ASIC will change the lens with which it views possible breaches of the Code of Ethics once the advice industry’s new Single Disciplinary Body (SDB) comes into effect in January, as the regulator’s “facilitative approach” to compliance comes to an end.
For advisers, this means a new focus on the intent of Standard 3 (conflicts) and Standard 7 (remuneration) needs to be adopted.
ASIC originally announced its more measured approach to breaches of the two Standards back in November 2019 when it was confirmed that the government was shooting for a single disciplinary body to watch over the industry instead of a code monitoring body.
Advisers still needed to comply with the code from Jan 1, 2020, ASIC said, but as licensees would be in charge of reporting code breaches until the SDB plan could be rolled out in 2021 it would “take a facilitative approach to Standards 3 and 7 of the code” in the interim.
During the period licensees needed to take “reasonable steps” to make sure the code was being adhered to, however ASIC would “take into account the context in which AFS licensees are operating”, including “the current dynamic regulatory environment, the timing of guidance provided by FASEA about the meaning of the code, and the evolving industry understanding about the meaning and implications of the code”.
Come January, the approach changes.
This will happen despite much of the regulatory uncertainty that led to ASIC’s original concessions remaining; only weeks ago FASEA announced a consultation on Standard 3 after years of consternation about the edict for advisers not to “advise, refer or act” where a conflict exists, which many felt precluded legal elements of advice such as insurance advice commissions and vertically integrated practices, as well as contradicting the treatment of conflicts in the Corporations Act.
The shape of the SDB is also still up in the air. The Better Advice Bill confirming its rollout only passed weeks ago and the regulator admitted, just before that, they had “no idea” how its Financial Services and Credit Panel will operate as the SDB.
In a matter of weeks, and over the holiday period, Standard 3 needs to be revamped, the SDB needs to be formed and trained, and the advice community needs to prepare for its new peer review era.
Through the eyes of the client
According to Phil Anderson, GM of policy and professionalism at the Association of Financial Advisers, the review of Standard 3 is welcome, yet it will create additional uncertainty in the early part of next year and a furthering of the facilitative approach may be appropriate.
“We’re now going into a new era with the SDB and we’re not entirely sure on how it’s going to operate. We still don’t have the regulations in place for something that starts in six weeks’ time, so you would hope there would be a sensible approach,” Anderson tells Professional Planner.
“This is compounded by never getting to a point of certainty as to what’s required. FASEA prepared three different guidance documents on the code but not so that one replaced the earlier editions, it was cumulative. So it’s going to be interesting to see how the FSCP views code breaches.”
Anderson believes the focus for advisers now should be on a sharper approach to the Code of Ethics, in particular Standard 7 which covers free and prior consent from the client and ensures the remuneration received is “fair and reasonable and represents value for money for the client”.
The ‘value for money’ requirement is something that can only be assessed in the eyes of the client, Anderson says. Advisers need to renew their focus on explaining the value proposition, making sure the client believes in it and, crucially, documenting that understanding.
“Advisers need to articulate and record the value, which is always a useful task anyway,” he says. “That way if the client ever asks what they’re getting you can sit them down and show them.”
Anderson reckons the client’s signature on a service agreement is not enough to ensure they’ve understood the value proposition they’ve signed up for. “I don’t think from a regulator’s perspective the fact they’ve continued to pay is proof of value and adviser would be wise not to rely on that,” he says.
An important piece of the puzzle, Anderson believes, will be the direction given to the industry by ASIC or the FSCP on Standard 7.
“Sanctions in the form of suspensions and prohibition of advisers will be visible on ASIC’s register, so it will be interesting to see what kind of feedback we get from the SDB,” he says. “How will they communicate learnings and precedents? Will we get further guidance and will there be case studies?”