Adviser relief for now, but how will Standard 3 be enforced?

22 April 2020

Although regulators have taken a soft approach to enforcement of Standard 3 of the Financial Advisers Standards and Ethics Authority (FASEA) Code of Ethics, since its implementation at the start of the year, there’s still the issue over how proper enforcement will work.

Last November, the Australian Securities and Investments Commission (ASIC) said they would not monitor or enforce the Code of Ethics.

John Maroney, SMSF Association chief executive, said the combined messages from FASEA, ASIC and the Australian Financial Complaints Authority (AFCA) had given the adviser community confidence it won’t have an immediate impact and that it will be a long-term view of lifting ethical standards.

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“The main regulator and the complaints handling body have said they recognise we are in a transition period; the code has been finalised but there’s still extra guidance expected,” Maroney said.

Standard 3 had been the best example of ambiguity with the code which said: “you must not advise, refer or act in any other manner where you have a conflict of interest or duty”.

FASEA had said to Parliament last December: “The Code does not seek to ban particular forms of remuneration nor does it determine that particular forms of remuneration are always an actual conflict”.

However, Maroney said it was still a concern given how the code was worded and the potential risk it opened advisers up to.

“That’s a very explicit statement and the concern was it would be very difficult for many advisers not to have conflicts because of the way things are structured in the industry,” Maroney said.

“And the approach up until before the code came into force was advisers were expected to manage any conflicts so they could still act in the best interest of their clients.”

An example of a potential conflict of interest would be if an adviser owned shares in a company and recommended those shares to a client.

“It can be a very immaterial conflict if it’s a BHP share, but it can be more significant if it’s a small cap company that doesn’t have a lot of shareholders,” Maroney said.

“But Standard 3 is pretty black and white, [which said] if you’ve got any other conflict, you can’t advise and you have to tell your client to go somewhere else.”

There was another issue of ambiguity in the code that said: ‘Unless this Code expressly says otherwise, do not read down any of the provisions of this Code by reference to any other provision of this code.’

“Which seems to say – and I’m not a lawyer but having spoken to a few lawyers – that would mean you have to comply with each standard regardless of what the other standards say,” Maroney said.

“Whereas FASEA has said all the standards should be read together and as long as you are acting in the best interest of your client overall then you don’t have to necessarily tick-off each and every single standard.”

Maroney said he hoped that it would be reviewed after operating for a year, which was typical of legislative instruments.

“It would be good to have this reviewed and see if there are any features of the code that could be worded better,” Maroney said.

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Why dance around the issue? The FASEA Code of Ethics is an unworkable piece of junk. No one supports it. If properly enforced, every adviser in the country
will be banned. It won't improve professional standards. It just puts livelihoods at risk and will make access to advice impossible.

All remuneration is conflicted regardless of what type. That includes fee for service. Under the literal interpretation of FASEA Standard 3, all professional advisers should be declining to service any clients.

And therein lies the problem. The enforcers of FASEA Standard 3 can pick or choose which types of remuneration they deem to be "conflicted" according to their own personal bias and prejudice. FASEA's guidance on this issue has been completely wishy washy. And at the end of the day FASEA has no role in enforcement of the Code. It will all come down to who sits on the new Financial Advisers Disciplinary Body, and what their particular biases and prejudices are.

If it is someone like high profile adviser hater Robert MC Brown for example, he will say that all commissions and asset based fees are conflicted, and anyone who uses them is breaching Standard 3. However if an adviser adopts the conflicted accountant approach of pushing clients into expensive, unnecessary products like SMSFs, which generate lots of inhouse fees for service, then that will be just fine. (Fine for the adviser/accountant that is. Probably not the client. But for some people it's all about clinging to their dogma.)

oh, don't worry Robert MC Brown and CEO of choice will be on the financial adviser's disciplinary body.

Lawyers charge by the hour - no conflict there.

You need $1m worth of life insurance. Result under insured on a claim, sue the adviser

You need $1.5m worth of life insurance (same client). No claim but you had a conflict of interest, breached std 3. Sue the adviser.

And don't anyone tell me a wide a section of the community will pay fee for what it costs to provide life insurance, let alone that dirty word....make a profit. Any argument along these lines is either someone who has little experience, has a very small cross section of the community or is cross subsidising with wealth advice.

It's a farce of EPIC proportions.

What does Robert's "MC" stand for ?
Why isn't he just plain old Robert Brown or wouldn't this have the same elevated status that grumpy ol' Rob aspires to ?
Would anyone like to have a guess?

Assume master of ceremonies, however not sure that is even an actual designation. A quick read of the defense force set up he runs will show apparently financial education is filling the gaps left by us being so overburdened with red tape its almost impossible to do business. Also of course he says hardly any of us can be trusted. Yes use his site or money smart , or of course the planners he recommends, as they can bw trusted. Reading some articles on pp hope he doesnt get a job anywhere near fasea or afca, too many biases and preconceived notions. It is quite funny reading the comments there though after his articles.

Do his mates just call him MC ?
Does he have any mates ?

no, of course not, he doesn't have any friends. he is an accountant.

have you ever met an accountant with any money or friends? yes, barry lambert and mark bouris - oh wait they both started a financial planning firm or mortgage broking

don't even ask me about their business advice, what commercial acumen do these accountants have they don't even have a MBA, do a measly accounting qualification, should be renamed book keeper's

I’ve raised this exact question re owning shares that I recommend to my clients with FASEA and with the ministers office and they will nor provide an answer.

Having done the study, the ethics professors say that a conflict is a conflict no matter how small, so the BHP issue is still a conflict.

How many times have your clients asked you if you are buying an investment? What would it look like if we said no...


So Intrafund advisers can only recommend on the Accumulation and ABP accounts for the fund (and get paid by the fund). Surely, that is in breach of “you must not advise, refer or act in any other manner where you have a conflict of interest or duty”. Am I missing anything here?

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