Draft Code and consultation paper published

The Financial Advice Code Working Group (Working Group) has today released a draft Code of Professional Conduct for Financial Advice Services (Code), and a consultation paper on the Code. The consultation paper requests feedback on the minimum standards of professional conduct that must be demonstrated by all persons who give regulated financial advice to a retail client.

The Working Group has asked for submissions by Friday 9 November 2018, with the aim of submitting the Code to the Minister of Commerce and Consumer Affairs for approval in early 2019.

The draft Code and consultation paper are available here.

Who needs to read it?  Why?

The consultation is relevant to all financial advisers and businesses providing financial advice. The Working Group also encourages consumers of financial advice to make submissions in relation to the quality of financial advice expected from financial advisers.

What does it cover?

The draft Code is divided into two parts, Part 1 covers standards of ethical behaviour, conduct and client care. Part 2 covers standards of competence, knowledge and skill. The majority of the standards also include a commentary section with further details.

  • Part 1: Ethical behaviour, conduct and client care
  • Standard 1: Treat clients fairly and act in their interests
  • Standard 2: Act with integrity
  • Standard 3: Manage conflicts of interests
  • Standard 4: Take reasonable steps to ensure that the client understands the financial advice
  • Standard 5: Give financial advice that is suitable for the client
  • Standard 6: Protect client information
  • Standard 7: Resolve complaints
  • Standard 8: Not bring the financial advice industry into disrepute
  • Part 2: Competence, knowledge, and skill
  • Standard 9: Have general competence, knowledge, and skill
  • Standard 10: Keep competence, knowledge, and skill up-to-date
  • Standard 11: Have particular competence, knowledge, and skill for designing an investment plan

In respect of each of the standards, the Consultation Paper asks whether the reader agrees or disagrees with, and for any comments on, each standard and proposed commentary. The Consultation Paper also asks whether there is anything missing, or that should be added to, the Code.

Our view

The Code is shorter than the current Code of Professional Conduct for Authorised Financial Advisers (AFAs), and is based on less detailed higher level minimum standards. We consider this is an appropriate and sensible approach, with the Working Group resisting the temptation to provide highly detailed codes of conduct that risk becoming another rule book where the market can play to the edge.

This approach is supported by the findings in the Hayne Interim Report from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This report counsels against passing new prescriptive laws or requirements which would add an extra layer of legal complexity to an already complex regulatory regime. We agree that a principles-based approach is generally a more effective method of influencing market conduct and achieving good advice outcomes.

Differences to the current Code

We note a number of differences between the Code and the current Code of Professional Conduct for AFAs (AFA Code). In part, these differences are because the purpose of the AFA Code was to create and regulate a professional class of individuals providing financial advice (i.e. AFAs), whereas the Code applies to all persons (entities or individuals) giving regulated financial advice.

Some notable differences are that there is no equivalent of, or important changes to, the following Code Standards in the AFA Code:

  • Code Standard 3, which prohibits an AFA from stating or implying that they or their services are independent, if a reasonable person would consider that they are not. The issue of statements regarding independence is not expressly covered in the new Code.
  • Code Standard 4, prohibiting borrowing or lending to a retail client by an AFA. Clearly, this would not be relevant for all financial advice providers (e.g. banks). The requirements to manage conflicts, however, remain in both the new Code and the proposed legislation.
  • Code Standard 7, which requires an AFA to ensure each retail client has sufficient information to enable the client to make an informed decision about whether to use the AFA’s services. However, this is primarily a disclosure requirement that should be addressed by the regulations.
  • Code Standard 12, which provides that an AFA must record in writing adequate information about any personalised services provided to a retail client, and Code Standard 13, which provides that an AFA must keep those records for 7 years. In the absence of this in the new Code, it isn’t yet clear what the record keeping requirements will be or where these will be located in the regime.
  • Code Standard 17, which provides that an AFA must maintain and keep current a professional development plan, although the new Code standard 10 applies a higher level standard.

It will be interesting to see whether, and how, any of these current AFA Code concepts are addressed in other parts of the new regime, for example through regulation, FMA guidance or the development of industry rules and practices.

Other points of interest

We also note the following points of interest:

  • The Code is mainly characterised by positive statements of what advisers should do, rather than negative prohibitions. The intention is to promote good conduct. Of interest will be how these positive statements are interpreted differently by the Financial Markets Authority of the Disciplinary Committee, where taking action to enforce the Code.
  • The Code has to be able to be followed by digital advice providers. The standards are intended to apply across all regulated advice whether it’s given by natural persons or by automated means.
  • There is a question as to how overlapping requirements in the Code and the Financial Markets Conduct Act 2013 (Act), once it is amended by the Financial Services Legislation Amendment Bill, will work together. For example, the duty to give priority to client’s interests in section 431J of the Act, and the requirement to act in client’s interests in the new Code Standard 1 are superficially similar. It will be interesting to see whether the Courts/FMA/Disciplinary Committee interpret these provisions differently (for example, applying the statutory duty as primarily a conflicts management duty).

What next

The consultation sets out a timetable with key dates for the Code being approved:

  • Submissions on the draft Code due – 9 November 2018
  • Code approved and published – Mid 2019

Please see our previous news alert here for full details on the expected timeframes of the new financial advice regime.

If you have any questions in relation to the Consultation Paper or would like assistance making a submission, please contact one of our experts.

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