The Financial Adviser Standards and Ethics Authority has relented to consternation about its treatment of conflicts in the Code of Ethics and gone to consultation with two alternatives to the directive that advisers must not “advise, refer or act” where a conflict exists.

In a release this morning, FASEA said that after “ongoing commentary” from stakeholders that Standard 3 is “not workable” and that the guidance is ill-suited for legal interpretation, it had narrowed feedback into six broad suggestions.

One of these – to revert to the original 2018 wording which said to not “advise, refer or act in any manner if you would derive inappropriate personal advantage” – was rejected by the authority as it “fails to give clear intent”.

Another suggestion – to specify that timeshare advisers be exempt from the Code – seems to have been dismissed outright as well.

In the end, FASEA put two options forward that broadly cater to the remaining industry suggestions.

The first of these incorporates FASEA’s intent in the standard, but in a way which may be slightly more palable to advisers:

You must only advise, refer or act where you do not have a conflict of interest or duty, being that which could reasonably be expected to induce you to act other than in the client’s best interest.

The second sticks closely to the Hayne royal commission finding that conflicts should be eliminated rather than managed as per the Corporations Act, while still retinaing some of the Act’s spirit:

“You must not receive any benefit (whether monetary or non-monetary), nor enter into any relationship, that could reasonably be expected to influence the advice you give or the service you provide to your client.”

Retaining the original 2018 wording of the standard was put forward as a third option. FASEA also invited stakeholders to propose other wording that may be suitable, with the caveat that it must realise the current (and continuing) intent of the standard and enable “effective implementation”.

Otherwise, FASEA said, the options put forward should be judged on their practical application in terms of consumer experience, adviser practice, licensee practice and guidance.

“FASEA is committed to preserving the intent of the current Code; namely, that financial advice only be offered by advisers who are free from conflict,” the consultation stated. “FASEA is also open to making changes to the means by which this clear intent is realised through the provisions of its Code.”

The consultation, which opens on Tuesday, will run for less than a month and close on December 1.

‘Impossible to manage’

Standard 3 has been dogged by controversy since the Code of Ethics was originally released via legislative instrument in 2019 leading into its implementation on January 1, 2020.

While the Code of Ethics has largely been embraced by the advice community as an effective way to both lift industry standards and engender trust in the community, Standard 3 has stood out as a contentious outlier.

Dubbed “impossible to manage” by the Association of Financial Advisers policy lead Phil Anderson, the standards exhortation for advisers to avoid all conflicts both contradicts the Corporations Act, which encourages AFSL holders to “manage” them, and rubs against current settings that allow for brokerage commissions in the insurance advice space.

“We need greater clarity on this,” Anderson said. “Anyone who provides life insurance advice or receives a commission – that has to be seen as a conflict of interest,” Anderson said in 2019.

More broadly, while the standard’s intent is well supported its wording precludes much of the vertically integrated practices – a potential vein of conflicted activity – that Hayne allowed in his final report.

Marrying the standard’s wording with the proliferation of conflicts in advice is something lawyers, too, have been grappling with.

“There’s an almost endless list of things that could be conflicts,” Ashurst lawyer Jonathan Gordon said at a SAFAA meetup last year, adding that the challenge lies in the fact that the standard is “black and white”.

In defence of Standard 3, FASEA CEO Stephen Glenfield – who will be leaving the group when it disbands at the end of the year – has repeatedly maintained that the original setting works if advisers look at the code “in its entirety”.

The code’s guidance says that it’s only “concerned with an actual conflict”, and “does not seek to ban any form of remuneration, nor does it determine that particular forms of remuneration will always give rise to an actual conflict of interest or duty”.

That guidance – which was a rework of the first guidance that spoke of an industry “beset with conflicts” – showed that Standard 3 is very much workable, Glenfield told Professional Planner in November last year.

“We make the clear point that it’s not stopping commissions,” he said.

ASIC’s Financial Services and Credit Panel, which will become the industry’s new single disciplinary body and police the Code of Ethics from January 1, will be an interested observer in the consultation’s outcome.

2 comments on “FASEA puts Standard 3 alternatives to industry”
  1. Avatar

    The furore over Standard 3 is a case of ‘back to the future’ where financial services is dominated by over anxious lawyers that have a vested interest in making sure the complexity is a mountain too high to climb and, without their learned council, we’ll all be doomed.
    A Code of Conduct is not about the law and the finer interpretation of it. Our Code is about setting standards for appropriate behaviour and, if practitioners need this spelled out, you have to question the lens in which they view their role as a professional.
    Chapter 7 gives enough law to choke on. There are sufficient penalties and ASIC closely monitors compliance. However, Haynes J found the industry was wanting and so the mission is now to become a profession – which is where you see a demonstration of the exercise of appropriate professional judgement rather than checking of a tick box compliance sheet.
    If practitioners continue to need tight regulatory constriction, this will never happen. And forget ever making advice affordable whilst the legal opinion fees keep clocking up.
    If your advice is truly in the client’s best interest, Standard 3 is observed. It is not about how you are paid for your advice but rather that you provided appropriate advice for the client that was in front of you or, you accepted you couldn’t, and declined the service. Why do you need a lawyer to get you to this point?

  2. Avatar
    Jeremy Wright

    For every action, there is a reaction and consequences.

    The reaction to what has always been an unworkable maze of interpretation, was an explosion of Tax payers money being spent on Lawyers and Regulators who debated the merits of legal wording, while ignoring the reasoned and experienced Advice practices that could see the future impact of the direction this was going.

    The consequence of further ignoring what was and still is a disaster unfolding in front of and caused by the Government, the Regulators and the Legal fraternity, is quite frankly an indictment on the whole process, which focuses on listening to theorists who suck the lifeblood from all Australians with their sheltered workshop ideologies and blithely destroy the Businesses that actually provide real service and real jobs.

    Tinkering around wording, will not fix a broken model.
    There has to be a overhaul of the entire Regulatory system and Lawyers, Regulators and the Government need to start listening more closely to practical, real world Business owners who always had the solution, though as usual were treated as a poor, uneducated cousin from the backwoods.

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