Call for referred brokers to support FASEA code

Specialists brought in by a financial adviser should be held to the same standards of conduct that the adviser is, according to Matt Lawler, CEO of advisory firm Wealth Market.

Mortgage brokers, in particular, should have their new best interests duties (BID) extended to match the FASEA Code of Ethics when they are brought in by an adviser to assist a mutual client, he believes.

“Where a mortgage broker is working with a financial planner and the financial planner is controlling the relationship then arguably the mortgage broker should be operating under the same set of standards,” Lawler tells Professional Planner.

“If the planner is acting as the project manager in terms of strategy and they need to bring other specialist in, they need to make sure the other specialists are operating under the same level,” he adds. “They’re part of the offer.”

Lawler’s practice, Wealth Market, is part of the White Family Group that owns sister outfit Loan Market and, most notably, the Ray White real estate network.

He believes the application of adviser standards to associated specialists like mortgage brokers is a natural progression, and one that the client has the right to expect.

“You can explain to a client that you operate under a set of standards but it’s more difficult to explain to the client that this other person does not operate under the same set of standards,” he says. “The client shouldn’t have to differentiate.”

Other specialists like lawyers and accountants are also expected to abide by the same level of standards, Lawler says, but their professions have codes that are the equivalent or at a higher standard than the Code of Ethics.

“Even though those codes are slightly different they are all similar in that you have to respect the client,” Lawler says.

Mortgage brokers themselves don’t have an equivalent to the Code of Ethics, but they are in the process of adapting to a new Best Interests Duty, which requires them to do things like thoroughly investigating clients’ circumstances, keeping detailed notes and prioritising the clients’ interests.

While the laws came into effect on July 1 this year, the regulator has given mortgage brokers an extra six months to comply with the new BID laws because of the disruption to businesses caused by the pandemic.

The Code of Ethics for advisers is made up of 12 ‘Standards’ that advisers must adhere to. It incorporates BID, but extends into other areas such as the avoidance of conflicts, continuing professional development and referral guidelines.

If brokers were to adopt the Code of Ethics when dealing with referred advice clients, most of the standards would already be covered by their new BID obligations as described in ASIC’s RG273. Both account for things like the need for thorough record keeping and the avoidance of conflicts.

There is, however, some unique direction in the Code that isn’t in the brokers’ new BID. Standard 2 exhorts advisers to “act with integrity”, for example, while the word ‘integrity’ is not included in RG273.

What could have more significance is Standard 7, which says advisers must disclose to clients “all benefits you and your principal will receive in connection with acting for the client”. If the Code was extended to brokers working with advisers, this could result in more transparency with regards to ongoing payments brokers received from banks.

“That isn’t really an imposition,” Lawler says. “It’s a step up but not a big step up.”

The concept would also go some way to fortifying the converged advice and broking model that groups like Wealth Market and Loan Market operate, as well as competitors such as Yellow Brick Road.

“There will be a lot of financial planners out there that have mortgage brokers either embedded in the business or they’re working with mortgage brokers,” he says. “It’s a big part of the industry.”

Consistency and clarity

According to Joel Ronchi, whose myIntegrity business provides education and training on FASEA to advisers, a better solution for mortgage brokers would be to set them up with a separate Code of Ethics that is mandated by the National Consumer Credit Protection Act.

Ronchi says he agrees with Lawler’s assertion that brokers should be under the same rules as advisers when working together “in principal”, however the fact that advisers operate under the Corporations Act while brokers do not makes this problematic.

“I would prefer that a similar Code be established for mortgage brokers as a legal requirement under the NCCP Act, rather than the FASEA Code of Ethics (as it currently exists) being applied to mortgage brokers when they are brought in to a client relationship by a financial advisers,” Ronchi says.

Instead of applying a Code that is intended for advisers to mortgage brokers, he says, do it the right way with appropriately tailored parameters.

“Consistency and clarity is required for mortgage brokers to understand any increased obligations, and this can only be achieved through a Code specifically for brokers [with] necessary training around how such a Code applies,” Ronchi says.

He warns, however, that the end result must be a net positive for all parties.

“The idea is not to make anyone’s life more onerous, but rather to ensure consistency of standards across professionals that clients engage,” Ronchi says.