The Financial Adviser Standards and Ethics Authority’s (FASEA) Code of Ethics (the Code) has been with us for one year, coming into effect on 1 January 2020. The Code consists of 12 standards and five values. Its objective is to encourage higher standards of behaviour and professionalism in the financial services industry, of which ‘Standard 12’ outlines financial planners’ professional commitment to support the Code.

Standard 12

As outlined in the FASEA Explanatory Statement, Standard 12 has two key elements. The first element requires that financial planners uphold and promote the ethical standards of the profession and hold others accountable.

The second element applies to supervisors of a new industry entrant in their ‘Professional Year’. It requires supervision that is in the best interest of the new entrant, and actively assists the new entrant in getting the full benefit of their Professional Year. That’s a big job for the supervisor!

Exploring the first element of Standard 12

The starting place for any conversation on the FASEA Code of Ethics should be to examine the legislation, which is the source of truth when considering how the Code is designed to operate. Let’s begin by looking at Standard 12:

Individually and in co-operation with peers, you must uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest.

The key aspect of Standard 12 is that financial planners are required to uphold the ethical standards of the profession. Upholding the Code means that financial planners are required to support it, become an advocate for and champion the purpose of the Code.

Equally as important is the requirement to ‘hold each other accountable for the protection of the public interest’. As financial planners embed the Code in their day-to-day operations, this element has started to attract some attention. Planners have started to consider this new obligation and ask what action or inaction is reportable? And to whom does the Code apply?

Let’s begin by considering a few case studies.

Scenario 1: Meet Malia – Should she speak up about in action? 

Malia is a financial planner who is working with her business partner, Tom. Malia reviews Tom’s file notes for one of his clients and discovers that he hasn’t provided a reasonable basis to advise a client to switch super funds. In Malia’s opinion, the advice is not in the best interest of the client. Does she have an obligation to raise the issue with Tom?

Yes – she does. Standard 12 requires we ‘…hold each other accountable for the protection of the public interest…’. Raising her concern over failure to provide advice in accordance with the Code is her obligation. If Tom takes no action, Malia should consider reporting Tom to the licensee supervisor. In action may result in client detriment, and Malia would be breaching Standard 12. She would also be failing to demonstrate the values of trustworthiness, honesty and competence.

Scenario 2: Meet Dev – Should he be reported for taking referral fees?

Dev is a mortgage broker who has a referral agreement with Anna. Anna is a financial planner, who has been referring clients to Dev for almost 10 years.

Anna explains to Dev that she can no longer receive referral payments, as these payments provide a conflict, per Standard 3 of the Code which states: ‘You must not advise, refer or act in any other manner where you have a conflict of interest or duty.’ On this basis, Anna seeks to modify the referral agreement, which Dev accepts.

During the discussion, Dev explains that he isn’t an expert in business loans and sometimes he refers Anna’s clients to another mortgage broker. Dev explains that he receives referral payments for these referrals. Anna contemplates whether this is a breach under the Code of Ethics, and whether she needs to report it to her licensee.

Dev is not a financial planner, so he is not bound by the Code of Ethics. Anna does not need to take action regarding his receipt of referral payments. However, Dev can no longer pay Anna for any referrals, nor can Anna receive any referral payments from any other party.

Scenario 3: Meet Chiyo – Should she report a possible lack of competency?

Chiyo is a business development manager for an insurance company. She is helping Zahra with a client’s life insurance application. Zahra is an experienced financial planner, but she doesn’t often provide life insurance advice, and is struggling to understand some of the terms and restrictions. Chiyo becomes concerned that Zahra doesn’t understand that the new insurance policy has some exclusions that don’t apply to the existing insurance. Chiyo believes that the recommendation is not in the best interest of the client, and that Zahra doesn’t understand the product.

Chiyo suggests to Zahra that she should refer the client to another planner, specifically one who understands the complexity of the product. Zahra tells Chiyo that she isn’t interested in her comments and stops returning Chiyo’s phone calls.

Both Chiyo and Zahra are authorised to provide advice, so are both subject to the Code. Chiyo believes Zahra may have breached some of the Code’s values and knows she has an obligation to report this under Section 12. Specifically, Chiyo identifies the following potential breaches relating to Zahra’s advice:

• Standard 2: The advice is not in the best interest of the client.
• Standard 9: The advice and product recommended are not offered in good faith or competence.
• Standard 10: She hasn’t developed a high level of the relevant knowledge and skills.
• Hasn’t demonstrated the values of trustworthiness, competence, honesty or fairness.

Should Chiyo lodge a report about Zahra’s advice?

Yes, Chiyo should lodge a report about her concerns. As Chiyo is authorised to provide advice, she is subject to the Code of Ethics, so is required to speak up on any potential breaches. Failure to report a concern may result in a poor consumer outcome and runs against the governing principles of the Code of Ethics.

