Ethical Behaviour Standards

Issue raisedResponse
 
Code Standard 1 - Placing clients interests first and acting with integrity
A number of submissions were received in relation to the term 'client first' and clarification has been sought as to its meaning. The most frequently suggested amendment was that a reasonableness qualification be introduced into CS 1. Code Standard 1 is seen as the most important of the Code Standards, with most of the other Code Standards covering specific instances of what an AFA must do in order to place the interests of the client first and act with integrity. Watering down the Code Standard risks defeating its effectiveness. However, the Committee accepts that it is important that the Code Standard is able to be applied practically, based on what is reasonable in the circumstances. An additional provision has been included to this effect. 

The Committee also considered adding a provision to clarify that the Code Standard prevents an AFA from preferring the interests of the AFA or any other party ahead of the interests of the client. On balance, it was considered that such an addition was superfluous, with the reasonableness qualification providing a more effective solution to problems identified in relation to the practical application of the Code Standard.
Should the 'client first' obligation be qualified so that competing contractual or professional obligations owed to the AFA's employer can be recognised? The reasonableness qualification discussed above includes express reference to any regulatory obligations binding on the AFA in addition to the Code. However, the Committee was strongly of the view that providing express relief for an AFA to prefer the interests or place obligations owed to the AFA's employer ahead of obligations owed to the client was inappropriate, and would significantly undermine the benefit of the Code Standard.
Should the 'client first' obligation be reworked to allow the AFA to take into account other clients' interests? The Committee considered that having regard to other clients' interests was adequately accommodated by the new provision confirming that the requirement is determined by what is reasonable in the circumstances.
Should an additional provision be inserted into CS 1 to state that AFAs are not required to take unreasonable steps to discharge their duty under CS 1? The fact that an AFA is not required to take unreasonable steps to discharge duties under the Code Standard is now addressed through the reference to requirements being determined by what is 'reasonable in the circumstances'.
Concern was expressed that requiring AFAs to place the client's interests 'first' is colloquial and imprecise. It was suggested that CS 1 be amended to read: 'An Authorised Financial Adviser must provide financial adviser services within the bounds of the law and the professional obligations of the AFA solely for the benefit of the client'. The Committee disagreed. The formulation embodied in the Code was preferred over that suggested. The Committee was confident that the concept of placing a client's interests 'first' was clear, and with the reasonableness qualification incorporated within the Code Standard, would be capable of practical application.
Code Standard 2 - Not bringing the financial advisory industry into disrepute
Should CS 2 be amended to read: 'An Authorised Financial Adviser must not do or omit to do anything that would undermine public confidence in the professionalism and integrity of financial advisers'? The Committee preferred the existing formulation of the Code Standard. The key principle of not bringing the financial advisory industry into disrepute has been retained. The Committee has, however, adjusted the additional provisions forming part of the Code Standard so as to clarify that the Code Standard does not prevent good faith commentary on the actions etc of any other 'person'. The reference to person, in turn, has been expanded to pick up reference to industry body, for the avoidance of any doubt. What this is intended to reflect is that properly researched comments made in good faith on what another adviser or financial group has done should not be problematic under the Code Standard. However, an AFA who publicises wide ranging generalisations about the financial advisory industry as a whole, or who fails to research before criticising others or who uses media criticism of others to self promote, is likely to be regarded as acting unethically and in breach of this Code Standard.
Can guidance and clarification be provided in relation to the words 'likely to bring' in order to provide certainty? The Committee did not consider that it was necessary to provide any further clarification in relation to 'likely to bring'. If an AFA is in doubt as to whether or not any wide sweeping comment they are about to make would be 'likely' to bring the financial advisory industry into disrepute, the best approach , to remove the doubt, would be for that AFA to temper the comments contemplated.
Code Standard 3 - Using the term 'independent'
Should the words 'in the position of a client' be deleted to maintain objectivity in relation to CS 3? The perspective of a client is critical for determining whether or not it is appropriate for an AFA to hold themselves out as being independent. Accordingly, the reference to a reasonable person in the position of a client considering the independence of the AFA has been retained.
Should the reference to 'salary or wages' be extended to include fees paid to a contractor that are not determined by volume or targets? The Committee agreed that such an extension would be appropriate.
