LATEST: New Financial Advice Code Approved

The new Code has been approved. Here are the links you need:

New Code


Draft Financial Advice Code - Code Standard Six and Seven

Here are the draft Code Standards, again with commentary omitted for brevity - but still recommending that you read the full text.

[Standard 6] Protect client information
A person who gives financial advice must take reasonable steps to protect client information against loss and unauthorised access, use, modification, or disclosure.

[Standard 7] Resolve complaints
A person who gives financial advice must provide arrangements for resolving complaints by clients.
A complaint is an expression of dissatisfaction made to or about a person, related to its products, services, staff or the handling of a complaint, where a response or resolution is explicitly or implicitly expected or legally required.

One concern - and it must have been a tension present in more areas of the draft Code than just these two areas - is the extent to which the Code might cover requirements for Financial Advisers that are already present elsewhere. Either in FMC Act (once amended), or in other law or regulation. These privacy and complaints process are two such areas where the Code Working Group is introducing a standard that is well covered elsewhere. The danger of doing so is that the standard somehow varies. The potential for variation, especially in a Code which is meant to be brief and easy for clients to understand, is significant. The standard on complaints includes a definition of complaint so broad that it would appear to include any vaguely expressed gripe. In the commentary it appears to suggest that all these must be resolved using someone other than the adviser. For smaller businesses this would mean many frequent referrals to the dispute resolution body. I am not sure that is the intention.

Two solutions exist - remove these standards, or make them work better as signposts. The signposting approach to drafting has been used elsewhere - there are several direct references to the law - and could be used here as well, drawing attention to the regulatory requirement for a dispute resolution scheme, and the requirement to maintain competence to meet privacy law and regulation.

Draft Financial Advice Code - Code Standard Five

The Code Standard as drafted is:

Give financial advice that is suitable for the client

A person who gives financial advice must ensure that the financial advice is suitable for the client. The person must have reasonable grounds for the financial advice, having regard to the nature and scope of the financial advice and the client’s circumstances.

Reasonable grounds for the financial advice means grounds that a prudent person engaged in the profession of giving financial advice would consider to be adequate in the same circumstances, including in relation to:

  • the strategy underpinning the financial advice
  • each financial advice product covered by the financial advice.

The client’s circumstances means those aspects of the client’s situation, needs, goals, and risk tolerance that a prudent person engaged in the profession of giving financial advice would consider to be relevant to the financial advice.

I have omitted the commentary, for the sake of the length of this post, but it is important.

First, I have heard people question the use of the first dot point: "...the strategy underpinning the financial advice..." I must admit, this sounds like it emerges more from the concepts of investment advice, than risk, home loans, or other areas. Having felt that, after sitting with the text for a while, I am not unhappy with the requirement. I can imagine part of the statement of advice listing client goals, and then a statement of strategy which addresses them, and selections for actions and products which deliver on them. Get these three in alignment and the plan should easily meet the test. For strategy, think "main overarching approach". A client with a need to save money may see a "strategy of reduce cost and buy value" delivered in cutting out bells and whistles and increasing excess levels. So I guess I have come around to feeling comfortable with this requirement. The recommendations section of the SOA may break down as "Strategy, actions, products" in a series of headings.

My concerns are that there are two tests offered in the Code, one is the advice is suitable given the nature and scope of the financial advice being provided. The other is that of "...a prudent person engaged in the profession of giving financial advice would consider to be relevant to the financial advice". The first test is in the hands of the client and the adviser, the second is in the judgement of the FADC about what an industry professional who is 'prudent' would seek. Although, to some extent, that view is kind of implicit in the whole process of the FADC, I prefer the primacy of the client and adviser scope, and that one should have priority.


Draft Financial Advice Code - Code Standard Four

This is the draft standard:

Take reasonable steps to ensure that the client understands the financial advice
A person who gives financial advice must take reasonable steps to ensure that the client understands the financial advice and all material risks and consequences of:

  •  the nature and scope of the financial advice (and of any limitations on the nature and scope)
  •  following the financial advice, including any associated fees and costs.

In addition, the commentary, as I has been identified before, contains a problematic example - which is understood, and at the recent briefing to the FSC by Angus Dale-Jones, it was explained will obviously be dealt with.

Two criticisms are leveled at the draft standard, commonly.

  1. that it does not make particular requirements for the range of products or services included
  2. that it doesn't work for generic or class types of advice
  3. that it doesn't provide a safe-harbour for definition of scope

On reflection, I prefer this draft to the wording in the current Code. I like that it is has a qualification of reasonableness, is framed in terms of client understanding, gives freedom to adviser and client to agree scope, and requires that whatever agreement is set, the material risks and consequences must be explained.

For example, whatever the range of products offered, whether it is many, few, or just one, the material risks and consequences of that limitation must be explained. There may be a better product out there, we have looked on so far. How far? Only the products of my employer, will have to be one common answer. That answer alone will help to signpost a critical limitation. What might be the consequences of that? There may be better products available. Depending on how the Code is enforced that could make products comparison a great deal more common. Of course, I have an interest in that, but I as a consumer I believe in the value of such comparisons, and I think that belief is widespread.

