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Industry concerns about the Code
Many professions have developed codes of ethics to deal with systemic conduct related questions or judgements which often arise in the course of professional duty. So why has the FASEA Code of Ethics (“the Code”) been subject to widespread criticism from the financial advice industry since its adoption?
Specific concerns raised by the industry include:
Indeed, industry argues it can no longer provide advice at the price point consumers want and this will have consequences on the future of the sector, where numbers of Advisers are already dropping (refer to Table 1).
However, there is a clear community need for financial advice, with an ASIC survey demonstrating that only 12% of Australians had received advice within the last 12 months and 41% of Australians intended to get financial advice in the next 12 months. The survey also stated 19% of Australians do not trust financial advisers and 18% do not see the value of consulting a financial adviser.
ASIC (2019), Report 627 Financial advice: What consumers really think, ASIC (Page 5, Page 7)
These statistics clearly indicate opportunity in financial advice, but only with a change in consumer sentiment, which was hoped would follow the formalisation of professionalism and in particular, the adoption of the Code. Even though there is room for improvement in the clarity and application of the Code, without the support of the industry, the Code cannot make the impact for which it was designed. But the reality is, the Code is not going anywhere anytime soon.
Will the Code or guidance change?
What we know is that the responsibilities of FASEA and the previously proposed code monitoring body will transfer to Treasury and ASIC/FSCP. Treasury, as owner of the Standards (i.e. Legislative Instruments) can make changes to the Code relatively quickly and indeed there are some industry participants lobbying for change directly. And, although it has not been stated who will have responsibility for setting guidance for the Code, it is likely that future guidance would come from ASIC as owners of the regulatory application of the Code.
But with the recent unpredictability in this regulatory space, and because coordinating change and practical application across two entities may mean this is procedurally difficult, it cannot be known whether the Code or its supporting guidance will change at all. If the Code and the guidance remain unchanged, then, unless the Legislative Instruments are suspended, the Code will be enforced in its current state. If this is the case, the most likely source of clarity will be achieved through determinations of AFCA and any case studies that may be issued by ASIC.
With so much uncertainty, taking reasonable steps to comply with the current form of the Code (which stands as a legal obligation) is an appropriate way to manage regulatory compliance risk in the short to medium term. It is recognised that, in a profession already considered to be compliance heavy, additional compliance hurdles may be too much for some advisers and licensees to handle – but there are opportunities to think about the Code in different ways and for better efficiency.
How can licensees and advisers be Code-ready?
Historically, ASIC applies a regulatory compliance approach that relies on evidence and controls and it is expected that this approach will continue at least in the short to medium term. So where should attention be focussed?
Here are three key areas.
1. Culture and Development
Firstly, and most importantly, licensees should think long and hard about the culture of professionalism they want to instil in their adviser network. How will they uphold the 5 values of the Code – Trustworthiness, Competence, Honesty, Fairness and Diligence? What other values do they want to uphold and which behaviours do they want to encourage? After all, isn’t the point of the Code to drive a cultural change across the industry and build trust and confidence in financial advice as a profession? Once a licensee is clear on its cultural vision, it can then drill down on key elements of the business such as assessing adviser business models, reviewing remuneration structures, considering authorisations and models of professional autonomy, identifying target markets and recruiting, training or retaining advisers and staff that align to their cultural values.
2. Compliance frameworks
An effective compliance framework will look different for each licensee. A crucial first step is for licensees to give careful thought to the Code considering their own practice, interpreting the Code and the supporting guidance and identifying any gaps between current compliance frameworks and the Code. From here, licensees can:
To assist in defending the positions reached, licensees should document their interpretation of the Code through procedures and policies, clearly referring to the 12 Standards to demonstrate consideration of them. This is important in developing a robust framework within which advisers can conduct their businesses with confidence.
3. Technology and partnering
To thrive rather than survive in the post-FASEA world, licensees should also consider the role of technology and systems within their business as well as whether partnering or outsourcing would be more effective than retaining certain functions in-house. As witnessed in numerous remediation programs, having accurate and complete data is incredibly important for effective monitoring and supervision, and this will be even more the case going forward.
In conclusion, the likely road to success for the Code and the industry as a whole seems to be one with high levels of collaboration between regulators, licensees and advisers; where regulators are consulting with industry participants and providing clear guidance, licensees are supporting advisers in new ways to drive a shift in culture and advisers are keeping the Code front of mind, not only when engineering advice, but in all activities and interactions regarding their clients.
Deloitte’s Governance, Regulation and Conduct Solutions team are available to discuss any specific aspects of your AFS licence.
Andy has over 15 years’ experience of working with financial services institutions to enhance their strategies and operating models and help them to better understand and manage their operational and compliance risks. He also works extensively with organisations to independently assess operations and support remediation programs to address regulatory concerns.
Andrew has 13 years’ experience in the Financial Services industry and specialises in Financial Advice. He has extensive experience working with Australian Financial Service Licensees (AFSL) to enhance compliance frameworks and provide support in remediation programs and regulatory change initiatives.