As the Government moves further towards finalising the legislation underpinning the new Single Disciplinary Body (SDB) covering financial advisers, it must also ensure that the continuing issues with the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics are sorted out, particularly Standard 3.
What should be obvious to the Government’s advisers as they scan the industry’s submissions to Treasury on the proposed legislation surrounding the establishment of the SDB is that the first step must be to clean up the many loose ends still surrounding the FASEA regime, with Standard 3 being a priority.
The issue has been raised by all the major financial planning groups, with both the Association of Financial Advisers (AFA) and the Stockbrokers and Financial Advisers Association (SAFAA) making it a core element of their submissions to Treasury regarding establishment of the SDB.
The SAFAA has quite rightly recognised that with the formal winding-up of FASEA, responsibility for the code of ethics will fall within the remit of the Minister, and therefore Treasury. The SAFAA believes that Standard 3 of the code must be amended and Standard 6 must be removed.
“SAFAA urges the minister to make these changes as soon as the bill comes into effect,” the submission said.
It is hard to argue against the urgings of the SAFAA and the AFA in circumstances where breaches of the FASEA code of ethics will be regarded as a contravention, therefore allowing the proposed SDB panel to issue an adviser with an infringement notice and to recommend to the Australian Securities and Investments Commission (ASIC) that it seek to impose a civil penalty.
As the SAFAA submission stated: “SAFAA has consistently voiced its serious concerns that elements of the code are unworkable and conflict with the law.
“Standard 3 of the code that imposes a blanket prohibition on any conflict of interest is impossible to comply with and conflicts with the law. The test in Standard 3 has no element of materiality or proportionality. For example, in any payment mechanism (commission, hourly rate, asset-based fee etc), there will be potential conflicts between the interests of the adviser and/or of their licensee and the client.
“SAFAA has recommended in submissions to FASEA that the code should utilise the wording of the Intent as Standard 3, so that the Standard states: ‘Advisers must not advise, refer or act in any other manner where they have a conflict of interest or duty that is contrary to the client’s best interests.’ This gives effect to the intent of the FASEA board without conflicting with the corporations law.
“Standard 6 of the code conflicts with the provision of scaled advice and is inconsistent with section 961B of the Corporations Act (the ‘best interest duty’). The Minister and ASIC have strongly supported the provision of scaled advice. Stockbroking involves the provision of scaled advice. While Standard 6 remains unchanged, stockbrokers and investment advisers providing scaled advice risk being found to be in breach of the standard by failing to take into account a client’s broader, long-term interests and likely circumstances.
“SAFAA has called for Standard 6 to be removed from the code. Until these changes are made, advisers risk contravening a civil penalty provision and being subjected to disciplinary action.”
At the same time as the SAFAA used its submission to make these points, AFA acting chief executive, Phil Anderson, used social media to argue that as Standard 3 currently exists, doctor referrals to pathologists and specialists would probably not comply.
In all the circumstances, the Minister owes it to financial advisers to take on board their concerns about Standard 3 and ensure it is amended to a more workable form to ensure that FASEA’s legacy does not become the SDB’s continuing burden.
