FASEA code guidance may not prevent lawsuits

Addressing the Stockbrokers and Financial Advisers Association virtual conference on Friday, Ashurst partner Jonathan Gordon said the “black and white terms” in which the FASEA code had been drafted meant its standards could be strictly enforced by the courts regardless of the authority’s guidance on how to interpret them.

“The authority have said you have nothing to worry about if you meet the values under the code – unfortunately that’s not how lawyers look at things and they will be involved. ASIC will be investigating customers making complaints, contractual parties will be giving the terms legal meaning and lawyers will look at it and pick apart those standards,” Mr Gordon said.

“If you look at the obligations we’ve got under the Corporations Act to act efficiently, fairly and honestly, they are being enforced in a way that they weren’t up until a few years ago. The courts are giving extended meaning to that and I think they'll give an extended meaning to the standards under the code.”

FASEA chief executive Stephen Glenfield, who also participated in the conference session, said the authority had created the code with the intention to be a “behavioural overlay” on adviser conduct, particularly in regards to Standard 3, which stated that advisers must not act for a client where they had a conflict of interest.

“Some of the commentary that continues [about the standard] is different to the intent that the regulator who has promulgated the standard has explained,” Mr Glenfield said. 

“If you think about how you apply it to your day-to-day operation, applying the totality of the standards helps to identify if you have a conflict. Giving advice for a fee that is fair under the standard is not seen by FASEA to be a conflict.”

Following the news earlier in the conference that the establishment of the government’s single disciplinary body to enforce the code would be delayed until the end of 2021, Mr Glenfield said the authority would continue to release new guidance to clarify the application of the code in different scenarios.

Mr Gordon said the interpretation of the code would need to be “tightened up over time” to avoid leaving advisers open to legal action around perceived breaches of Standard 3.

“Avoiding any conflict of interest is actually impossible because that test has no element to it of materiality or proportionality – the smallest holding in BHP may present a conflict of interest if one wants to be difficult in applying it,” he said.

“The challenge is regardless of guidance it will still fall to others to enforce those provisions or seek recourse through AFCA or the courts. I think the intent is good to provide that guidance but it will evolve over time and the courts and others will have to deal with it.”