I used to think that writing about the meaning and consequences of professional and ethical standards, especially the mandated Code of Ethics, would be an uncontroversial and useful activity, especially given the industry’s much promoted desire to evolve into a profession.

After all, it’s widely accepted in the Australian community that avoidance (not just disclosure) of conflicts of interest is the unique and special quality that distinguishes a true and trusted profession from a conventional occupation. Therefore, it would be reasonable to conclude that assisting financial advice industry participants to understand their professional obligations would be welcomed.

I quickly learned that of all the standards in the Code, Standard 3 is easily the most controversial. That’s because it brings into question (and even contradicts) certain forms of remuneration, structures and behaviours that many in the industry do not wish to stop. These include life insurance commissions, percentage-based asset fees and profit shares/incentives on “in-house”, preferred and “white label” products and platforms.

As a result of this realisation, opponents of Standard 3 have adopted a number of (sometimes disingenuous) strategies designed to dilute, reinterpret and ultimately ensure that the standard is ineffective in its intention to remove conflicts of interest from the industry, while concurrently arguing that the industry has become a profession.

One strategy is to create doubt about the meaning of the words in the standard when, in fact, the opponents know exactly what the words mean. Ironically, the clarity and inconvenient consequences of the words is the problem, not their lack of it.

Another strategy is to argue that the industry’s behaviour has improved in recent years. Therefore (so the argument goes), conflicts of interest should be allowed to continue, so long as they are managed or disclosed. This should be reflected in a rewritten and diluted Standard 3. Sadly, however, the industry’s long history of poor behaviour and the well demonstrated impact of conflicts of interest on human decision making in general (not just the financial advice industry), show that mere management or disclosure of conflicts doesn’t work. This is especially so when an industry is seeking to create the level of trust required of a true profession.

And then there’s a strategy that has become all too common in recent times. This one is promoted by some commentators who should and (I suspect) do know better. It’s based on the mischievous proposition that financial advising and business life in general are unavoidably full of conflicts. Therefore, all forms of remuneration, including hourly rates and flat fees, are conflicted. Accept this proposition and all forms of remuneration becomes acceptable. And conveniently, Standard 3 becomes meaningless.

Whether deliberately or otherwise, what many of these commentators fail to take into account in considering the meaning of Standard 3 is the concept known as the “standard of judgement” when dealing with conflicts of interest or duty. This is described by Code of Ethics co-author Simon Longstaff in code guidebook ‘Everyday Ethics for Financial Advisers’ as “commonly used in the law. It is neither novel nor unfamiliar. Indeed, it is very much a matter of common sense. The components are simple. All that an adviser needs to do is ask if an unbiased (disinterested) and reasonable person, in possession of all the facts, could reasonably conclude that an arrangement or benefit could induce and adviser to act other than in their client’s best interests. An arrangement that fails this test is in breach of Standard 3. Otherwise, arrangements are permitted, whatever their specific form. The adviser merely needs to be confident of their arguments (and the evidence) if challenged. If in doubt, then the adviser should not enter into the questionable arrangement.”

This “unbiased (disinterested) and reasonable person” test is common in other professions. For example, the CEO of the Accounting Professional and Ethical Standards Board, Channa Wijesinghe, explains that the accounting profession’s Code of Ethics “requires the member to view the situation (of conflicts) through the lens of a reasonable and informed third party and exercise professional judgement to determine whether their actions would comply with the fundamental (ethical) principles”.

Expanding on this concept in the context of financial advice, Simon Longstaff writes “it has been claimed that advisers who own a share in their advice firm may be conflicted. However, no unbiased, reasonable person objects to a doctor charging a fee in a practice that they own. There is no objection to a partner of a law firm charging their client a fee… it is difficult to see why an adviser would wish to argue against such a standard, other than for reasons of self-interest. Yet one of the principal objectives of the Code is unambiguously to curb the self-interest of the professional adviser in favour of the interests of their clients. Given that one of the defining characteristics of a profession is that its members subordinate their interests to duties owed to others, it is difficult to justify a regime in which conflicts are allowed as long as they are ‘managed’.”

One could go on at length with examples, but that’s not the point. Suffice to say that the Code is deliberately not prescriptive about these issues. It is principles-based. It was “drafted in broad terms so as to limit to the greatest extent possible, any opportunity to avoid its clear intent through the exploitation of loopholes. This is an essential point… the first point of judgement does not lie with the regulator but with each adviser… Standard 3 is at the core of the professionalisation of the financial advice sector. It marks a turning point, where what was previously common practice for some, is now prohibited. Prior to the standards, it was an accepted practice for financial advisers to provide advice where a conflict of interest existed and to explicitly disclose the conflict of interest.”

