CHAPTER 3
Ethics and Compliance
Introduction
• Sound financial advice is important to
Australia’s economy
• Financial advice is subject to regulation
• Many reviews have examined how the
industry should be structured
• The compliance framework depends on
statutory law, common law and ethics
• All participants need to work to meet
stakeholder expectations
Sound Advice is Important
All sectors benefit from individuals
managing their money well
— Government
— Business
— Financial markets
— Individuals and families
Regulation and Structure of the Financial Planning Industry
Licensees:
To maintain their securities licence,
licensees have to meet a stringent set of
requirements. In addition, they are required
to monitor, supervise and control the
actions of their authorised representatives
to ensure that they are meeting their
obligations and responsibilities. Where the
licensee is a Principal Member of the
Financial Planning Association, it is bound by
the Association’s Code of Ethics and Rules of
Professional Conduct, as are individual
members.
Industry partners:
While licensees and their authorised
representatives make up the public face of
financial planning, there are a number of
other important service providers that
work within the financial services
industry. These other ‘partners’ within the
industry are also governed by the law,
regulations and industry standards — and
often through significant contractual
arrangements.
Potential Conflicts of Interest
There can be some very interesting
entanglements of these different players,
as one large business may consist of
insurance and non-insurance product
providers, banking, licensees,
stockbroking, research, technology and inhouse training. Where licensees are also
product providers, their responsibilities to
the client and their responsibilities to the
business could be in conflict.
Current Regulators
• The Reserve Bank of Australia (RBA),
with responsibility for monetary policy,
financial system security and payments
system regulation
• The Australian Prudential Regulatory
Authority (APRA), responsible for the
prudential regulation of deposit-taking
institutions, life and general insurance and
superannuation
• The Australian Securities and
Investments Commission (ASIC),
responsible for market integrity, consumer
protection and the regulation of
businesses
Current Regulators
• The Australian Taxation Office (ATO),
responsible for administering taxation law
and for regulating certain self-managed
superannuation funds, and
• The Australian Competition and
Consumer Commission (ACCC) which
administers the Trade Practices Act
The Role of ASIC in the Financial Services Industry
• Licensing regime
• Audit programs
• Enforcement, including enforceable
undertakings and banning of advisers
• Obtaining an AFSL is one of the areas
that the Financial Services Reform Act has
changed
• Requirements to gain such a licence
have been significantly strengthened
under the FSRA
• Directors are held personally
responsible if their statements are proven
false
Financial Advisers
• Most financial advisers work within large,
highly controlled licensees such as those
associated with multi-business financial
institutions, the banks or insurance
companies.
• Financial advisers may be salaried
employees, or running their own businesses
and sharing client fees or product.
commissions with a licensee.
• Licensees may be individuals or
companies, as can authorised
representatives of licensees.
• Financial advisers must either be licensed
themselves or be authorised to represent a
licensee.
Roles
Financial advisers may:
• source clients, develop marketing
campaigns, establish ‘centres of influence’
and referral networks, run seminars and
workshops, produce newsletters, etc
• determine the types of clients they will
source, for example retirees or small
business owners
• explain to clients the financial planning
process and how they run their business
• prepare and provide a Financial Services
Guide, Privacy Statement and other
documentation
• interview, collect data and administer
risk tolerance assessments
• analyse client information, develop
strategies and recommendations, prepare
a written Statement of Advice (SOA)
• present the plan, answer questions,
obtain closure on sale
• assist with implementation of the SOA
• schedule first review and detail their
ongoing communications with clients
• schedule and provide annual reviews
• seek referrals, and
• manage their own office and
relationships with their licensee and other
suppliers.
The financial adviser has a direct
professional and ethical responsibility to
the client to act in the client’s
best interest
Financial Planning Association (FPA)
• Code of ethics
• Rules of professional conduct
• Diligence
• While advisers and licensees may not be
members of the FPA, its Code of Ethics
and Rules of Professional Conduct will
form part of the ‘industry standards’ that
courts will use to judge the behaviour of
advisers and licensees
Reviews: Wallace
• A number of commissions, in particular
the Wallis Commission, made
recommendations for far-reaching changes
in the industry.
• Prior to July 1998, the industry was
regulated in a split fashion.
• In July 1998, as part of the
recommendations from the Wallis
Commission, there was a reorganisation of
the regulatory authorities with the express
purpose of simplifying and strengthening
the regulatory environment and ensuring
clear demarcation between the regulators.