To further complicate matters, in the absence of a Single Financial Disciplinary Body (SFDB), Chiyo has some difficulty determining where she can report a concern that the Code of Ethics has been breached.

Who oversees enforcement of the Code?

When the Code of Ethics was being legislated, it was intended that a Code Monitoring Body would be established. This body was supposed to be responsible for investigating failures, or possible failures, of the Code.

However, in October 2019, the Government decided to accelerate the introduction of the Single Financial Disciplinary Body (SFDB). This led to the sidelining of a Code Monitoring Body.

The intention was to have legislation on the operation of the SFDB available by mid-2020. In the absence of a SFDB, ASIC issued ruling 19-319MR, which indicated that it expects Australian financial services licensees to ensure that their financial planners comply with the Code. So, the industry continued its work to implement the Code, under the understanding that the SFDB would (shortly) come into existence.

COVID-19 threw a spanner in the works. Suddenly, we started working from home and financial markets went into free fall. ASIC announced that it would realign its focus to provide pandemic support and temporarily suspend some regulatory activity. At the same time, the Government was busy introducing JobKeeper and JobSeeker, and people began fighting over toilet paper in supermarket aisles.

The knock-on effect of all of this is a delay to the introduction of the SFDB. Senator Hume announced in August 2020, that the SFDB is not expected to commence until late 2021.

In December 2020, the Government announced its intention to expand the operation of the Financial Services and Credit Panel (FSCP) within the Australian Securities and Investments Commission (ASIC) to encompass the functions of a single, central disciplinary body for financial planners, which will include oversight and monitoring of the Code.

Reporting a breach under the Code

In the absence of the SFDB, several options exist to report a possible breach of the Code, which we will step through below. In all options, you should carefully articulate reasons why you believe a breach has occurred, clearly identify which standards may have been breached and which values have not been demonstrated.

1. Report it to your licensee

If you have a concern with another planner, you should report it to your licensee. If the planner you believed has breached the Code is from the same licensee, your licensee can evaluate the issue to determine whether or not a breach has occurred, whether any action is required and whether a report should be lodged with ASIC.

If the planner in question is from another licensee, a further discussion may be required on whether ASIC is contacted directly or if a discussion between licensees is more appropriate.

2. Lodge a report directly to ASIC

Planners can lodge a report directly to ASIC. To do so, you can visit the ASIC website. Carefully consider what is being reported and ensure that you clearly articulate your reasons. Your licensee may be able to assist you with writing the report to ASIC and you should consider obtaining legal advice from someone who understands the governance framework that ASIC operates within.

3. Contact the licensee of the planner

If you would like to report a concern or potential breach of the Code by a planner from another licensee, you should consider contacting that planner’s licensee. You should research who operates the licensee and contact them directly. Even if an initial discussion is via phone, we recommend that a detailed report is emailed to the licensee, so that you have a record.

4. Contact a professional association

You may consider reporting any concerns of a breach of the Code to a professional association, such as the FPA. A professional association is likely to be interested in these reports, but also would consider whether there has been a breach of its own Code of Ethics/Code of Conduct.

5. Encourage client complaints to be lodged through the correct channels

Whilst you should encourage your clients to report any concerns of misconduct, be clear that ASIC does not settle disputes about financial services or advice. Therefore, the first port of call for disputes is to make a report to the licensee and attempt to have it resolved under the licensee’s Internal Dispute Resolution Scheme. If unsuccessful, the complaint can be lodged with the Australian Financial Complaints Authority (AFCA). A careful distinction needs to be made between disputes and breaches under the Code of Ethics.

Supervising a new entrant to the industry

The second element to Standard 12, outlined in FASEA’s Explanatory Notes, is the requirement for supervisors to provide guidance that assists a new entrant in getting the full benefit from their Professional Year. Let’s start by examining the explanatory statement:

65. One element of this duty affects relevant providers who are acting as supervisors for provisional relevant providers undertaking the professional year (see the Corporations (Provisional Relevant Providers Professional Year Standard) Determination 2018). This Standard requires that you must provide supervision that is in the best interest of the provisional relevant provider, that is, supervision that actively assists him or her in getting the full benefit of the professional year.

Before we begin to discuss the role and responsibilities of a supervisor, let’s define a new entrant. A new entrant:

• Is not authorised to provide advice and not listed on the Financial Advisers Register prior to 31 December 2018.
• Must have completed a FASEA approved qualification, such as a:
  • FASEA approved bachelor’s degree (AQF7); or
  • FASEA approved post graduate diploma (AQF8); or
  • FASEA approved master’s degree (AQF9).

The path of a new entrant through a Professional Year is not easy. FASEA requires that they complete 1,500 hours of work activity and 100 hours of structured education and training. The Professional Year policy issued by FASEA requires that during quarter one and quarter two of their Professional Year, they are limited to back-office duties and are directly supervised whilst attending client meetings.

