AFA head of policy and professionalism, Phil Anderson

The existing Code of Ethics for advisers contains a range of measures that will be impractical to implement, according to the AFA’s head of policy and professionalism, Phil Anderson.

Presenting at the Association of Financial Advisers’ National Roadshow in Sydney on Wednesday morning, Anderson identified several areas of the code he believed need to be amended, including ‘Standard 3’, which states that advisers “must not advise, refer or act in any other manner where you have a conflict of interest or duty”.

“We need greater clarity on this,” Anderson said. “Anyone who provides life insurance advice or receives a commission – that has to be seen as a conflict of interest.”

Speaking to to Professional Planner on the sidelines of the roadshow, Anderson referred to a question in the recent preparation exam, provided by the Financial Adviser Standards and Ethics Authority, that involved an adviser belonging to the same golf club as their client.

“Where do you draw the boundary there?” he said. “There are conflicts everywhere.”

Anderson made the point that advisers have always been taught to manage conflicts. The new code, however, is binary. The finite nature of Standard 3 is a reflection of what Commissioner Hayne identified in his royal commission final report as a failure by advisers to manage them successfully.

“You can’t even refer where you’ve got a conflict,” Anderson said, noting that reciprocal referral agreements advisers may have with accountants, SMSF specialist and legal professionals will be “potentially challenged”.

Another concern Anderson noted in the presentation was ‘Standard 2’, which requires advisers to act with integrity and in the best interests of clients. Neither of those directives posed a problem in themselves, he said, but the standard neglected to provide scope for limited or scaled advice that is provided without holistic knowledge of the client’s situation.

“It means you can’t just focus on a scaled piece of advice,” he explained. “If someone comes to you and says ‘I just want you to sort this out’, you’ve now got to look at their long-term interests and likely future circumstances.”

Other bones of contention for the AFA include Standard 6, which asks advisers to take into account the “broad effects” arising from the client acting on the advice. Again, Anderson noted, this directive did not accommodate scaled advice.

“In the absence of a crystal ball this is going to be a very costly exercise,” he told members. “You’re going to need to dig deep – deeper than you might have otherwise done – particularly if its only scaled advice that your providing.”

Standard 7 in the Code, which centres on client consent and disclosure, is also problematic. “There are post-FoFA defined service fee clients, there’s life insurance clients, there’s grandfathered clients. Are you going to be expected to get consent for those clients?”

‘Impossible to manage’

Anderson noted that the AFA is working with FASEA to “better understand the intention of the code”, which is a requirement for all financial advisers from 1 January 2020.

“In the absence of the guidance it’s impossible to manage it right now,” he said. “But we’re working with FASEA, we’re talking with them on that.”

Anderson acknowledged that a lot of the further guidance for the Code of Ethics is provided in FASEA’s ‘explanatory statement’, but contended that clients would be unlikely to read this or the ‘practice guidance’ FASEA will release to provide further context to the Code.

“The concern is if clients are still reading the code itself and comparing what’s happening. they’re probably not going to be cross referencing the practice guidance,” he said.

The AFA’s preference, he stated, would be for clarity around the Standards to be included in the code itself, rather than the attendant documents.

“The practice guidance is not the law, the law is the legislative instrument. The explanatory statement is the explanation of the law and the practice guidance is just further detail.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
3 comments on “Code of Ethics ‘impossible to manage’: AFA”
  1. Avatar Peter Humble

    The wording of Standard #3 has changed dramatically from the draft version floated June 2018, perhaps as a direct result of the finding from the Royal Commission. Whilst Ken Hayne himself stopped short of dismantling the vertically integrated (and conflicted) business model of the major institutions, the change in wording (with all of the very profound implications for currently conflicted advisers) would imply FASEA is intent on taking us down that road anyway. Perhaps he knew that was always going to happen and simply sort not to politicize the issue right before the election. You might say that the writing is on the wall – quite literally – on what needs to happen next. Fortune favours the brave folks. Be Brave.

  2. Avatar David Barber

    The article highlights how difficult it is for practitioners, be they Financial Advisers, Accountants or other professionals in referring work to other parties, especially if the referring party works in the same business – e.g. Accounting firms with finaical advice practices.

    Hopefully FASEA provides some useful guidance on this important issue.

  3. Avatar George Lawrence

    It is impossible to legislate for someone’s state of mind. Ethics and integrity cannot be put into words. A person either has it or they don’t have it. If they have it there is no need for rules or legislation. If they don’t have it no amount of rules or legislation will be adequate.

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