Reviews: Rippol
2009 investigation into the reasons for a
number of high-profile crashes: Storm
Financial, Opus Prime.
Recommendations included:
— Fiduciary duty for advisers
— Improved disclosure
— Strengthened ASIC
— Elimination of commissions
— Tax-deductible financial planning
fees
— A professional standards board
Reviews: Henry
A comprehensive review of studies
taxation system.
Recommendations included:
— 28% corporate tax rate
— Resource rent tax
— Super guarantee levy to 12%
Reviews: Harmer
A review of measures affecting retirees
and pensioners
Recommendations included:
— Increases in the rate of single full
pension
— Improved single pensions relative
to married
— Pension payments tied to increases
in actual pensioner cost of living
Reviews: Cooper
An examination of the governance,
efficiency, structure and operations of
superannuation.
Recommendations included:
— A national no-frills superannuation
fund ‘My Super’
— Strengthening of member choice
— Easier comparisons of different
types of fund
— Review of lending arrangements
Reviews: Bowen
A report by the Minister responsible for
financial services and superannuation
• Described overriding principles
— Financial advice must be in the
client’s best interests
— Financial advice should be within
the reach of those who need it
• Three reforms apply from July 2012
— Ban on commissions and volumebased payments
— Statutory fiduciary duty for
planners
— Flexible charging and opt in review
services
The law
• The common law, the Corporations Law
(including the Financial Services Reform
Act) and the Financial Planning
Association’s Code of Ethics and Rules of
Professional Conduct form the core of the
regulatory environment within which
financial advisers work, but many other
laws and regulations also apply.
Law of contract
• Elements of a contract
— Offer and acceptance
— Consideration
— Intention to create a legal
relationship
— Capacity to contract
— Genuine consent
• Discharge of contracts
• Breach of contract
• Contract management
Law of Agency, Licensing and Employment
Agency:
• Agency law derives from common law
and establishes the relationship between
principal and agent, whether expressed or
not. A contract of agency is formed when
one person (or company) who is the
principal gives authority to another
person (or company) to act on his or her
behalf.
• That is, the agent is given the power to
bind the principal to agreements with
third parties.
Licensing:
• The provision of a licence to provide
financial advice is done under statutory
law. In a financial planning context,
therefore, the licensee (the principal)
authorises the financial adviser
(the authorised representative) to act for
it as an extension of its licence, which was
granted to it by ASIC under the terms and
conditions stated in the Corporations Act
and the Financial Services Reform Act.
Common Law
• Common law is based on precedent — ie,
the decisions of previous judges over time.
• The relationship of a financial adviser to a
client is based on the expectations of the client
and those of the wider community that the
professional can be trusted. With this
expectation of trust comes a high level of
responsibility on the professional’s part to
constantly warrant that trust by being reliable,
confidential, careful and concerned.
Fiduciaries
• This fiduciary relationship is recognised
in law and, if broken, has legal
consequences for the professional
involved.
• Therefore, if a financial adviser gives
advice to a client, the client should be
able to reasonably rely upon that advice.
Education and Training
• Education and training are important in
building a professional and competent
service industry.
• Under the Financial Services Reform Act
and RG146, education for financial
advisers must be competency based and
cover both generic industry and specialist
knowledge and associated skills.
• Licensees must ensure that advisers’
competencies are maintained, updated
and developed.
‘Know Your Client’ Rule
• Financial advisers are bound by a
fiduciary relationship with their clients,
regardless of whether there is a
formalised agreement or contract
between them. The core of this fiduciary
relationship is that the adviser must
always put the client’s best interests first.
• Reasonable basis for advice.