Throughout quarter two, the new entrant may sit the FASEA exam. Note that this is the same exam that all financial planners are required to pass by 1 January 2022. If the new entrant does not pass the exam, they cannot proceed through to the next part of their Professional Year.

Once they have passed the FASEA exam, they can commence quarters three and four of their Professional Year and they can refer to themselves as a ‘provisional financial planner’ or ‘provisional financial adviser’. Importantly, they can begin providing advice to clients with indirect supervision.

Upon completion of quarters three and four, a new entrant will receive a completion certificate and they are officially recognised as a financial planner (or financial adviser). Simple, right?

The role of a supervisor

Supervising a new entrant can be a rewarding way for you to pass on your knowledge and experience to someone starting out in the industry. However, you should be prepared to provide them enough time and resources to allow them to get the best out of their Professional Year.

FASEA requires that supervisors must have at least two years’ experience working as a relevant provider (this does not count any period during which the supervisor was a person undertaking his or her own Professional Year).

A supervisor must possess the following key attributes:

• They understand the structure of the Professional Year.
• They have the experience to act as a supervisor.
• They have the time to act as a supervisor.
• They are not subject to any pre-vetting or special licensee conditions.
• They have a good audit rating.

If the supervisor requires assistance with supervision, they can nominate another supervisor to participate in the supervision process. This may enable the supervisor to access specialist skills and experience that they don’t currently possess, which perhaps a colleague has.

Not always running to plan

The entrant is required to have an individual and customised Professional Year plan. The supervisor is required to sign off on the successful completion of each quarter, as well as the new entrant’s ability to move onto the next quarter. In some cases, the new entrant will not have met the criteria and won’t be ready to progress to the next quarter.

A new entrant cannot start quarter three until they have successfully passed the FASEA exam. Some new entrants may require more than one sitting to pass the exam. This will add further time to their Professional Year. Therefore, supervisors and the licensee should be prepared for the Professional Year to extend beyond 12 months.

Completion Certificate

At the completion of a Professional Year, the new entrant (now a provisional financial planner) begins the process to obtain their Completion Certificate. Before it can be provided, the supervising planner needs to complete the following steps:

• Review and confirm that the logbook is correct.
• Confirmation that key competencies have been met.
• Attestation and confirmation that the provisional financial planner is competent to be authorised.

In addition, the licensee will need to confirm that the competencies are met, review the workbook, confirm the supervisor has met the requirements and conduct an audit on five client files of the provisional financial adviser.

Once everything has been checked and passed, a completion certificate is issued. The provisional financial planner can then remove their ‘P plates’ and become a ‘fully-fledged’ financial planner.

Where to from here?

Both supervisors and entrants can find information on the Professional Year, templated logbooks, templated completion certificates and frequently asked questions at the FASEA website. Alternatively, contact your licensee to determine if it has produced its own resources.

Summary

Standard 12 plays an important role in the Code, ensuring that financial planners uphold and promote the Code. It requires that they hold each other accountable, which is a positive step forward to help lift the ethics and professionalism of the financial advice industry as a whole.

Standard 12 also requires that supervisors actively help new entrants get the full benefit out of their Professional Year. Although it requires work on both the supervisor and new entrant, it provides the framework for developing skills and passing on knowledge. That should lead to better outcomes for consumers, which is the ultimate objective of the Code of Ethics.

Troy Smith, Senior Technical and Regulatory Change Manager, IOOF TechConnect.

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QUESTIONS

To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals

1. Standard 12 of the Code gives guidance on:
2. 1. How to advise clients when a potential conflict of interest exists.
   2. How financial planners uphold and promote the ethical standards of the Code and hold others accountable.
   3. Consideration of the effects of advice and how clients’ long-term goals and likely circumstances will be impacted.
   4. Development of relevant knowledge and skills to give advice.

2. Under what circumstances should a breach of the Code be reported?
   1. If a financial planner has possibly breached the Code.
   2. If a mortgage broker has possibly breached the Code.
   3. If a client has possibly breached the Code.
   4. All of the above.

3. Jenny, age 55, comes to see you. She is concerned that her investment portfolio has declined in value. Jenny believes her current financial planner, who is authorised with a different licensee, has put her investments in an incorrect platform product. Who do you advise Jenny discuss this issue with in the first instance?
   1. ASIC.
   2. AFCA.
   3. ASX.
   4. Jenny’s financial planner’s licensee.

4. Under FASEA’s Explanatory Notes for Standard 12, a supervisor to a new entrant in their Professional Year is required to have:
   1. a FASEA approved qualification.
   2. A TAFE qualification.
   3. A university undergraduate degree or above.
   4. Any of the above.

5. Jack has successfully completed the first two quarters of his Professional Year. In order to commence quarter three, Jack must:
   1. Produce a Statement of Advice.
   2. Sit the FASEA exam.
   3. Pass the FASEA exam.
   4. Complete 1,500 hours of work activity.