Article 3: Case studies and standard 12
By Marshall Ross, Acenda Partner Education Manager
- Part 1: Ethical dilemma case studies
- Part 2: All ships rise with the tide
- Test your knowledge and earn 0.75 CPD points.
Part 1: Ethical dilemma case studies
Key Financial Services and Credit Panel (FSCP) Determinations Breakdown
The introduction of the Financial Adviser Code of Ethics by FASEA in 2019 established a new framework for delivering financial advice. Although it operates alongside the legal standards outlined in the Corporations Act, enforcement of the Code now falls under ASIC’s Financial Services and Credit Panel (FSCP). With the FSCP beginning enforcement in early 2023, the Code has become an active and practical part of professional advice standards.
The FSCP
The FSCP is a pool of industry participants that ASIC draws upon to form individual sitting panels to review referrals. The FSCP operates independently but alongside ASIC, with each sitting panel comprising an ASIC staff member and at least two members from the FSCP pool.Breaches to date
As of September 2024, 22 published determinations by the FSCP have been made on various instances of advice misconduct across both the Code of Ethics and the Corporations Act. A full summary of the FSCP outcomes is available on the ASIC website at the FSCP Outcomes Register.
Common outcomes
The FSCP has a range of powers to respond to misconduct, including powers to:
- direct financial advisers to undertake specified training, counselling, supervision, or report certain matters to ASIC
- suspend or prohibit a financial adviser’s registration
- issue infringement notices in specified circumstances
- recommend that ASIC commence civil penalty proceedings
- accept enforceable undertakings from financial advisers.
For less serious misconduct, ASIC is not required to convene a sitting panel or exercise other enforcement powers. However, it must issue a warning or reprimand in these instances.
Case Study 1 – Mr G
The sitting panel found reasonable grounds to believe that the relevant provider, in advising two retail clients:
- failed to identify the clients’ goals accurately
- did not make reasonable inquiries to obtain complete and accurate health information for one client
- overlooked important insurance information for one client
- failed to consider the clients’ risk profiles.
As a result, the provider was found to have contravened section 961B of the Corporations Act.
The sitting panel determined that the Statement of Advice (SOA) did not address the clients’ goals and did not ensure that the clients kept their existing insurance until their new insurance was in place, contravening s961G of the Corporations Act.
In its determination, the sitting panel said it reasonably believed that the relevant provider failed to ensure that the SOAs provided set out the potential benefits, pecuniary or otherwise, that may be lost by implementing the advice. The relevant provider also failed to out any significant consequences of implementing the advice. By failing to do these two things, the relevant provider was found to have contravened s947D of the Corporations Act.
Additionally, in instances where clients’ ability to retain their existing insurance cover was not considered, the sitting panel found the provider had shown a preference for generating commissions for themselves and their associates over their clients’ insurance needs or costs.
The sitting panel reasonably believed that in giving the advice, the relevant provider failed to demonstrate the Code of Ethics’ values of competence, fairness and diligence – breaching Standards 3 and 5.
Takeaways
- Timing issues around insurance implementation are important, given the vital nature of continuity of cover.
- When it comes to replacement advice, it’s essential to appropriately outline the benefits and consequences so that the client can make an informed decision.
- Given that insurance recommendations may generate commissions, the needs, benefits, and quantifications of any recommendations must be clearly shown transparently and objectively. This is to avoid the inference that there could be any conflict with the end recommendation implemented.
Case Study 2 – Mr F
In relation to the first SOA, the relevant provider contravened s961B(1) and s961G by recommending the client make a voluntary contribution to their super fund to obtain a personal tax deduction when the fund did not allow voluntary contributions.
In relation to the second SOA, for a married couple nearing retirement, the relevant provider contravened s961B(1) and s961G by failing to consider the insurance options available in one of the client’s super funds or address the conflict between their retirement goals and their financial protection goals.
The provider also underestimated the insurance costs in the SOA’s retirement projections by $74,479 for one client and $14,566 for the other. The relevant provider further contravened s961J because the insurance recommendation earned an upfront commission of $20,000, and an ongoing commission of $6,700 despite the advice not being appropriate or in the clients’ best interests.
In relation to the third SOA – for a married couple with a very low combined income and super balance – the provider contravened s961B(1) in relation to their super and insurance recommendations by:
- failing to ascertain the details of one of the client’s super funds
- failing to consider the insurance options in their existing super funds.
The provider also failed to refer to the 50% to 75% loading that would apply to the insurance recommendations for one of the clients in the SOA or address the effect this would have on their superannuation balance.
As a result of the above contraventions, the sitting panel found the relevant provider’s failure to comply with the Code of Ethics – notably Standard 2 and the value of diligence – constituted a breach of s921E(3) of the Corporations Act 2001.
