In the wake of the Royal Commission, there’s been wide focus on the professional conduct and standards of financial planners and the organisations they represent.
March 2019
In January this year, a new regime came into play to raise the education, training and ethical standards of planners and ensure clients’ interests are protected. The standards are governed by the Financial Adviser Standards and Ethics Authority (FASEA).
While the industry has focussed on the educational standards, it is the ethical standards, and the regimes to enforce them, that has the potential to revolutionise fnancial advice. These will impact planners, as well as licensees and funds.
Meeting the education requirements will pose significant challenges, but it is unlikely that more education will impact the nature and quality of advice to the same extent as the new ethical standards.
“It is the ethical standards, and the regimes to enforce them, that has the potential to revolutionise financial advice”
The ethical standards specifically target individual planners, holding them to a best interest duty free of carve outs and safe harbours. They’re designed to ensure planners advocate for their clients and not for product manufacturers. The reforms provide a platform to address the concerns raised through the Royal Commission and should be broadly welcomed by superannuation trustees. But, while their impact will be most keenly felt by those who continue to see advice as a means of distribution, they will also have implications for those who offer advice as a service.
Moreover, the reforms bring another layer of regulation in an already complex regulatory environment, with significant overlap in responsibilities between ASIC, licensees and FASEA.
What’s New
The FASEA standards are being phased in between now and 2024 across six key areas. The code of ethics applies from 1 January 2020, other standards address education and professional development.
The code of ethics sets a new framework that brings out the spirit of being a fiduciary and ensures that planners always act in their clients’ best interests. It deals with ethical behaviour, client care, quality process and professional commitment and is underpinned by five core values (see the diagram below).
FASEA will enforce the standards via a compliance monitoring framework that holds planners individually accountable for their actions. From April 2020, planners will be monitored by an ASIC approved, independent code monitoring body that every planner must join.
Code monitoring bodies will have authority to take disciplinary action against a planner in the event of misconduct. Any breach will be reported to ASIC and available on the public record.
In addition to licensing licensees and planners, ASIC will be responsible for regulating these bodies. The code monitoring framework calls out clearly that there’s nowhere to hide. Planners who don’t meet the required standards may find that they are no longer able to practise.
Key issues and considerations
As with any change, there are layers of complexity and still some uncertainty as to how some parts of the standards will play out. Still it is essential to take action now as many of the changes will need time to embed.
The regulatory environment is complex
The regulatory design is not ideal. ASIC, the Tax Practitioners Board and AFCA, will have significant roles to play and planners will also need to meet the requirements of their licensee. The FASEA standards overlay another layer of compliance managed by ASIC in approving and overseeing the code monitoring bodies.
“The regulatory design is not ideal.”
It is not yet clear how many code monitoring bodies ASIC will approve, what information these bodies will require, and what mechanisms they’ll put in place to monitor planners. What we do know is that a code monitoring body will need to be both proactive and reactive in monitoring.
While the ethical and legal obligations of planners have similarities there are nuances. A planner who doesn’t act in the spirit of a fiduciary, may meet the legal obligations under the Corporations Act, but not the FASEA standards (i.e. by doing the wrong thing with the right steps). This is where behaviour is paramount - a planner who does not act in the client’s best interests will not be compliant.
FASEA has a ripple effect and will impact all planners and all organisations offering advice
These reforms are aimed at breaking financial advice as a distribution channel for product managers. Given most not-for-profit funds view advice as a service it is tempting to think our model is not impacted. That view would be naive. The potential impacts for industry super sit across three broad areas.
“Although the aim is to break the distribution model, those that offer advice as a service will be impacted”
1. As the client’s fiduciary, planners are required to recommend products most suited to their client’s needs and not just a product offered by their fund. So, in-house planners will need to draw on a wider product set and may need to make recommendations away from their fund.
2. Many funds use scaled models as a means of catering to the varying needs of their members. The ethical standards have been designed for complex advice and don’t really contemplate intra- fund and limited advice. The standards clearly require that planners take a broad approach and fully understand the client’s circumstances. They must also consider the wider implications of the advice on the client and on others, for example, the client’s family members (see case study example). The onus is firmly on the planner to be proactive in seeking information rather than just relying on the information the client provides, and the planner must ensure that the client properly understands the advice.