‘Know Your Product’ Rule
Financial advisers offer a large number of
products and services, including:
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development of a full financial plan
asset allocation optimisation
fund manager and product selection
stock selection
model portfolio development
lending
insurance and estate planning
• salary packaging
• leasing
• small business advice
• DIY superannuation
• budgeting
• administration services
• referrals
• monitoring and review
• annual review services, and
• educational services, eg seminars, but
not property
Disclosures and Disclaimers
• If a financial adviser makes a
recommendation which leads to the
transaction of a security and the client
might rely upon the advice, Section 942 of
the Corporations Act requires the financial
adviser to disclose:
— any commission, fee, or other
benefit or advantage, whether
pecuniary or not, direct or indirect,
that the securities adviser may
receive in connection with the
recommendation
and
— any other pecuniary or other
interests, whether direct or indirect,
of the adviser that may be capable of
influencing him or her when making
the recommendation
Financial Services Guide
The information required to be included
is:
• the name, ABN, registered and local
address of the licensee and any
associations
• identification of the authorised
representative and his or her capacity
(including qualifications and experience)
• a disclosure of the type(s) of advice
being offered, including the range of
securities and products and services, such
as portfolio monitoring
• disclosure of the fees and charges and
methods of calculation of the fees and
charges for all services offered (including
annual reviews)
• a discussion of the client’s basic rights
when obtaining investment advice, such as
the right to know of any conflicts of interest,
the right to receive advice appropriate to
the client’s needs, the right to know the
risks involved when investing
• a comparison of the services offered with
those offered by other dealers, and
• the mechanisms in place for complaint
resolution, both internal and through the
external complaint resolution scheme,
including response-time standards
Ongoing Review
• Completing annual reviews is as
important as the production of the
original plan and probably involves more
work. A number of personal and economic
changes can occur over a year and the
impact of these changes on the client’s
current and future financial situation must
be assessed.
Complaint and Dispute Resolution
• All AFSL holders must have internal
complaint management procedures in
place and ensure that clients understand
how to access them.
• External complaint schemes
• Financial Ombudsman Scheme (FOS)
(formerly FICS)
Insurance Regulation, Product and Advice
• The changes in the regulatory
environment (especially the Financial
Services Reform Act) have seen ASIC
taking over many of the responsibilities
for administering the law and regulations
with regard to life and general insurance
• Insurance brokers
• Insurance agents
• Life insurance code of practice
Privacy
• The Commonwealth Privacy Act of
1988 introduced the process of more
closely ensuring that customers’ privacy is
honoured. This Act looked at the
safeguards that must be in place when
collecting, storing, using and disclosing
personal information. This includes
information regarding consumer credit,
insurance claims, employment, and
superannuation and social security
information. Initially the main concern
was clients’ Tax File Numbers (TFNs).
Ethics
• Compliance has to do with the attitude
companies and their employees take
towards the regulatory environment in
which they operate. Ethics is the sum of the
community and personal attitudes towards
standards.
• An ethical framework is supported by and
reflective of community values, which
include trustworthiness, honesty, integrity
and diligence in respect of professional
behaviour.
• Ethical and legally compliant organisations
will have formalised, effective corporate
governance procedures.
Attributes of a Professional Relationship
People have certain expectations of
professionals, including:
• confidentiality
• recognition of special educational and
training requirements
• a relationship based on trust
• underlying values and principles
• diligence
• The law says that financial advisers must
‘know the client’. The use of datacollection forms and the process of
completing these forms is the
methodology that is used to meet this
requirement.
The actions that financial advisers can
take towards compliance are:
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disregard
avoidance
minimal compliance
compliance
best practice
Licensee Responsibilities
• The licensee continuously needs to
ascertain if its current business practices
are meeting or exceeding requirements.
• Where there are gaps, new procedures
and processes will need to be put in place.
• The licensee’s compliance system has to
be fully documented.
• An implementation strategy must be
developed, communicated to every
person within the advisory group and
successfully implemented.
• T he whole process must then be
monitored, reviewed and updated when
necessary.
Management Responsibilities
They must ensure that:
• the system reflects their values
• they provide the necessary resources
to support the system
• they make business decisions within
the compliance system framework, and
• they support disciplinary outcomes
from the system
Comprehensive ongoing education is
essential for all employees, and is a legal
requirement for financial advisers.
Issues for Financial Advisers
— Legislative changes
— Business management
— Court and tribunal determinations
— Taxation rules
— Superannuation rules
— Social security rates and rules
— Products and markets
— Technology
— Professional indemnity insurance
— Remuneration and business
practice
— Monitoring and review
— Use of support staff
— Mentoring and apprenticeship
— Paternalism and informed consent
— Client privilege
Summary
• Sound financial advice is important to
Australia’s economy.
• Financial advice is subject to regulation.
• Many reviews have examined how the
industry should be structured.
• The compliance framework depends on
statutory law, common law and ethics.
• Complying to rules and regulations and
putting your clients best interest first, is
the key critical part of financial planning!