In February 2019, the Financial Adviser Standards and Ethics Authority (FASEA) published the Financial Planners and Advisers Code of Ethics 2019 (the Code).1 As of 1 January 2020, compliance with the Code is mandatory. The Code imposes ethical duties on financial planners and advisers to encourage higher standards of behaviour and professionalism in the financial services industry.
The Code requires financial planners and advisers to act in a way that demonstrates, realises and promotes certain values, being trustworthiness, competence, honesty, fairness and diligence. The Code also contains twelve standards which financial planners and advisers must comply with, relating to ethical behaviour, client care, quality process and professional commitment.
Who does the Code Apply to?
All “relevant providers” must comply with the Code under section 921E of the Corporations Act 2001 (Cth) (the Corporations Act). A relevant provider is defined in section 910A of the Corporations Act as an individual who is:
- a financial services licensee;
- an authorised representative, employee or director of a financial services licensee; or
- an employee or director of a related body corporate of a financial services licensee;
and is authorised to provide personal advice to retail clients, as or on behalf of the licensee, in relation to relevant financial products. Relevant financial products are financial products other than basic banking products, general insurance products or consumer credit insurance.
How is the Code Enforced?
Under Division 8B of Part 7.6 of the Corporations Act, financial service licensees must ensure that their relevant providers are covered by an ASIC-approved compliance scheme. A compliance scheme must include a monitoring body that monitors compliance with the Code, investigates alleged breaches and imposes sanctions. Potential sanctions that a compliance scheme may provide for include:
- a warning or reprimand;
- requiring the relevant provider to undertake additional training or counselling;
- additional supervision on a relevant provider;
- specified corrective action;
- an independent compliance audit of the relevant provider (if it is a licensee);
- requiring the relevant provider to provide the services to the retail client again at no cost, or to reduce or waive fees; and
- exclusion of the relevant provider from the compliance scheme.
ASIC may also investigate contraventions of the Code and suspend or terminate the financial services licence of a relevant provider.
In November 2019, ASIC announced the creation of a new single disciplinary body to replace compliance schemes in monitoring and enforcing the Code.2 However, as yet, the new body has not been created.
A Higher Threshold for Wholesale Clients
FASEA’s guidance on the Code contains some perhaps surprising implications. Part of that guidance suggests that if a relevant provider relies solely on an accountant’s certificate to determine that a client is a “wholesale client” or ”sophisticated investor” for the purposes of the Corporations Act, the provider could be in breach of the Code’s standards (and therefore in breach of the Corporations Act).3 The guidance indicates that providers must assess whether each client is financially competent, even if the client otherwise meets the Corporations Act’s “bright line” tests for determining that the client is a wholesale client. If not, the client must be treated as a retail client and the provider must comply with additional disclosure requirements.
The guidance on this point is given in the form of an example, in a situation where the adviser knows that the relevant client is not actually financially sophisticated. However, the guidance interprets the Code extremely broadly, and it is unclear whether FASEA considers that the additional element of knowledge is required to found a breach of the Code.
Further, according to the guidance, the particular standard which could be breached by relying solely on an accountant’s certificate is Standard 1 (acting in accordance with all applicable laws and not trying to avoid their intent), rather than the perhaps more directly applicable Standard 5 (ensuring that advice is appropriate to the client’s individual circumstances and is understood). This interpretation of the Code has raised practical concerns that providers will be required to form a view of the ‘intent’ of applicable financial service laws.4
Where to from here?
Given the Code is already in force, relevant providers should immediately familiarise themselves with the Standards and ensure they are in compliance. Given the extremely broad interpretation of the Code evidenced in FASEA’s guidance, providers should take a particularly cautious approach when classifying investors as wholesale.
Although issuers of financial products are not directly required to comply with the Code, they should take care to avoid exposure to accessorial liability for a breach of the Code by any relevant providers they instruct. For example, it would be prudent for issuers to ensure that when entering arrangements with distribution channels that include relevant providers, the terms of those arrangements place the onus for ensuring compliance with the Code on the distribution channel, and expressly acknowledge reliance by the product issuer on the distributor’s compliance with the Code.
1.Financial Planners and Advisers Code of Ethics 2019.
2. ASIC Media Release 19-319.
3. Financial Planners and Advisers Code of Ethics 2019 Guidance.
4. Wealthy Clients are No Longer Sophisticated Investors.
Liability limited by a scheme approved under Professional Standards Legislation.
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