“If I, taking care of everyone’s interest, also take care of my own, you can’t talk about a conflict of interest”
— Silvio Berlusconi, International Ethics Adviser
Don’t say you weren’t asked
Considering that the Better Advice Bill applies a definitive “Best Before” date of 1 January 2022 to FASEA, their effort to engage in a final round of consultation in November is a testament to either their commitment or their unreasoned optimism.
Considering that many advisers consider FASEA Consultations to be a blood sport, it’s surprising that the obvious problems with Standard 3 weren’t simply passed to treasury to resolve when the clock runs out. It’s not surprising to us, because we’re well aware of their determination to support the emergence of an advice profession.
In case you missed it, on 3 October 2021, FASEA released their Consultation Paper on Standard 3 of the Financial Planners and Advisers Code of Ethics. As you’re no doubt aware, Standard 3’s prohibition against advising, referring or acting where there’s a conflict of interest or duty, was both practical and problematic. Worse, it threatened the sustainability of practices otherwise engineered to exceed legal requirements.
FASEA Consultation Paper
Despite the guidance FASEA provided, many advisers, licensees and their legal and compliance people struggled to operationalise a standard that ambiguously asked too much, too soon.
To their credit, FASEA heard and responded.
The practical limits of encouragement
“These ethical obligations go above the legal requirements in the law and are designed to encourage higher standards of behaviour and professionalism in the financial services industry.”
— Explanatory Memorandum (p30) for the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016
Given the Government’s commitment to transparency, accountability and conflicts of interest, and Commissioner Hayne’s recommendations, it was unsurprising that the relevant legislative instrument recorded Standard 3 as a definitive and absolute prohibition. It declared that “You must not advise, refer or act in any other manner where you have a conflict of interest or duty”.
Although the intent of the Standard resonated with professional advisers seeking to break free from the significant structural tensions inherent in old distribution models, and although committed to providing professional services that met their clients’ best interests, they struggled with the absolute tone of the Standard.
It’s too reductionist to rationalise their opposition as a consequence of their decision to become product manufacturers/distributors. Even those advisers who could otherwise cope with declining margins and increasing costs worried about how Standard 3 would be operationalised, assessed and enforced.
We’ve always taken a pragmatic and balanced approach to the Standard, focusing on context, intent and outcome, but we were aware that others were taking very different (and in some cases, nonsensical) position on the Standard.
From our perspective, further clarity was needed to reassure an emerging profession paralysed by fear of regulatory sanction.
Three options
“Too often conflicts between interest and duty are ‘managed’ in a way that coincides with the interests of the party who owes some conflicting duty or has some conflicting interest”
— Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (interim report), page 323
Although there’s still a preference to eliminate, rather than manage, conflicts of interest and duty (due, in large part, from our spectacular failures to manage conflicts), FASEA have sought your view on which of the following options best reconcile the intent of the Code with the reality of the circumstances and conditions faced by advice professionals.
The alternatives, on which they seek your feedback are:
Option One
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.
Option Two
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.
Option Three
You must not advise, refer or act in any other matter where you have a conflict of interest or duty.
FASEA is interested in your specific feedback on three options (or other wording) and their practical application.
We’ll be lodging our own submission (to which you’re welcome to contribute or be joined) but if you want to make a submission ensure that you do so by 1 December 2021.
Another Option
We’d be poor lawyers indeed, and unusual compliance experts, if we didn’t offer another alternative to FASEA’s options.
They all have their strengths but, in our view, don’t provide adequate guidance about the nature of the conflicts to be avoided or eliminated, the reasons why or a measure by which they can be assessed. In our view, it’s important to ensure that advisers don’t just focus on remuneration or structures. Conflicts arise from relationships, associations and (prior) knowledge and may harm a client notwithstanding that the adviser neither benefits financially nor the client suffers financial harm.
With this in mind, we’d offer a fourth option for your consideration
You must neither advise, refer, act nor enter into any relationship, where there are circumstances, arrangements or benefits that could, objectively, compromise your capacity to act in your client’s best interests.
The intent of this version is clear. Don’t act (or enter into a relationship with a client or other party) where an external party would expect it to compromise your capacity to act as a fiduciary; it covers monetary and non-monetary benefits, structural and personal relationships but includes an assessment of materiality.
It may not be for everyone, but if you think that works better, we’re happy to hear from you or have you use our proposed wording.
In any event, make sure you lodge your feedback with FASEA by 1 December 2021.
