears just once in the 487 pages of Volume 2. And it appears not at all in the 107 pages of Volume 3. It’s a curiously light touch on an issue that would seem to be at the core of the report’s narrative.

The inquiry is unambiguous in its view that just about all of the misconduct it examined, including during nine excruciating days of public hearings into financial advice, was caused by two main issues: greed and dishonesty. It makes what it describes as “one simple, but telling, observation”.

“All the conduct identified and criticised in this report was conduct that provided a financial benefit to the individuals and entities concerned,” it states. “If there are exceptions, they are immaterial. For individuals, the conduct resulted in being paid more. For entities, the conduct resulted in greater profit.”

The Hayne royal commission has made it as clear as it’s possible to make it that the financial services industry is riddled with conflicts, and that the root cause of conflicts is misalignment between the interests of the industry and those of its consumers.

The inquiry has been criticised for drawing broad conclusions from a handful of case studies. But it has received and considered more than 10,000 submissions, and it could never shine a light on the good things the financial services industry does because its brief was to focus on the bad things.

“Like any inquiry that is required to investigate whether there has been wrongdoing, and if there has, to identify its causes, there is always a risk that the resulting picture of the industry is distorted,” the interim report states.

But even if the picture is distorted, the fact remains it’s the picture that is in plain view of the public. The question for every individual participant in the financial services industry now is what to do about it. The issues the inquiry raised demand a committed response by every individual working in the sector.

Behaving ethically is, of course, critical in rebooting the public’s trust in the financial services industry and in financial advice in particular. But ethical behaviour cannot necessarily spontaneously flourish in a system with built-in conflicts. Addressing the conflicts that the Hayne royal commission has identified within the industry will require a concerted effort.

It will demand that individuals take accountability and responsibility for their own behaviour. The remedy will start and end with true client-centricity, which means putting the interests of the client first – ahead of an adviser’s interests and ahead of the interests of the adviser’s employee or licensee.

Addressing behavioural change, particularly in large numbers of people, is not going to be easy but it’s going to be essential to the industry recovering and thriving in the future. A code of ethics being developed by the Financial Adviser Standards and Ethics Authority (FASEA) – with which all financial advisers will be required to comply – will provide an invaluable starting point.

Regular readers of Professional Planner will recall the idea that a profession is built on three pillars: normative, cognitive and structural. The cognitive pillar includes things such as minimum education standards and expected levels of competence; ethics forms a component of the normative pillar, by setting out clearly the standards and modes of behaviour that a profession demands of its own members. The structural pillar covers things like the composition and purpose of professional bodies (but that may be an issue for another article).

Breaching a profession’s code of ethics should lead to a sanction against the transgressor, imposed by the profession itself. It may include expulsion from the professional community for serious enough violations.

The inquiry’s interim report examines the possible impact of FASEA’s code of ethics, and the role of the compliance schemes and monitoring bodies that will be set up to keep an eye on advisers’ adherence to the code. It states, “Consistency between various code monitoring bodies in enforcing discipline will therefore be important” in ensuring uniform, industry wide standards are set and maintained and that breaches are identified and acted upon.

The interim report notes that an adviser under investigation by a compliance monitoring body will not be allowed to just switch compliance schemes to evade sanction.

But the inquiry is at pains to point out that professional codes are not the same as laws. Codes that address personal behaviour and accountability, on the one hand, and laws that govern financial services providers, on the other, may have similar objectives, but they serve “different normative purposes”.

“It is laws, and not codes of ethics, that are the proper repositories for basic norms of conduct,” it states. “This qualitative disparity mandates a difference in approach to contraventions of each.”


The interim report of the royal commission states that “different enforcement” may be all that’s necessary to ensure financial services providers apply basic standards of fairness and honesty in dealing with consumers.

The basic ideas are very simple, the report states, and the law may in fact need only to be simplified to ensure that financial services providers observe six basic principles:

1 | Obey the law
2 | Do not mislead or deceive
3 | Act fairly
4 | Provide services that are fit for purpose
5 | Deliver services with reasonable care and skill
6 | When acting for another, act in the best interests of that other.

In other words, breaking the law shouldn’t be addressed the same way as breaching a professional code and if an adviser breaks the law then it should be the law that deals with it, not a professional body, code compliance monitoring body or licensee.

“A breach of the code of ethics must not be allowed to obscure [a breach of the law] or be treated as more significant than a breach of the law,” the report stated.

Being expelled from a profession for unethical conduct is not an equivalent punishment to being found guilty in a court of law.

Nevertheless, a solid and widely observed code of ethics is an important block for rebuilding trust in the industry. As the royal commission’s public hearings continued to turn up case after case of misconduct, a typical response appeared on social media (this is a mildly edited version): “This was a culture issue, where the environment created by aggressive sales targets and incentives…allowed a lack of personal ethics to thrive. We can talk about banning of conflicted remuneration and training to identify customers experiencing vulnerability; however, personal accountability and ethical behaviour will be the first step in rebuilding consumer trust.

“I certainly feel for the majority of us in insurance who are genuinely decent people conducting our business fairly and honestly. Our industry is much better than this.”

Without picking on the author of this particular comment, because it is a broadly representative view, it highlights the biggest issue facing the industry and the greatest challenge to everyone who works in it.

Firsthand experience has demonstrated how difficult it can be to firstly recognise that a conflict exists and then make the decision to leave an organisation, when a significant percentage of income is at risk. But a financial consideration can’t be allowed to determine an ethical decision. Choices frequently must be made at a personal cost to the individual. That’s a real test of ethics, and it has little to do with the law.

Simon Hoyle is head of market insight for CoreData Research.
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