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New Financial Advice Code

The new, slimmer, fitter, Financial Advice Code is quite an update on the consultation document we saw last. The much more focused style, using plainer language, and pitched at the level of principles makes it a much more accessible document. That is ideal. The financial advice industry can spend a lot of time arguing over how to meet these principles, but the document should be readable by clients, and allow them to use it to judge whether the service they are getting meets the Code.

The broad approach to treating clients fairly, and acting in their interests brings in wider business practice, not just advice given. This approach is present in several of the standards, but show up especially well in standards one, two, and four. That fits well with the current conversation about conduct, especially some practices highlighted by the Australian Royal Commission.

There is quite a lot of detail to unpack in each section. One worth spending time on is the subject of conflicts of interest. Here the entire wording is 'standard' not 'commentary' and there is a direct quote from the relevant section of the law. Along with all the debate around the law, MBIE's long review, and their recent comments on commission, we should see clearly the role of commission in this standard, and the importance of avoiding conflicts where possible, and managing them where it is now. That connects really well with the next standard, which is headlined as dealing with client understanding, but under that heading then correctly identifies that explaining the risks and consequences of scope limitation as the main task in meeting that standard.

I was delighted by the use of an insurance example, but disappointed by the detail in the example. Apologies to Code Working Group members that may feel this is nitpicking, but my compliance consultant and I went over this one, and … the example is flawed. It states that a comparison is excluded, but then goes on to state that there ARE things in the current policy that MAY NOT BE covered under the new policy, thereby implying that the old policy has been reviewed and, worse, the adviser is uncertain of the cover being offered under the new policy being recommended. Surely, if no comparison is being done, this wording should be the other way around, along the lines of, “It is possible that the new policy may not provide cover that is provided under the old policy but, because no comparison has been completed, such circumstances, if any, have not been identified.” I also note that the example doesn’t include any comment on what limitations on the product range, if any, that apply, being the first bullet point under the Code Standard – another major omission, I suspect, noting that this point is explicitly covered in the bank term deposit example provided under Standard 5. I note that Katrina Shanks and Simon Hassan picked up the same point as you can reference at this link.

Clearly a great deal of discussion has focused on the shift in competence requirements, dealt with in standards 9 through 12. However, given the, now extended, timetable for implementation in conjunction with the reduced requirement, and the transition period, there is plenty of time to meet the required standard. It is compliance with the first eight Code standards, and particularly standards three, four, and five, that should be the focus. More on those soon.

A more detailed reflection on the draft is available to Chatswood clients to contribute to the work they may be doing in formulating their contribution to the consultation process.




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