FASEA published the second version of its Code of Ethics on Friday which contains several explanatory changes that both exhort advisers to look at the standards holistically and detail remuneration dynamics that could lead to a breach.
Standard three of the Code of Ethics has not changed from the original Code, released in February, which states “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”
Several changes, however, stand out from the original explanatory statement dealing with conflicts, which caused consternation from advisers making the case that conflicts are unavoidable in the provision of financial services.
A new insert telling advisers to read and apply the entire Code “as a whole” echoes comments made by CEO Stephen Glenfield that advisers should read “the totality of the standard”, instead of “standard by standard”.
Another sentence tells advisers that the standard refers to “actual” conflicts of interest between duties to a client and personal interest. In a separate section, a relevant warning is given; “You should also be alert to challenges posed to your professional integrity by potential and perceived conflicts of interest or duty.”
Where the old version told advisers they wouldn’t necessarily breach the standards for recommending their employers’ products, but you would if a variable component depends on volume, the new version reassures them that they won’t breach “merely by being a duly remunerated employee”, as long as best interests duty and the other codes are adhered to.
The term “duly remunerated” is unexplained and unreferenced, leaving open concerns that while an adviser may not be directly compensated for volume sales they could be rewarded, for example, with a promotion. This could, however, be something that FASEA’s instruction to look at the Code holistically is referring to; other standards may be relied upon to cover these holes.
Another new section reassures advisers they will not breach standard three if they “share in profits generated by the provision of ancillary products and services to clients”, providing they are “incidental to the adviser’s dominant purpose in providing advice”.
This, too, is unexplained and will provoke conjecture. “Ancillary” could refer to anything from managed account services to insurance, depending on what is defined as ‘core’. The term “incidental” is a grey area that will be tested. More commentary on this from FASEA could follow.
A final change in standard three is a warning that advisers will breach if a “disinterested person, in possession of all the facts,” concludes that variable income has induced an adviser to not act in the best interests of a client.
This intimates that variable income – including asset-based fees and commissions – remains viable, but subject to best interest duty.
The outcry over the original Code’s section on conflicts was such that Phil Anderson, head of policy and professionalism at the Association of Financial Advisers, called the standards “impossible to manage” in June. “There are conflicts everywhere,” Anderson added.
The new version of the Code’s standard on conflicts does little to address this concern.