FASEA’s Code of Ethics: Existential threat or golden opportunity?

It commences on 1 January 2020, less than 40 business days from now, and has largely flown under the radar since its enactment in February. This has been aided by industry's focus on various other changes in the meantime. It reminds me of a famous quote by Mike Tyson: “Everyone has a plan until they get punched in the face”. And to continue the boxing analogy, the code represents a real haymaker.

ASIC recently made it abundantly clear that every Australian Financial Services (AFS) licensee must take ‘reasonable steps’ to ensure their financial advisers comply with the code from that date. This isn’t something new as licensees already have a general obligation to monitor their representatives, but what needs to be monitored and how is completely new and requires a re-think of traditional approaches.

Each adviser will carry a legal obligation to comply with the code. Due to its potential (almost certain) impact on every professional activity they undertake, including the basis on which they’re remunerated, it would be easy to conclude that it represents an existential threat to the livelihood of advisers and their licensees.

Leaving aside the pros and cons of the standards embedded in the code or the process of industry consultation (or as some may say, lack thereof), the inescapable conclusion is that the code is enshrined in legislation with an expectation that every ‘relevant provider’ must ‘demonstrate, realise and promote’ the five values of trustworthiness, competence, honesty, fairness, and diligence from 1 January.

Make no mistake, this is not about box-ticking or black letter law compliance. Anyone who contemplates how they can circumvent the code is totally missing the point and risks significant impairment to their business and personal reputation (along with possible loss of livelihood).

FASEA has been at pains to point out the code is principles-based and is designed to bring about change in culture and conduct to drive the professionalisation of the industry and, ultimately, to deliver better consumer outcomes. That's the bottom line.

It's impossible to argue that a client would want to work with an adviser who can't demonstrate trustworthiness, competence, honesty, fairness and diligence.

So, just like the Olympics, all licensees and advisers are now facing a hard stop deadline. 1 January 2020, ready or not.

Non-compliance risks loss of licence and/or livelihood, so to that extent, an existential threat does exist. But only if licensees fail to take reasonable steps to monitor and advisers likewise fail to put themselves in a strong position to demonstrate their compliance. What could that look like? I find it useful to think about this through the different, but highly complementary approaches that represent the inside-out view and the outside-in view.

The inside-out approach represents what largely occurs today. Licensees have established policies, processes and procedures, setting expectations around exchanges between advisers and their clients, record-keeping, documentation etc. Other elements include file reviews, audits and perhaps real-time monitoring of statements of advice using AI and machine learning software (aka regtech).

Will this be sufficient to monitor and demonstrate compliance with the code? In my non-legalistic but practical view, no.

As important as the internally focused mechanisms are to managing compliance (which probably need to be enhanced and enforced) and mitigating associated risks, the inside-out approach fails in my view to fully align with or seriously test the central expectation underpinning the code – better consumer outcomes.

It’s hard to see how an adviser could possibly ‘demonstrate, realise and promote’ the values that adherence to the code are designed to deliver, without seeking direct evidence from clients.

So, the outside-in view should capture the experience of each client through a simple, yet highly effective feedback mechanism designed to elicit information about performance against expected adviser conduct. And I would argue it should also capture feedback that aids future commercial performance.

Collecting this sort of feedback should be universally embraced as a critical part of the industry’s journey to demonstrate its client-centricity through hard evidence that proves it. That's the hallmark of every client-centric business. It’s a lot like personal virtue – we all know how important it is but it’s easier said than done unless you are using the right approaches and tools.

Less than 30 per cent of practices currently have a systematic voice of client process in place (and by that, I mean regular rather than ad hoc), which is alarming for an industry that proclaims the significance of its positive impact on individual lives and where virtually everyone claims to be client-centric. Check out practice web sites if you don’t believe me.

That’s why I believe the introduction of the code represents a golden opportunity for licensees, advisers and the overall industry, particularly if they adopt the outside-in view described earlier.

Data collected from clients about their experience will not only help fulfil obligations under the code, but also help drive performance improvement, growth and badly needed consumer trust and confidence at a time when financial advice is required more than ever by consumers.

Are you ready to fulfil your obligations under the code from 1 January 2020 and take advantage of the golden opportunity that awaits?

Dr Ray McHale, chief executive and co-founder, MyNextAdvice

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].