Takeaways
- Knowledge of funds and product rules is essential when doing due diligence and giving personal advice to clients.
- The impact on retirement savings must be appropriately quantified when funding insurance from superannuation, to appropriately illustrate to the client the real impact on their retirement through the advice. General disclaimers or warnings are unlikely to be sufficient in this space, as the client needs to be able to assess the consequences of the advice when making a decision to proceed.
- When client goals conflict with one another, the client must be clearly informed of the consequences of prioritising one over the other. This allows them to make an effective trade-off decision that can be documented in the file in relation to their personal situation.
- When underwriting leads to changes in the implemented cover, it’s essential that the advice is adjusted to consider these altered impacts on cost, risk, coverage, and other financial priorities so that the client can make an informed decision to still proceed with the advice.
Case Study 3 – Mr. X
The relevant provider gave SOAs to three clients on the same day, which the sitting panel determined involved contraventions of sections 961B(1), 961G, 947D(2) and 921E(3) of the Corporations Act 2001. The relevant provider adopted a layered advice strategy for each of the three clients in circumstances where it was not appropriate to do so. It was unclear as to how the limited insurance advice scope was effective in each client’s circumstances without a contemporaneous assessment of their super.
Additionally, the relevant provider did not adequately consider the three clients’ objectives, needs or financial situation, or base their judgements on their relevant circumstances. For example, the client files showed the collection of minimal information about their debts and expenses and lacked an explanation as to the basis for the insurance cover recommendations.
The relevant provider relied on generic, unsubstantiated reasons to support the recommendations for the replacement insurance products, and all three clients appeared to be underinsured due to the relevant provider’s recommendations.
Further, when recommending that the three clients roll over their super, the SOAs did not include any product replacement information related to the clients’ residual super balances e.g. no comparisons of fees or risks, or identification of any benefits lost by closing their existing super accounts. In giving the advice, the relevant provider failed to demonstrate the Code of Ethics’ values of trustworthiness and diligence and breached Standards 5 and 6.
Takeaways
- Sums insured must be personalised and shown to be appropriate to the client’s individual circumstances, particularly in the instance of trade-offs due to cost/other priorities. Exposures must be documented and clearly shown to the client in the event lower levels of cover are taken, and the link between the level of cover recommended and their risk exposures must be visible in the file.
- As set out in s947D, replacement product advice must be done with care and include all elements of benefits and loss to allow the client to make an informed decision on proceeding with the replacement.
- The scoping of advice must take into account both implicit and explicit subject matter (safe harbour) and also consider likely broad long-term consequences (standard 6, Code of Ethics), making related areas – such as insurance’s the impact on super – a factor that should be considered in the advice.
Enforcing the Code of Ethics and transparently regulating advice standards is an important step for the future of the financial advice profession. These determinations provide confidence that the ongoing standards of financial advice will continue to be upheld. They can also give insight into potential advice construction areas to be aware of and help evolve, enhance, and de-risk our own advice processes into the future.
Part 2: All ships rise with the tide
Building a more robust profession through Standard 12
Standard 12
Individually and in cooperation with peers, you must uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest.
All professions are bound by a collective aspiration to provide quality services and improve their standards over time. This applies not only to improving one’s own business or practice but to acting in a way that enhances the reputation, impact, and community engagement of all who work in the profession. For financial advisers, this commitment is essential to increasing the confidence of the community, regulators, government, and adviser members in the sector’s standards.
Why professional standards matter
Many different professions have ethical standards governing the behaviour and conduct of those working in it. These are important for several reasons:
- Trust and credibility: Ethical standards help build trust between professionals and their clients, colleagues, and the wider public. Adhering to ethical guidelines enhances professionals’ credibility and the reputation of their profession.
- Guidance and accountability: These standards provide a clear framework for acceptable behaviour, helping professionals to navigate complex situations and make informed decisions. They also hold professionals accountable for their actions.
- Protection of clients and the public: Ethical standards are designed to protect the interests of clients and the public by ensuring that professionals act fairly and responsibly.
- Professional integrity: Adhering to ethical standards helps maintain the profession’s integrity. It ensures that all members uphold the same values and principles, which are crucial to the profession’s overall health and sustainability.
- Legal and regulatory compliance: Many ethical standards align with legal and regulatory requirements, helping professionals avoid legal issues and ensure compliance with relevant laws.
Standard 12 in spirit
Standard 12 of the Code emphasises the collective responsibility of financial advisers to uphold and promote the ethical standards of their profession. It encourages advisers to work together to maintain high ethical standards and hold each other accountable, ensuring that the public interest is always protected.
This standard is broader than it might initially seem, encompassing three main components:
- Upholding and promoting ethical standards: Financial advisers should actively support and advocate for the ethical principles of their profession.
- Accountability: Advisers should hold themselves and their peers accountable for maintaining these standards.
- