5 things to know about the FASEA Code of Conduct

image description
Sarah Archer Special Counsel Linkedin

Those of you caught-up in the wonderful world of FASEA have likely spent more time than you care to count deliberating with colleagues, reading about and considering the impact of the FASEA Code of Ethics (Code).

In fear of adding to that pile, here are five things you should know about the Code:

1 The origin story: what is its purpose and where does it come from?

The purpose of the Code is not to give consumers additional rights to enforce against advisers.  It’s to introduce a formal framework to promote the ethical conduct of financial advisers and safeguard the integrity and professionalism of the industry.

Essentially, the Code is seeking to impose certain “fiduciary duties” on a financial adviser’s relationship with their client.

Fiduciary duties, which are also referred to as duties of loyalty, originate from a body of law called equity.  Equity is system of principles that was developed to make the common law (that is, “judge made” or “case made” law) fairer.  In the most general sense, equity means fair dealing through the application of good conscience.

And so it is with the Code: it sets out a list of principles to ensure advisers act in good conscience and with a sense of loyalty to the client (rather than their hip pocket or licensee!) to bring about a fair outcome.  Or, in FASEA’s words, to ensure that advisers conduct themselves with the values of trustworthiness, competence, honesty, fairness and diligence.

2 Who is responsible: the adviser v the licensee

The Code applies to “relevant providers”, who are defined as individual advisers authorised to provide personal financial advice to retail clients.  The Code is all about individual advisers acting ethically when they give advice; it follows, therefore, that Code duties are owed by individual advisers (not licensees), to clients (not clients’ extended family) and in relation to the advice (not the entire client relationship).

Although responsibility under the Code ultimately lies with the individual advisers, licensees still have an important role to play and there may be repercussions for licensees if advisers breach the Code. For example, AFCA may take breaches of the Code into account in deciding complaints.

The Code is a financial services law and therefore licensees need to take reasonable steps to ensure their advisers comply with it, and monitor and supervise that compliance.  ASIC has also stated it expects licensees to assist with monitoring compliance.  What might that involve?  Having a FASEA Code of Ethics policy in place is a good start.  Licensees should also expand their existing monitoring and supervision practices, such as file audits and performance reviews, to encompass Code compliance.

As a licensee, you don’t want to hinder the ability of advisers from complying.  Encourage advisers to come forward if there are any internal processes or procedures which may be hindering their ability to comply.  For example, it may sound counter-intuitive, but templates and inflexible document systems can sometimes prevent, rather than assist,  compliance.

3 How does it fit in with the existing law?

The Code obligations sit alongside existing legal obligations under legislation (such as the Corporations Act and the ASIC Act) and common law (such as contracts and the law of tort).

Most of the Code obligations are already covered by existing legal obligations and are not particularly new or groundbreaking.  For example, advisers already have the obligation to: act in clients’ best interests in relation to the advice, provide appropriate advice, manage conflicts of interest to ensure the clients’ interests are prioritised, disclose pertinent information, obtain consent  to act, make proper enquiries and maintain an appropriate level of knowledge and skills. And licensees already have the obligation to provided their financial services (which are provided through advisers) in an efficient, honest and fair manner.

While FASEA commentary and guidance is important, it is not law – the wording of the Code is law.  FASEA has provided a number of examples to assist in understanding how the Code may apply in different fact scenarios.  Although the examples may be helpful, they cannot be extrapolated or used to extract rules to apply to all situations. For example, an adviser does not need to consider every relative of every client because of an example published by FASEA suggested it was appropriate to do so in that specific fact scenario.

It is also worth noting the overlap and inconsistency between terminology used in the Code and terminology used in chapter 7 of the Corporations Act.  A clear example, which has caused some confusion, is the concept of a “conflict of interest”.  The Code provides that an adviser must not act if there is a conflict of interest or duty, whereas the Corporations Act recognises conflicts exist and requires them to be managed.  At first this seems nonsensical, but FASEA has interpreted a “conflict of interest” as one that cannot be appropriately managed (that is, an actual conflict, as opposed to a potential or adequately managed conflict).

4 Record keeping

It would be remiss if we didn’t mention record keeping.  If ASIC or the new Code monitoring body ever comes knocking, advisers will be in a much better position if they have documentary evidence of compliance.  It’s also a Code requirement to maintain complete and accurate client records. Client correspondence, disclosures, reasons for recommendations and consent should all be documented.

5 Cooperate with ASIC, but don’t incriminate yourself

The Code obligation to cooperate with ASIC and monitoring bodies if they are investigating a breach of the Code does not take away current legal protections in relation to self-incrimination and client privilege. Again, the Code is about ethical conduct. Of course, an adviser should not hinder an investigation that is being conducted to bring about a fair outcome for a client, but they are not required to “fall on their own sword”.

If in doubt, the highly-technical “front page” and “special person” tests can be useful: would you be happy for your conduct and advice to be front page news and would you act in the same way and if you were providing advice to your parent/ child/ partner.  As a general rule, if the answer to these questions is “yes”, an adviser will be in good shape.

Authors: Sarah Archer (Senior Associate) and Grant Holley (Partner)