Dixon saga shows why we needed Code of Ethics

The Hayne royal commission recommended a single disciplinary body be set up to, among other things, ensure advisers’ compliance with an industry-wide Code of Ethics, and to sanction advisers who breach the code.

There’s a Best Interests Duty in the Corporations Act that advisers are obliged to meet, but the point of the Code of Ethics is to impose obligations on professionals that go over and above the bare minimum requirement of the law.

In light of the collapse of Dixon Advisory and the volume and value of complaints it’s generated, it’s worth reflecting on whether that particular situation could have been different had the code been in operation at the time of the behaviour that’s given rise to the complaints and compensation.

Standard 3 of the financial adviser’s code of ethics states that “you must not advise, refer or act in any other manner where you have a conflict of interest or duty”.

The standard does not say it’s OK to go ahead if you’ve disclosed the conflict to the client; nor does it say that a conflict is OK if it’s managed (whatever that even means).

What Standard 3 requires is quite clear, which is why it’s perhaps the most contentious of the code’s 12 standards. But the Dixon situation also illustrates why it’s one of the most important standards, and why it should be neither diluted nor removed from the code.

In practice, Standard 3 means that if the owner or the senior management of a licensee or an advice firm encourages, incentivises, cajoles, forces or in any other way causes an authorised representative to give advice to a client where a conflict of interest exists for the adviser, the adviser must refuse to give that advice. They must not “advise, refer or act”.

If they do, they will be in breach of the Code of Ethics. The ultimate sanction for breaching the code is to be deregistered as an adviser.

An adviser facing a conflict of interest clearly has a difficult decision to make and will face a real test of their commitment to the principles of professionalism. It’s a tough situation to be in, and the reasons some people will end up acting in accordance with their employer’s wishes were examined in fine detail all the way back in 2009 in a paper entitle Professionalism and Ethics in Financial Planning, published by Dr June Smith (who went on to become lead superannuation ombudsman at the Australian Financial Complaints Authority).

Smith’s paper – her PhD thesis – examined how the culture of an organisation has a significant impact on how employees perceive ethics and their ethical obligations. In short (and at the risk of oversimplifying a 700-page document), the normalised behaviours and ethics of an organisation tend to trump the ethics and behaviour of the individual.

Imagine for a moment that a licensee directs its advisers to amass client funds in the licensee’s own investment products, irrespective of whether that’s the best idea for the client. Smith’s research looks at why advisers might tend to go along with it and could help explain, though by no means excuse, why advisers at Dixon seemed happy to do exactly this.

In the lead decision in the Dixon case, AFCA determined that Dixon and its advisers did not prioritise the client’s interests ahead of its own. The Code of Ethics operating at that time is not a guarantee this behaviour would not have happened, but it might have made some Dixon advisers question what they were doing. It might have given some Dixon advisers the confidence they needed to say no to the licensee. It might have stopped the apparently rotten Dixon culture from poisoning individual advisers’ actions.

And if advisers outside the Dixon group knew what was happening, they would have had a professional obligation, too. Standard 12 of the Code of Ethics says: “Individually and in co-operation with peers, you must uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest”.

Again, at the risk of over simplifying: if you see something, say something. An adviser who is aware of conduct by another adviser that is in breach of the Code of Ethics has a professional obligation to call out that behaviour – with the adviser or licensee concerned; and if need be, with the regulator.

The focus on the individual in these circumstances reinforces the fact that professional obligations sit with advisers themselves, not with the licensee or with the adviser’s employer, whose interests are irrelevant to the adviser’s professional duties.

No one ever said that becoming a profession and claiming the title of “professional” would be easy, and some of the potential pain points were obvious. In 2017 Professional Planner wrote:

“…if a licensee insisted an adviser do something contrary to the adviser’s professional or ethical standards, the adviser would have a choice to make. They could refuse the licensee’s demand, just as they can do now, and run the risk of being fired. Or they could comply with the demand, in the hope of keeping their job, but run the risk of being pinged by the independent body and de-registered, and therefore rendered unemployable anywhere. If they refused the demand, as a professional upholding professional obligations, they’d be backed by their professional community, but it’s still possible things could get pretty hairy. Such is the price of professionalism.”

At the end of the day, the root cause of the Dixon collapse was the actions of Dixon advisers who knowingly or unwittingly acted despite the existence of a conflict of interest. They could and arguably should have resisted except, of course, the Code of Ethics didn’t come into effect until the start of 2021, by which time it was too late to have any impact.

The Code of Ethics will almost invariably create circumstances where the objectives or interests of an adviser’s licensee or employer will clash with the adviser’s ethical obligations. But it might also head-off Dixon-like behaviour in future.

Certainly today, no adviser can say they’re not aware of the code, or their obligations under it.