“The onus is firmly on the planner to seek information rather than rely on information the client provides”
This will require close engagement between the planner and the client. It will also require a higher professional capability for all planners which is being addressed through the other standards.
In this environment, the costs of providing advice are likely to increase, not just from the additional time that planners will need to engage with clients, but also as a result of other factors. Amongst these are the costs of monitoring and training planners, and the potential for upward pressure on salary expectations as planning becomes more professionalised.
The very nature of these requirements, challenges scaled advice models and digital advice and puts added pressure on funds’ ability to o er high quality, cost effective advice to their members.
“these requirements challenge scaled advice”
3. While FASEA focuses on the individual planner, any breach will be registered by ASIC and publicly available. So, a breach by a planner can have a brand impact on licensees and funds including reputational damage. It is therefore in everyone’s interests to ensure planners comply and both licensees and funds must have mechanisms in place to proactively manage risks.
“A breach by a planner can have a brand impact on licensees and funds”
FASEA is happening now, even though milestones are phased
Building understanding and alignment with the ethical standards will take time. Although code monitoring starts in April 2020, to ensure that the advice given today will meet the new ethical standards funds must work with planners now.
“It is essential to take action now”
Industry Fund Services (IFS) is working closely with planners to ensure they are FASEA-ready well ahead of the cut off dates. All IFS licensed planners have learning pathways, attend compulsory CPD and complete an annual exam.
Ramping up to deliver advice in a new world
While welcome, the FASEA standards will push anyone offering or delivering advice to review their approach.
To operate in this new environment funds need a good licensee with the right infrastructure. Culture is critical as is having strong risk management, and the tools, systems and processes needed to run advice.
“To operate in this new environment funds need a good licensee with the right infrastructure”
Some of the key areas funds must consider include:
Strategic use of data for supervision and monitoring both systemically and anecdotally
Having appropriate regulatory technologies to enable early detection of risks and/or non-compliance
Extending internal audit and advice assurance programs
Helping planners improve their practice and meet the ethical and educational standards Putting protocols in place for dealing with behavioural concerns.
The new world of financial advice creates challenges and opportunities. The complexities of regulation, the ethical and professional requirements, and the risks to reputation and brand, all make it critical for funds to act now.
If you’d like more information, please contact Chris Joiner, Executive Manager Advice Solutions at IFS on T: 03 9657 4305 | M: 0488 016 876 | E: cjoiner@ifs.net.au
IFS has been partnering with industry super funds for 25 years to help members achieve a secure retirement. We leverage our deep expertise, aligned ownership and our commitment to always putting members’ interests first. Our services include financial advice, the collection of unpaid super, non-super investments and AUSfund, which transfers lost and inactive super accounts to active member accounts to minimise the incidence of multiple accounts. We are proud of the tangible difference we’ve made in supporting millions of fund members.
Critical dates
Code of ethics
January 2020 - Code of ethics applies
January 2020 - Code monitoring commences
Education, professional development and training
January 2019 - Existing advisers must meet continuing professional development standards
January 2019 - Education standards apply to new entrants
January 2019 - New entrants required to complete professional year and professional supervision
January 2021 - Existing advisers must pass a 3.5 hour exam which includes the applied ethical and professional reasoning and communication area
January 2024 - Education requirements apply to existing advisers
Case study
Anna and Brian, a married couple, are seeking advice on improving the performance of their superannuation funds. The adviser (Margo) is an authorised representative of Acme Financial Planning Pty Ltd.
Margo advises Anna and Brian to roll over their superannuation bene ts from their current funds (not related to Acme) to Acme funds. Margo does not attempt to compare Brian’s likely returns if he were to stay in his current fund with those from the Acme Fund. She ignores (or does not address) the increased ongoing fees that Anna will have to pay in the Acme Fund.
Margo has failed to demonstrate, realise or promote the values of competence and diligence.
She has breached:
Standard 2 - Her advice was not in the best interest of either Anna or Brian
Standard 3 - As Acme received a bene t from the implementation of her advice to switch to Acme funds
Standard 10 - Her failure to consider relevant issues (Brian’s likely returns, and Anna’s ongoing fees) does not demonstrate competence.
