FASEA’s code of ethics guide explained

How code breaches will be assessed

Following a number of questions around how the code will be practically interpreted and enforced, FASEA’s latest guide gives an indication on how advisers’ reasoning and client files will be assessed in case of a future suspected breach.

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“You should always be prepared to give an account of the ethical reasoning that has informed your conduct in general or, in particular cases, if called upon to do so,” the guide states.

“As is the case with all other professions, ultimate responsibility for applying the tenets of the code falls on individual advisers. Each must be ready to give an account of how they have interpreted and applied the code in specific situations.

“You will need to keep appropriate records to demonstrate, if called upon, your compliance with your obligations under the code.”

Answers to adviser queries

FASEA has replaced its examples from the previous guidance with broader questions that are commonly asked by advisers in relation to the code.

Some examples of these include the treatment of wholesale investors under Standard 1, how certain types of remuneration are to be treated under Standard 3, and how Standard 4 applies to existing and insurance-only clients.

FASEA said the questions are intended to “help illustrate the code and highlight the requirement for advisers to exercise their professional judgement in the best interests of their client guided by the values and standards of the code”.

Intent versus application

Guidelines around each standard are now structured in terms of the intent of the individual standard, and how it can be practically applied through certain assessment criteria.

As an example, guidance around the intent of Standard 3 sets out the need for advisers to professionally assess whether a conflict exists between their personal interests or the interests of an organisation, and the interests of their clients, and to continually update this assessment throughout the advice relationship.

Guidance around the practical application of the standard advises practitioners to assess whether the advice they will give complies with the other standards in the code, and then assess whether an “ordinary person” would consider a conflict could exist in the adviser-client relationship.

The ‘disinterested person’ test

FASEA has provided further details in its guidance on Standard 3 into what constitutes its ‘disinterested person test’ to assess whether a conflict of interest exists in an adviser’s relationship with a client.

The guide states that the “standard for judgement in determining whether an arrangement is conflicted is that if a disinterested person (an unbiased third party with nothing to gain or lose from how the question of conflicts is resolved) who knows all the facts would reasonably conclude (that is, has good reasons that other reasonable people would find convincing) that the arrangement could induce the adviser to act other than in the best interests of the client”.

“In making this assessment, the adviser is to imagine standing in the shoes of an ordinary person – not the client, not a consumer advocate, not another adviser, not a regulator, just an ordinary person in the street with ordinary intelligence and good judgement,” the guide says.

“Second, this imagined, ordinary person has to be unbiased – with nothing to gain or lose from what is decided about whether or not a conflict exists.

“Third, this unbiased (disinterested person) should be imagined having at hand (and to understand) all of the relevant facts about what has to be decided.

“Finally, whatever this person decides – it has to be reasonable. That is, it has to be based on the information before them, capable of withstanding public scrutiny and of attracting the agreement of other reasonable people.”

The APL and best interests

New guidance around Standard 5 of the code indicates that advisers should not rely solely on their licensee’s APL when implementing product recommendations for a client. 

A ‘fundamental question’ around this states that “it would be reasonable to expect that you have a good understanding of not only the products on the APL but a general understanding of other well rated products [that] may be visible in the modelling tools that you use in formulating your advice”.

“It would be expected that if you are aware of a product that is not on your licensee’s APL and is a demonstrably more appropriate product to meet the client’s best interests, that you seek licensee approval to recommend that product,” the guidance says.

“If the licensee doesn’t approve the demonstrably more appropriate product, the adviser should not recommend the product on the licensee APL and may need to refer the client to another adviser.”