FAAA calls for regulatory clarification in response to draft ASIC guidelines

Responding to ASIC’s conflicts management guidance, the FAAA argued that the regulator has a chance to set clearer expectations for identifying and managing related-party conflicts, including those embedded in business structures rather than isolated transactions.

The FAAA said past lack of clarity, as demonstrated in the Dixon Advisory and other cases, has led to significant consumer harm.

“Confidence in the handling of related-party transactions is fundamental,” the FAAA’s Phil Anderson said.

“Failures in this space, most prominently in the Dixon Advisory, United Global Capital, Shield Master Fund and First Guardian cases, have been central to consumer harm and a loss of trust in financial services and financial markets.

“The update to RG 181 provides ASIC with an important opportunity to set clearer expectations about how related-party conflicts are identified and managed”.

While broadly supportive of ASIC’s initiative to refresh RG 181, Anderson said: “We encourage a final guide that is principle-based, scalable, and clear”.

“In particular, ASIC should: emphasise adviser-level responsibilities alongside licensee frameworks; preserve the roadmap as broad guidance, not a checklist; and anchor the framework in proportionality,” he said.

Providing background to the regulatory clutter advisers find themselves in, Anderson said that while advisers are legally required to prioritise clients’ interests when conflicts arise under the Corporations Act and the Code of Ethics, the Code’s current rules, in place since 2020, are widely seen as impractical, and a promised 2023 review has not yet occurred.

“Despite this failing to reflect the reality of any profession and being totally inconsistent with the law, it has been in place since commencing in 2020,” he said of standard 3 which states that advisers “ must not advise, refer or act in any other manner” where they have a conflict of interest or duty.

The association stated that while the draft RG 181 does recognise the Code of Ethics, it does not provide any further guidance and fails to address this contradiction.

This regulatory contradiction has been criticised by organisations beyond the FAAA, with the Stockbrokers and Investment Advisers Association (SIAA) arguing that Standard 3 also makes the code “impossible” to comply with, as it contradicts legislation.

“Every time an adviser is paid (regardless of form), they are potentially conflicted, so for the code to promulgate that conflicts have to be avoided altogether is clearly unworkable,” SIAA said.

“We reiterate the importance of changes being made to the code to ensure there is consistency between the provisions of the code and this draft guidance,” the association added.

FAAA has recommended in its response that ASIC should “make explicit” that licensees should establish conflict management frameworks, and additionally ensure that advisers understand and follow their own obligations, something they believe would clear up the contradictions.

“It is not sufficient for conflict obligations to sit conceptually at the licensee level; obligations must cascade clearly to the adviser-client relationship,” the association stated, arguing that a broad approach is preferable to making a checklist.

“The obligations under RG 181 are deliberately broad and should remain principle-based: they are designed to encourage careful, contextualised decisions, not mechanical compliance.”

ASIC commenced this consultation last month after announcing it would seek guidance on changing RQ 181, which had remained unchanged since 2004, highlighting this initiative as a part of their “simplification agenda”.

At the time, the regulator said: “Our approach in draft RG 181 reframes our guidance to align it with parliamentary intent and the operation of the law – that the conflicts management obligation applies to all conflicts of interest, except those that occur entirely outside of a financial services business.”

It also comes after an extended period of the FAAA calling for an update to the Code of Ethics after its introduction by the Financial Adviser Standards and Ethics Authority (FASEA) in 2019, with the government neglecting much needed changes for six years.