The Ethics Centre's Simon Longstaff and AFCA Ombudsman Shail Singh

Standard 3 of the Code of Ethics goes beyond the Corporations Act’s treatment of conflicts and should take precedence for financial advisers trying to understand whether to manage or avoid conflicts of interest according to Simon Longstaff, executive director at The Ethics Centre.

Speaking at the Professional Planner Digital Licensee Summit in Sydney recently in his capacity at the Ethics Centre – and not in his role as a board member at the FASEA, the government mandated body that formulated the Code – Longstaff addressed the contradictory relationship between the Code, which exhorts advisers to avoid conflicts of interest, and the Corporations Act, which says conflicts must be managed.

“Corporations law… talks about the fact that if there is a conflict of interest and this is how you go about managing it, but of course what the FASEA code says is that you cannot have a conflict of interest,” Longstaff explained. “Therefore, whilst the Corps’ Act says ‘this is what you do if there is one’, this extends the law and in that sense it makes that element inoperative to the extent that it applies to financial advisers.”

The confirmation that the Code sits above the law in its treatment of conflicts settles one of the major bones of contention the industry has had with the Code of Ethics, which Longstaff made clear should not be underestimated in terms of the strength with which it is wielded.

“I think people often fail to realise that the Code of Ethics is itself a piece of legislation, a legislative instrument that has the force of law,” he said.

 

Longstaff reminded the audience of licensees, advisers and business leaders that the whole point of having a standalone Code of Ethics was to go beyond the existing set of laws that gave rise to the need for a Code in the first place.

“The Code’s got be understood within the broad context with which it was brought into existence,” he said. “Firstly, the explanatory memorandum giving rise to this whole scheme made clear it was intended that the Code of Ethics go beyond existing law to address what was seen as a shortfall.”

A fairness lens on complaints

Longstaff was joined on the panel via video link by Shail Singh, Ombudsman for investments and advice at the Australian Financial Complaints Authority, who gave insight into AFCA’s own priorities in dealing with disputes that depend on multiple sources of truth.

“We look through a fairness lens, primarily,” Singh revealed. “Under our rule A14.2 we’re required to do what’s fair, but we’re also required to [heed] the law, codes of practice and previous AFCA decisions. Obviously, the Code of Ethics feeds into that.”

AFCA’s rule A14.2 states that decision-makers must do what is fair with regards to legal principals, applicable industry codes or guidance, good industry practice and previous determinations.

“Essentially the requirement of what we do is to act fair,” Singh said.

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. Contact at tahn.sharpe@conexusfinancial.com.au
6 comments on “Code trumps Corps’ Act on conflicts: Longstaff”
  1. Avatar Jeremy Wright

    Inconsistencies around interpretation and a plethora of views, does not help advisers who are drowning under Regulatory overload.
    It is all very well for Lawyers and Public servants to debate, though this does not solve the main issue, which is, we have a maze of complexity that is stifling any opportunity to grow our Businesses.

    80% of Australians now cannot afford advice due to the “improvements” we now live under and if it keeps up, 80% of advisers will not be able to afford to stay in the Business of providing quality advice.
    The solution is simple. It is called Simplification of Regulations that are consistent with the ideals we all want, though are lost in interpretation.

  2. I think I have to disagree with Simon on this one. Yes the Code is a new provision in the Corps Act but I don’t think it overrides the existing provisions. Surely (Treasury) would have modified the existing law, if that was the intention. Most bodies of law have tie-breaker provisions when there is a deliberate conflict provision.
    The way I view the Code is it echos/reinforces the current law, but requires Advisers to comply from a ‘behavioural’ perspective rather than a black letter law perspective. S3 is one such where Simon can add real value on how this might look. Advisers have the best interests duty and a series of ‘safe harbour steps’ to guide them (black letter law) however, the Code requires themselves to consider their behaviour, and reach deep to settle within themselves that the advice is in the client’s best interests. The Code is principles based and underpinned by 5 values. The Standards then are interpreted through this lens and, Simon’s suggestion that a literal interpretation is required, seems out of whack.
    There will always be a conflict of interest otherwise everything would be state run and no free enterprise. Even doctors (used as an example of a ‘true profession’) have conflicts of interest and, in most cases, do not work for no reward. They have the Hippocratic oath to guide them, planners have the Code.
    This industry will not emerge as a profession if advisers don’t get comfortable with self-reflection and understanding what biases etc they bring to the role. The suffocating state of over-regulation of the industry is because this has not be a feature. The Code is empowering individuals to make their mark and prove that we don’t need such a strangle-hold in order to get the right outcomes for both the client and the (industry)..

  3. Avatar Daniel Richards

    A code of ethics should not be a legislated instrument. This is a very odd set of circumstances. A good read here for anyone who wants it:

    https://www.intheblack.com/articles/2015/04/01/why-ethics-and-law-are-not-the-same-thing

  4. Avatar Craig Meldrum

    It’s convenient to say the Code trumps the Corps Act but we (the advice industry) desperately need the Government, ASIC, FASEA, AFCA and the associations to come together to nut out these inconsistencies between the Code requirements and our obligations under Chapter 7 of the Act and the regs.

    The confusion and conflict over the interpretation and application of Standard 3 is only one example. The multitude of inconsistencies is having material impact on how licensees and advisers produce compliant advice. It has created an unlevel playing field. I’m sure it would not surprise anyone to hear that some licensees (generally boutique and self-licensed firms) are completely burying their heads and have taken the failure to establish a code monitoring body at the end of 2019 as licence to continue on through 2020 paying no heed to the standards. Whereas larger and institutional licensees have take the bull by the horns and outside of any useful, practical guidance from Government or FASEA have interpreted and implemented the standards at great cost at a time when we have unprecedented change (and I’m not talking about C-19).

    But in short, trying to solve for that juxtaposition of meeting our legislative and regulatory obligations post FoFA and now the overlay the Code requirements is, without being too dramatic, killing affordable advice (look at the question of scoping advice to meet a client’s immediate need). A case in point is the C-19 relief ASIC provided around the $10,000 super withdrawal and 50% pension reduction which ignored our requirements under the Code for which no relief was provided. I don’t like these broad brush statements like “Code overrides Act” because it creates an impression that where we see an inconsistency we can ignore that aspect of the Act or regs and rely on the “higher” duty. As a compliance manager (and not to be facetious), but I don’t want to sitting in front of ASIC saying we decided to ignore our requirements under the Act and regs because the Code overrides it and it doesn’t say anything about needing to meet safe harbour.

    We need the stakeholders to come together before there is no more industry left to regulate.

  5. Avatar Christoph Schnelle

    I personally like Standard 3 but am wondering where this will end up:

    The FASEA code of ethics is law but so is the Corporations Act. They clearly contradict each other in part. Is there a hierarchy? Is it obvious that the most restrictive piece of legislation applies? That has not been my experience reading through caselaw.

    This is now lawyer territory but couldn’t a judge say that ‘in this case, the Corporations Act applies rather than the FASEA code of Ethics because…’?

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