Legislation / Profession

The carrot and stick of financial advice ethics

Marisa Broome

The biggest changes financial advisers face in the next few years don’t stem from new education standards or the industry-wide exam and are not due to the introduction of new continuing professional development (CPD) rules or a professional year. Marisa Broome, chair of the Financial Planning Association, says the biggest change will be compliance with the new industry-wide code of ethics.

The code of ethics hasn’t received the same publicity as new education standards, but Broome says advisers’ compliance with the code is simply “the biggest shift we’re going to see out of all the FASEA changes”.

Just over a week ago Code Monitoring Australia (CMA) finalised its application to become a body approved to monitor financial advisers’ compliance with the code of ethics developed by the Financial Adviser Standards and Ethics Authority (FASEA). 

All advisers must register with an approved code monitoring body by November 15 his year. These bodies have the power to proactively investigate advisers’ compliance with the code, and the obligation to report breaches to the industry regulator, the Australian Securities and Investments Commission (ASIC). 

Current indications are that CMA is likely to be the sole – and almost certainly the first – approved body for financial advisers, being a co-operative venture between the FPA, the Association of Financial Advisers (AFA), the Boutique Financial Planners (BFP), the Financial Services Institute of Australasia (FINSIA), the SMSF Association, and the Stockbrokers and Financial Advisers Association (SAFAA).

A carrot, not a stick

CMA will oversee the Financial Adviser Monitoring Scheme (FAMS), which Broome describes as less of a compliance scheme and more of “a support mechanism to improve the quality of advice and help advisers meet higher standards going forward”.

“We’re seeing it as a carrot, as a way of supporting advisers, rather than as a stick,” she says. “Yes, it’s going to have a disciplinary role, there’s no doubt about it, because we have to make sure the bad eggs in the market are gone. We are judged at the lowest common denominator, so we have to raise those standards.”

The code of ethics is just one element in the string of new standards to be applied between now and 2024 to financial advisers – with the notable exception of authorised representatives in the property timeshare industry who, inexplicably, have been granted carve-outs from all of the substantive education reforms that affect other advisers.

Broome says a set of uniform standards applying to almost every other individual named on the ASIC financial adviser register will underpin the development of financial planning as a profession – recognition that the industry has “fought for so long to actually be called”.

“Now everyone will have those obligations, and those two things
– ethics and education – are a cornerstone of any profession”

Marisa Broome

“These new standards do cement us as being a profession,” Broome says.

“We have a foundation now for everyone. For a long time, members within the FPA have had a foundation of education –  both initial, because we have required a degree to do the CFP [Certified Financial Planner designation] since 2007, and ongoing CPD requirements – and we’ve had a code of professional practice which has a code of ethics. But half the market hasn’t. They haven’t had any of those obligations under the Corps Act. Now everyone will have those obligations, and those two things – ethics and education – are a cornerstone of any profession.”

Empathy with the impact

Broome says six elected FPA board members run advice businesses and understand the financial impact of new standards on advisers and advice practices.

“We understand what those costs are like, and how difficult it is to open the doors every year,” she says.

Broome herself says she has seen compliance costs in her business, the own-AFSL firm wealthadvice, leap from $5000 to $50,000 this year. Even after one-off items are removed, Broome estimates annual compliance costs will still be around five times greater than they were previously. 

“It’s tough, there’s no doubt about that,” she says. “We understand that very clearly. I’m walking that same path.

“I’ve had to pay an ASIC levy this year, of $7500, which I haven’t had to pay before; I’m paying for my people to go through the exam; I am contributing to the cost of study; we’re looking at possibly a compensation scheme of last resort, so we’ve put money aside for that; and in the past two years my PI costs – in a business that’s never had a complaint, not even a letter of complaint – have gone up 40 per cent and are likely to go up further. Big costs.”

But Broome maintains the current pain and expense will be worth it in the longer term for advisers who successfully navigate the next few years.

“The amount of enquiries I’m getting coming into the business at the moment show that financial planning is still in demand,” she says.

“My PI costs – in a business that’s never had a complaint,
not even a letter of complaint – have gone up 40 per cent”

Marisa Broome

“There’s a lot of opportunity as we have an ageing population, a complex financial services system, especially around superannuation. There’s going to be fewer advisers, with better qualifications, and better outcomes for clients.”

Broome says the financial advice profession continues to experience the dichotomy of a fiercely loyal existing clients, and a high level of mistrust among the “unadvised” public at large. New standards – with the code of ethics front-and-centre – will stand as proof of a behavioural change among advisers and help to address public perceptions over time.

“For someone who’s only heard the bad misconduct stories that came out of the royal commission, obviously we have got to be on a journey of trust,” she says.

“But there will be a level of reassurance that all advisers that are practicing as financial planners – under a regulated term – will have met standards before they can put their shingle up. And I think that automatically builds some trust that we haven’t had before.”

Standing above the pack

While the FPA’s short-term focus is on heling its members navigate the FASEA-related changes of the next four to fie years, longer-term it is also considering its role in helping members differentiate themselves from the pack. To date it has supported members through the CFP; but in a world where all advisers – FPA members or not – have a university degree or equivalent, or higher, qualification, pass an exam, meet uniform CPD requirements and adhere to an industry-wide code of conduct, it will be a tougher task.

Broome says the FPA is currently redesigning the CFP designation to ensure it remains relevant, and desirable.

“We still think having a professional designation and aspiration to hold yourself to a higher standard – not saying you’re better but holding yourself to standards that are higher – will still be critically important,” she says.

 “There’s still a place for it, in the same way accountants come out with a qualification and they do a designation to become a CA or a CPA. Lawyers do a similar thing. We think there’s the same value within our profession – and we’ll be at the same level; we’ll be considered a profession at that point.”

A hallmark of professionalism

Broome believes there will be sufficient change wrought by new education, professional and ethical standards, and by resultant peer pressure, to ensure financial advice practitioners become more effective at monitoring each other’s behaviour and calling out poor practices where they see them – a recognised hallmark of any profession.

“I hope that is the case,” she says.

“That’s one of the messages I want to come out with. We have a responsibility to make sure the bad eggs don’t practice. We have to call that out. We absolutely have a responsibility to make sure all the bad eggs are gone, so we can benefit from those higher levels of trust from consumers.”

Whether this give advisers confidence and a mechanism to call out the sort of institutional behaviour highlighted in the royal commission remains to be seen, but Broome is optimistic.

“They’ve always done the right thing by their client.
But we never hear that. That’s not news”

Marisa Broome

I think that 99.9 per cent of advisers know exactly who they are, what service they offer and they are great people,” Broome says.

“A code of ethics does not make a good person; the quality of the person is there from the beginning. And their licensee arrangement or employee arrangement stopped them from having any power to stop the conduct that was taking place at a higher level, which was all about their own bonuses.

“The advisers down at the coal face were doing the right thing. Even if they are not a member of an association, they’ve always done the right thing by their client. But we never hear that. That’s not news.”

Note: This article was edited on 23/9/19 to reflect the fact that authorised representatives of property timeshare operations are exempted from only the education standards of FASEA, not the ethical and professional standards. However, they will not be included in Code Monitoring Australi’s compliance scheme.

One Comment

  1. The Code of Ethics standard 3 on “conflicting interests” is more stringent than FPA and AFA codes. Is it likely to be subdued or will professional associations update theirs inline with FASEA?

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