Code of ethics review yet another casualty of the slow-moving Jones era

Enacted in 2019, the Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics continues to put excessive restraints on the advice profession in the wake of the royal commission.

Now six years down the track, Financial Advice Association Australia general manager of policy, advocacy and standards Phil Anderson believes a review of the code is long overdue.

Reflecting back on when the code first came into force, Anderson said on an Acenda webinar on Wednesday that standard three and seven of the code were particularly contentious, something that continues to this day.

He argued that if the government didn’t push so hard to get those over the line then the profession would have “warmly embraced the code, and we would have been focused on maximising the value in the code, rather than on pushing back on certain elements”.

As stated in the code, standard three dictates: “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.”

Standard seven refers to the need for clients to give “free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged”.

While these standards may seem simple on the surface, Anderson said they have proven significantly more complicated in practice.

He added it is important to note the environment in which the code was developed, as the advice profession was dealing with the fallout of the royal commission that led to significant changes and upheaval and the sense that financial advisers were largely untrustworthy.

As such, he suggested that the government may have decided to be stricter in the creation of the code on the back of this event.

However, more than six years on and the advice profession has undergone a significant overhaul, and Anderson argued that certain control, including the code, should be placed back in the hands of the profession in a move towards self-regulation.

“I don’t think that the code of ethics needs to be set by the government. I think it can be set by the professional body,” he said.

Conceding that a self-regulated advice profession is still a ways off, Anderson said a full review of the code should occur, with standard three and seven in particular requiring attention.

Though he also called into question why this was not done sooner, however the events of the intervening years appear to answer that question well enough, namely the collapse of FASEA and then the Quality of Advice Review (QAR).

“FASEA was closed down at the end of December 2021. It’s more than three years ago now … but in November and December of 2021, they had a look at standard three with the endorsement of the government, but ultimately decided not to make any changes,” Anderson said.

“And I reflect back on that and think why they didn’t.

“We had the [federal] election in May of 2022. In August of 2022, Stephen Jones, the minister at the time, issued a media release and he made it clear that he had received strong arguments as to the need for changes to the code of ethics, and he said that we’ll do that in 2023 after we’ve fixed up the QAR report.”

The clear issue here is that it has been three years since Jones made that, among other, unfulfilled promises he made to the profession. Given advisers are still waiting on the rest of the Delivering Better Financial Outcomes (DBFO) reforms to be delivered, a review of the code remains on the backburner.

However, with a new financial services minister in Dr Daniel Mulino on the scene, the profession is waiting to see when these reforms will finally get over the line.

“We are now nearly three years later and we still don’t have the final DBFO reforms fixed, but that commitment to review the Code of Ethics is definitely there, and we will certainly be working with the new minister on that, but we acknowledge that there’s an interdependency with the DBFO reforms, and then the prioritisation is to get the DBFO reforms through,” Anderson said.

Beyond changes needed for the standards themselves, Anderson also took issue with several key sections in the introduction of the code.

“I’ve been one who’s been quite critical of the introduction to the code. It talked about refocusing financial advisers and financial planners from providing commercial services to acting as professionals,” he said.

“I never held the view that the financial advisers weren’t professionals in the lead-up to the release of the code, but I think you can run both a commercial service and run a professional practice.

“And then it went on to say, ‘While the ethos of the market legitimises the pursuit of self-interest through the satisfaction of others’ wants, the ethos of the professions aims to secure the public good through the subordination of self-interest in favour of serving the interests of others’.”

He explained that his issue with these sections essentially comes down to the phrasing and the tone behind the words.

“Now, I found that to be quite unrealistic and condescending, and anyone who’s gone to see a lawyer or a specialist doctor would hardly feel that they had subordinated their own interest in the interest of the public by providing very reasonable rates. Other professions charge very high rates,” Anderson said.

“So, look, I do think that tone should be withdrawn.”

Although there are changes beyond these that need to be reviewed and considered, Anderson suggested that, given it has been more than six years since its inception, it is time to look back and consider whether these rules are still appropriate today.

“I think we want to go back and look at not only the code itself, but the explanatory statement that went with it and the guidance that sits alongside it,” he said.

“So, if you make changes to the standards themselves, the explanatory statement has to change, the guidance has to change.”