While FASEA’s Code of Ethics is largely appropriate, world-renowned ethicist and Princeton University professor Peter Singer reckons the education authority fell short on conflicts of interest, which they “didn’t quite get right”.
Delivering a keynote speech at the Professional Planner Best Practice Forum in Sydney this morning, Singer brought up the Financial Adviser Standards and Ethics Authority’s treatment of vertically integration, and said its interplay with conflicted adviser remuneration remains a “grey area”.
Singer compared FASEA’s third ethics standard – which says advisers cannot “advise, refer or act” if a conflict exists – to the standards’ explanatory note, which says that while you won’t breach the standard for merely recommending products your employer offers, you will breach it if a variable part of your remuneration depends on it.
“So, no volume bonus and no commission for putting products in – that’s pretty clear,” Singer said. “But what if recommending those products puts you in the good books with your employer? Isn’t that relevant to your future success in the company, and possibly to your pay rises in future years which are not volume bonuses?”
Singer warned FASEA was trying to draw “a pretty fine line” between the code and the explanatory statement. The education authority nailed most of the ethics standards, he believes, but not this one.
“Perhaps this was an area they didn’t get right, or perhaps they didn’t dare to push hard enough to get it right, because there seems to be a bit of a clash with what they’re saying about conflicts of interest, [and] this line between volume bonuses and remuneration,” he explained.
The ethicist suggested FASEA should have either banned financial advisers from working for institutions that offered products or, if that wasn’t feasible, putting up barriers that stopped advisers from advising people to invest in those products.
“One of those two things would have been more consistent with what they’re saying about avoiding conflicts of interest,” he said.
The disclosure misconception
Singer also identified gaps in advisers’ understanding of the code, and highlighted the misconception some still have that disclosure is a cure-all for conflicted advice provision.
The explanatory statement clearly states that explaining a conflict does not absolve advisers of the duty to abide by standard three, Singer said. “It seems like not all of you necessarily know that,” he added.
“I find the juxtaposition interesting because the explanatory statement explicitly says that [disclosure is] not enough,” he said. “If you have a conflict of interest you must not act; exposing it to the client and getting their consent is not sufficient.”
That some advisers aren’t aware of this justifies the ethics portion of exam, he noted.
“Maybe that’s the point of requiring people to take exams – so that you know where you are in this situation,” Singer said.
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