A good discussion was had at the recent FSC meeting with Angus Dale-Jones about what to do with more general types of advice - such as a sharebroker's research paper with a 'buy / hold / sell' recommendation, or an international investment guru giving a general talk about an asset class. There are some problems with these, and they may require some revision to the law. The Code, however, could operate fine, provided you define 'the client' as 'the attendees at this workshop, assuming general characteristics ... and disclaim appropriately'. That will require some flexibility and understanding on the part of the regulator. I can see that working, but I can also see why a safe harbour may be desirable in such circumstances as well. One will not likely be forthcoming.

Lastly, a reminder that with submissions on the Code due by Friday, we all need to get moving.







Code of Conduct - and Fees for No Service

An interesting discussion yesterday about whether a service standard should be included in the new draft Financial Advice Code. There is a widespread belief that providing ongoing advice service should be part of the Code, and some attempt should be made to define the service, and place it in the Code.

Defining the service is a tough ask. I am not in favour of the Code requiring certain types of service, charge, or economic activity. That was rejected by MBIE in drafting the law and if you like innovation, flexibility, and freedom, then you probably think that was a good idea. I am also concerned as to how we would define the service, at what thresh-hold level of renewal commission we might require it, and whether we might bind an adviser to a situation where they were required by the Code to provide a service that was uneconomic, in the case of very small renewal commissions.

But the problem is real, as illustrated from Australia, is when a financial adviser receives a payment for no service given. Plainly, this is wrong. I recently had my neighborhood gym charging me for personal training, with a trainer that had left the business. Unnoticed for some months, I was not happy when I found out. Consumers are like that. In Australia, such advice fees were charged in some cases, even on the accounts of people who had been dead some time. It is not a good look.

But there is a solution, possible with relatively little complication to the admirably principles-based design of the Code.

In Code Standard One, in the commentary, we could add an illustration that it is never fair to receive a fee or commission when no service is provided and no reasonable attempt has been made to provide the service. That would leave the exact nature of the service, the value proposition, the form of charge and so on, with advisers. It would also clearly signal that fee for no service is unacceptable.

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.



Insurance and fee-based remuneration

The International Association of Insurance Supervisors feels that commission is probably an integral part of insurance advice. Like most of the people I know, I think the same way. But fee-based remuneration is bound to get a bit of attention due to the new, draft Financial Advice Code. I shall write more on that later today. But quite a few advisers already see a role for fees as a part of a balanced remuneration strategy. If you would like to explore that world, please drop me a line. I am aiming to get a few of us together for lunch and ideas sharing.

Code Working Group: new draft Code available for review and consultation

The new draft Code has just been released for consultation:

Read more about the consultation, including the draft code and link to the online survey.

Consultation closes on Friday, 9 November 2018.

Selected details from MBIE's media release:

11 October 2018

Consultation is now open on a draft code of professional conduct for people who provide financial advice to consumers.

Code Working Group chair Angus Dale-Jones says the Group has been working to create a workable and robust code that will help ensure the availability and quality of financial advice.

“Our role in developing the Code is to set minimum standards of ethical behaviour, conduct and client care, and competence, knowledge and skill that will apply to anyone who gives financial advice to a retail client,” says Mr Dale-Jones.

“Earlier this year we consulted on the key concepts and high-level approach, which gave us a clear indication of what people wanted to see in the Code. As part of this consultation we also conducted a survey of consumers’ experiences with financial advice, which provided some useful insights on what consumers expect and how a Code of Conduct could improve outcomes for consumers.

“We received a lot of feedback on the need to set robust and achievable competence standards, and have taken this feedback on board. The draft Code proposes to set competence equivalent to the learning outcomes in the New Zealand Certificate in Financial Services (Level 5), approved by the New Zealand Qualifications Authority in 2014.

“We have also taken a principles-based approach to ensure the Code is flexible and works for all the different types of businesses that provide financial advice, including small firms.

“We’re now seeking feedback on the draft Code, and want to hear from people about what they think of the proposed standards and how they will work in practice.

“We want to encourage feedback from all parties who will be affected by the Code, including anyone who is representative of the financial advice industry as well as consumers of financial advice. We will be holding a live chat session during the consultation period and people can also submit feedback via our online submission form,” says Mr Dale-Jones.

The Code is technology-neutral and will apply to robo-advice, as well as financial advice given by people. It sets out 12 proposed standards and supporting commentary. It includes requirements to treat clients fairly and act in their interests, act with integrity, manage conflicts of interest, take steps to ensure the client understands the advice, give advice that is suitable for the client and meet standards of competence, knowledge and skill.

The Code will sit within a wider regulatory regime that will include statutory duties, disclosure requirements and licensing. These changes are being introduced through the Financial Services Legislation Amendment Bill.