Posted October 27, 2020
Posted By Meghann Cannon
Financial Planners & Advisers Code of Ethics 2019 Guide
Prepared by Catherine Evans
We refer to the Financial Planners & Advisers Code of Ethics 2019 Guide released for consultation by FASEA on 5 October 2020 (Guide) and welcome the opportunity to make a submission on the Guide.
Kit Legal is a specialist financial services law firm. We act for a number of financial advisory firms and advisers around Australia, assisting them to comply with their regulatory obligations. Most of our clients are SME enterprises that hold their own AFSL.
In our experience, financial advisers want to comply with their obligations and have the best interests of their clients at the forefront of their activities. However, they are desperately seeking clear and simple guidance to enable them to do so.
Australia currently has a complex, layered and ambiguous regulatory framework for financial advice. The Corporations Act provisions are in many cases unclear. They are amended by the Corporations Regulations and then further amended by ASIC class order relief. ASIC guidance goes some way to assist on some topics. However, it is a difficult maze to navigate for businesses that want to do the right thing and just want to know what they need to do. Lawyers across Australia have different interpretations of the provisions which indicates the lack of clarity and drives compliance costs up.
We agree with a principles-based approach to the Code of Ethics and, on the whole, agree with what the Code is intending to achieve. However, having guidance that is ambiguous and provides further uncertainty does not assist advisers. Further, attempting to change the law through examples and guidance is not appropriate in our view and will create further uncertainty, cost, and negative impact for consumers who will bear the brunt of the compliance cost involved where there is such uncertainty.
On this basis, below is our key feedback in relation to the Guide based on the queries we have had from advisers over the last 12 months. We are approaching this from the perspective of helping individuals and businesses interpret and implement the Code in a practical setting.
Standard 1 requires that an adviser must act in accordance with all applicable laws, including the Code, and not try to avoid or circumvent their intent. We agree with this Standard as it is worded. We agree with the intent of the Standard as stated in bold on page 13 of the Guide.
However, we believe it is inappropriate and unhelpful to imply a test of competency into an already ambiguous and complex wholesale client test without a full review of the wholesale client tests and how they operate. As you know, there are a number of different tests that classify a client as wholesale. One test assesses the client’s assets/income. Another test assesses the client’s financial sophistication. Another test considers the value of the client’s investment. They are entirely separate tests.
The industry has been seeking clarification on wholesale clients for many years. Many law firms differ in their interpretation of the wholesale client tests which shows the lack of clarity in the legislation and ASIC guidance. It is not appropriate to add another layer of ambiguity and complexity via guidance that extends well beyond the wording and stated intent of Standard 1.
In our view, it would be more appropriate in the guidance relating to Standard 1 to refer to the sophisticated client test in s761GA in making an assessment of financial competency to avoid the intent of the law rather than the assets test.
In addition, the intention of Standard 1 is that an adviser should not classify a client as retail to deliberately avoid the intent of the law (regardless of the client’s level of financial competency).
A client can be classified as a wholesale client if they meet the Corporations Act assets test (or any of the other wholesale client tests available). This impacts on the form of disclosure documents provided to the client and the products they can invest in (for instance, some products are only available to wholesale clients or for a minimum investment that would classify the client as wholesale under a different test) and in some cases the protections afforded them (noting that AFCA can still hear complaints from wholesale clients in its discretion).
Advisers still have fiduciary duties when advising wholesale clients. So whilst a client may be classified as a wholesale client to access wholesale products and not require a formal Statement of Advice (SOA) document or PDS, an adviser should still match the client’s level of financial literacy with the type of advice provided, complexity of products recommended, the level of information provided to the client and the way in which information is presented to the client.
Many firms have developed wholesale advice documents that provide a similar level of critical information that a SOA provides. They are not trying to avoid disclosure. However, the benefit of the wholesale classification (for the client and the adviser) is that there is more flexibility in how information is presented and the communication flow and relationship with the client. In many cases a client wants to be classified as wholesale for a number of reasons including access to wholesale products (there is an assumption these are more complex but in many cases that may not be accurate) and a more dynamic and flexible relationship with the adviser. In some cases, the information can be more effectively communicated in an advice document that is not a SOA because there is more flexibility in how it is communicated and presented.
Standard 3 requires that an adviser must not advise, refer or act in any other manner where he or she has a conflict of interest or duty. The intention stated in the Guide clarifies this by stating that the conflict or interest or duty is “contrary to the client’s best interests”.
We have had many queries from advisers about Standard 3. Advisers understand they cannot receive referral fees after the introduction of the Code. However, they are confused about whether they can refer clients to other professional advisers or referral partners on their Licensee’s (or CAR’s) referral panel where the Licensee or CAR may receive referral fees and the adviser may not be able to assess whether the referral fee received by the Licensee or CAR is fair and reasonable. The Guide does not provide clarity on this issue.