Importantly, the drafters of the Code were clear that they were neither prohibiting nor approving any particular arrangement or form of remuneration. However, it was made clear that financial advisers using arrangements such as percentage-based asset fees, life insurance commissions, profit shares/incentives on “in-house”, preferred or “white label” products or platforms will need to be confident (with evidence) that they have met the “disinterested person” test which is central to an understanding of Standard 3.

Nothing could be clearer or fairer than that. In summary, the differences are:

  1. Conflicts of interest are now prohibited. They are not to be just ‘managed’ or ‘disclosed’; and
  2. Financial advisers are now required to make personal and professional judgements about their compliance with the standards in the Code. They can no longer rely on the opinions of compliance managers or on the contents of prescriptive lists of what’s in/what’s out.

Most advisers know what this means. Whether they like the consequences is another matter. However, these are the fundamental underpinning principles required of any true profession. Therefore, if we want to be recognised as such and widely trusted by the community we serve, then the consequences must be accepted. The obfuscation and avoidance must cease.

3 comments on “Conflicts and the code”
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    Jeremy Wright

    Conflicted remuneration as an entry point or fail point of how Financial Planners can be perceived as being Professional, or not, is not taking into account as to what the end recipient of all this discussion and Regulatory requirements, actually wants.

    Let us look at the much heralded Legal and Judicial system and ask the question, what basis of Professional jurisprudence would you place on a body that charges $500 to $1,000 an hour to attempt to bring some semblance of common sense to a rule book written by vested interest parties that use legalize as a weapon that the client pays for, though understands virtually none of what is argued amongst this Ivory tower elitist group, who then allow others of their ilk, being Judges and magistrates to deliberate on grey case law and interpretation, with little recourse for the great unwashed non-lawyers to appeal to, if the current Laws have no ability to see or act on the blindingly obvious.

    Robert, you are doing what Lawyers and Judges do.

    You follow processes and expect everyone else to be pushed down the only path you determine is correct, that suits your way, and ignores what it is that the customer wants and should be able to do if it is a simpler path and gives them choices.

    Life Insurance Commissions is a case in point.

    The vast majority of Australians have said they prefer to pay for all the work associated with risk advice as a commission.

    Yet you in your ultimate wisdom, have made a decision that in effect tells all Australians that what they want is irrelevant and they must obey your every word, in the name of Professionalism.

    The changes that came into effect that made the provision of risk advice, more of a Regulatory maze brought to life by the Professional Legal framework, actually decimated the Industry and has caused all Australians to pay double for their Life and Disability Insurances.

    THIS IS the end result of a Utopian vision brought about by elitist Professionals and now all Australians are much worse off, which means under every other standard, this vision has failed every test of common sense and decency.

    Avatar
    Phil Oxenbridge

    I’m going to cut and paste directly from the CPA code of practice:

    “Section 310 requires members in public practice not to allow conflict of interest to compromise professional or business judgement. If conflicts of interest are identified, members in public practice are required to apply appropriate safeguards to eliminate them or reduce them to an acceptable level.

    When a conflict of interest creates a threat that cannot be eliminated or reduced to an acceptable level, the member must not accept, or must resign from, the conflicting engagement.”

    So you have so much to say about the wording of the financial planning code of ethics and yours (accounting) is allowing management of conflicts, not elimination unless detrimental to the outcome. Financial planning is only asking for the same professional courtesy…WE are not given discretion in our code…and there is no professionalism or equity in this.

    Avatar
    Martin Longden

    I’m not sure if calling attention to certain arrangements of privilege through the test of standard 3 against them, is in the best interests of promoting disclosure in a manner that both informs and educates the client in the arrangement.

    Whilst any professional code should be based on principles and boundaries to define acceptable behaviour according with the standard, to broadly advocate in favour against them or not in this context is simply to apply broad based legalistic mindset, and so suppress the spirit of the principle itself – given that motivation precedes mindset, and having this initiator of action helps to create sustainable change people accept responsibility for.

    By doing that, the whole impetus is carried by the people who choose to own it in principle, and in the spirit of advocating ethical outcomes, draws leadership to the surface as an example for others.

    When leaders use the Code standards to arbitrate outcomes through finger pointing from outside of the industry, it reveals a perception consistent with style of ethics which is characterised as utilitarian, whereas the Code of Ethics for the Advice Industry was specifically researched by the likes of Hunt, Brimble and others, recognised for their leadership in Ethical development for the industry for over 30 years, was developed on the Virtue Ethics model.

    The basis of your argument is inconsistent with the foundational model, so in this it appears you’re sorely mistaken. The price of stewardship gone wrong should, and must be, legal and pecuniary in its consequence, but to use your style of ethics framed in your argument implies guilt before innocence through association within the arbitration of a financial benefit, and precludes an inability to act with ethical (and therefore legal) efficacy in the first place.

    This isn’t advocating for the profession’s development, rather it appears to pontificate on Hayne’s coat tails – and I’m certain he would have much to say about the Accounting profession’s own back yard on current matters years and years in the making, only which we are hearing about now.

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