That's the theme of my latest piece at goodreturns which draws on some astonishing examples of guidance to advisers in Australia.
FINSIA Council member News Update announces a code monitoring agreement (see below). What interesting is the interaction between various standards and requirements. Legal standards, regulations, licence requirements, code standards, and contract terms all form a complex web of requirements for an advice business. Governance processes to monitor meeting all the requirements are central to the operation of the business. What can be safely outsourced, versus what must be managed within the business, will be a major issue for advice businesses whatever their size.
FINSIA signs up to landmark code monitoring agreement with professional associations
The Financial Services Institute of Australasia has agreed to be part of a group of six professional financial planning and advice associations developing a code monitoring solution for members to deal with upcoming regulations.
The associations have agreed to work together to submit a code monitoring compliance scheme application to ASIC so the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics can be monitored and enforced.
Chris Whitehead, FINSIA CEO and MD, F FIN, said: “As the professional membership body for the financial services sector, FINSIA brings its expertise to the cooperating associations to help lift professional standards within the sector by the introduction of a defined code monitoring cooperation agreement.
“FINSIA supports its members by ensuring the financial planning and advice sector is recognised as a profession by developing a scheme by the profession for the benefit of the community.”
For a copy of the media release, ‘A landmark code monitoring cooperation agreement announced by professional associations’ please click here
FINSIA is committed to keeping its members up to date on initiatives like these that help raise standards of professionalism for the financial services sector.
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.
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.
Overall I agree with the draft Code Standard. My comments only apply to the commentary under the standard. I agree in general with the “Where practicable, avoid conflicts of interest” but suggest that this should not preclude delivery of a service provided on the basis that commission shall be taken. I note MBIE's recent comments on the role of commission as a form of remuneration, and the International Association of Insurance Supervisors view on the matter too. Perhaps every adviser should offer a fee-only alternative. I discussed that with my compliance adviser, and we could end up with something of a pantomime of not-really-an-option-fee-offers. The commentary should support the decision of our legislators to allow commission, but to require the conflict to be managed. So I think it important to allow that a service can be provided on a commission basis despite the conflict, if the product or service would not otherwise be available to the client, or would require the client to incur additional inconvenience and cost to obtain the same product or service elsewhere, and the client still wishes to proceed.
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.