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.
“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.