Greater ethics requirements contributing to lower fraud levels

Advisers may struggle to meet their ethics CPD requirements, but the learnings are paying off as research finds it has helped to reduce adviser misconduct and financial fraud.

Under their mandatory CPD rules, financial advisers must complete nine hours of CPD into professionalism and ethics which is designed to enhance advisers’ capacity to act as an ethical professional. 

However, advisers previously told Money Management that it is difficult for them to meet these requirements due to the availability of resources and learning materials. 

But researchers Jerry T. Parwada, Natalie Oh and Eugene Wang at the University of New South Wales Business School explored the correlation between additional ethics instruction and fraud rates in the advisers’ local government areas. As well as this, it considered their membership of a professional body which may also have their own ethics requirements. 

For example, the Financial Advice Association Australia requires its members to comply with its professional code and best practice standards, as well as the FASEA Code of Ethics. 

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Their paper, Unsung Guardians? Communal Fraud Susceptibility and Complaints Following Mass Financial Adviser Attrition, confirmed those with higher levels of ethics education had lower levels of fraud or misconduct.

“The results confirm LGAs with higher proportions of affiliated advisers (those with membership in professional associations) have lower amounts of registered fraud. The outcomes suggest FASEA’s requirements for additional ethics instruction improve adviser performance, given that professional associations often internally mandate members to undergo similar training.

“Increased ethics training among advisers has been shown to be beneficial in terms of reducing fraud via the strengthening of financial acumen within their surrounding populace. This may, in turn, improve individuals’ ability to discern whether their adviser’s investment recommendations are indeed beneficial for them.”

It also posited the higher requirements may also weed out underperforming advisers who are unlikely to be willing to undertake the extra work, thereby increasing the quality of those who remain. 

Interestingly, the report noted ethics training has a higher bearing on fraud rates than education levels, which have also been increased since the Hayne royal commission. 

Commenting on the paper, Adviser Ratings said: “[The paper] provides compelling evidence that financial advisers serve a broader social purpose beyond their direct client relationships, functioning as protective guardians against financial misconduct in their wider communities.

“As regulatory frameworks continue to evolve, policymakers must consider the direct impacts on clients and these wider societal benefits, particularly the ability of professional advisers to support larger client bases through a professional regulatory framework.”