Doesn't the relief provided for benefits received in the form of salary or wages undermine the Standard? Independence should still be reported as being impaired where the AFA's employer receives commissions or is otherwise influenced, even if the AFA is on a straight salary. The relief provided at Code Standard 3 in relation to benefits received in the form of salary or wages as an employee is limited. The relief cannot sensibly be interpreted as meaning that if you receive benefits in the form of salary or wages, anything goes - all it means is that on its own, such a receipt will not be regarded as tainting a reasonable client's perception of your independence for the purposes of this Code Standard. If a 'related person' of the AFA (such as the AFA's employer) directly or indirectly receives a benefit from a person other than the client, the fact that the AFA himself or herself only benefits in the form of salary or wages (that are not determined in whole or in part by reference to volume or other targets) will not support a claim of independence by the AFA. The third party benefit received at the employer level will be fatal to any such claim.
It was suggested that under (b) the words 'and the AFAs arrangements with any third party' should be deleted, on the basis that the words are superfluous. The words identified are important to ensure that the relief provided has practical effect. Otherwise, an AFA who utilises a restricted platform, but is able to compensate for the restrictions on the platform through other arrangements so that the clients of the AFA are able to access a wide range of financial products and product providers, would be unable to claim independence. This was considered inappropriate by the Committee. Provided the outcome of being able to provide clients with access to a wide range of financial products and product providers is achieved, the mechanisms in place by which that is achieved should not be determinative of the issue of independence.
Further guidance was requested at paragraph (c) to clarify what is required for a benefit to be considered remote or insignificant. If it relates to benefits that a reasonable person would not expect to influence an AFA, this should be stated. If an AFA is uncertain as to whether or not a particular benefit should be regarded as 'remote or insignificant' it seems to be a pretty good steer that receipt of the benefit would taint a reasonable client's perception of the AFA's independence. The Committee did not consider that any clarification was warranted.
Code Standard 4 - Borrowing from or lending to a client
It has been submitted that CS 4 should be extended beyond the borrowing and lending of money to encompass any business transactions beyond those associated with the giving and receiving of financial advice that takes place between an AFA and their client. This Code Standard deliberately targets borrowing and lending activities. Given the complexity and variety of client relationships that occur within the financial advisory industry, the Committee did not wish to extend the scope of this specific limitation beyond the activity specified. The Committee was comfortable that reliance could be placed on other Code Standards to ensure AFAs were subject to appropriate professional obligations in relation to other client dealings.
Should the words 'money or valuable property' be reinserted, especially given that the final provision of this Code Standard retains reference to 'valuable property'? Reference to 'money or valuable property' has been removed from the final additional provision of this Code Standard. The Committee preferred the generic constraint placed on borrowing and lending, without specifying what might be borrowed or lent.
Code Standard 5 - Restrictions that apply where AFA is related person of product provider
Should the words 'in relation to a financial product that is not offered to the public' be deleted and the wording from the previous version of CS 6 reinstated? This Code Standard is deliberately targeted towards non-public offerings, where the product in question is not subject to normal regulatory constraints that would otherwise apply in respect of a public offering.
Should the requirement for the explanation referred to in CS 5 to be in writing be removed, or limited to a one-off disclosure of interest? Given the very limited scope to this Code Standard, the Committee did not consider that any relaxation to the protection contemplated would be appropriate. The Code Standard does not, of itself, require the same explanation to be given on multiple occasions where an explanation previously provided is adequate to cover future engagements, although the AFA will need to determine on each occasion whether an explanation previously given remains adequate or appropriate.
Should an AFA be permitted to advise in relation to the AFA's employer's products where such advice is reasonable and appropriate? Relief for such advice is already provided at paragraph (b). However, the written explanation specified at paragraph (b), together with a recommendation that the client takes financial advice from another AFA who is not related, will need to be provided.
The Code should include a definition of 'conflict of interest' to help clarify what is required. Defining 'conflict of interest' in this context would have risked exposing the Code to taking a prescriptive approach. The Committee considered that a definition for this term was not required or appropriate.
The Commissioner for Financial Advisers directed that the limited scope of this Code Standard be clarified, along with the fact that an AFA may not provide financial advice to a retail client in relation to the acquisition of a financial product that is not able to be lawfully offered to the client. The Committee has updated the Code Standard by adding an explanatory note to clarify its scope and effect.