There has also been significant debate around insurance commissions and Standard 3. In its response to submissions issued on 20 December 2019 FASEA clarified that insurance commissions are allowable as long as certain elements can be satisfied. However, this is not explicitly stated in the Guide and without this clarification, there is still doubt as to whether insurance commissions are consistent with compliance with the Code. The ability for advisers to receive insurance commissions and brokerage should be explicitly stated in the Guide.
We welcome the example of clients undergoing separation as we have had a number of queries about this situation over the past 12 months.
Standard 4 states that an adviser may only act for a client with the client’s free, prior and informed consent. If required in the case of an existing client, the consent should be obtained as soon as practicable after the Code commences.
Obtaining consent from ongoing insurance clients may be problematic where the client may only touch base with the adviser when they want a review or when circumstances change. We understand the intention of the Code is to obtain consent from these clients for ongoing commissions. However, the Guide suggests that the consent would need to be signed by the client which may prove difficult in some circumstances. We believe that where the adviser speaks to the client, explains the commissions in detail and obtains verbal consent to continue with the fee arrangement, this could be evidenced in a file note and written confirmation to the client rather than the client having to return a signed document.
Standard 5 requires that all advice and product recommendations provided to a client must be in the best interests of the client and appropriate to the client’s individual circumstances. The adviser must be satisfied that the client understands the advice and the benefits, costs and risks of the financial products that the adviser recommends and the adviser must have reasonable grounds to be satisfied.
The intention stated in the Guide goes further to suggest that advisers have a duty to be aware of available products in the market beyond the APL. This is not in the wording of the Standard itself.
Adviser’s obligations in relation to considering alternatives is an area for confusion across the industry. The role of the investment committee, APL and adviser due diligence also differs from firm to firm.
In RG 175 ASIC states that:
“In other cases, an advice provider will need to investigate and consider a product that is not on their AFS licensee’s approved product list to show that they have acted in the best interests of the client when providing them with personal advice for example:
- if the client’s existing products are not on the approved product list of the advice provider’s licensee and these products might be able to meet the client’s relevant circumstances;
- if an approved product list used by an advice provider is restricted to one class of product and there are products that are not in that class that would better meet the client’s relevant circumstances, considering the subject matter of the advice sought by the client; or
- if the client requests the advice provider to consider a specified financial product that is not on the approved product list of the advice provider’s licensee.
Advice providers are expected to exercise judgement in determining whether s961B(2)(e) requires them to consider products that are not on their AFS licensee’s approved product list.”
We consider best practice to be a consideration of at least 2 other products (recommended and one other) that meet the client’s objectives in addition to the client’s existing holding to demonstrate that best interests have been met and why alternatives have been discounted.
The Guide creates further confusion in suggesting that advisers have a duty to be aware of available products in the market. The answer to question 1 on page 24 states that advisers should have a “good understanding of not only the products on the APL but a general understanding of other well rated products that may be suitable to the client’s circumstances”.
In many firms the heavy lifting as far as pricing and product comparisons and features is performed by the investment committee to compare new and existing platforms and products. This is a time consuming and complex process. It is very difficult for an individual adviser to keep across the complexity of new market entrants and the due diligence and risk assessment required before putting a new to market platform or product on a licensee’s APL. If an adviser was required to do this at an individual level, the cost of advice would increase considerably.
If the adviser is comfortable in relation to the activities of the Licensee’s investment committee in considering pricing and product changes and new market entrants, the adviser should be able to rely on the investment committee to do so (as long as the client’s existing holding is considered and the APL is wide enough to allow consideration of alternatives that could meet the client’s objectives).
Standard 7 requires the client to give free, prior and informed consent to all benefits the adviser or his or her principal will receive in connection with acting for the client.
The intent of Standard 7 stated in the Guide “is to ensure that clients freely give informed consent to benefits the adviser will receive, and this consent is obtained before they receive advice”.
Specific fees and charges and all benefits in connection with acting for the client are contained in the SOA and ongoing fee agreement. These documents are provided at the time of giving advice so that a client can make an assessment of whether to proceed with the recommendations. General fees are disclosed beforehand in general terms and conditions and engagement letters. The Financial Services Guide also contains fee disclosure. However, the fee disclosure to the client that is specific to their arrangement and the products recommended is usually contained in the SOA. We are not sure where the requirement to provide specific fee disclosure and obtain the client’s consent before the advice has been provided has come from. The Guide should be amended to remove this requirement.
We look forward to further clarity from FASEA so that advisers can have confidence that they are meeting their duties and moving forward in creating a profession for the financial advice industry.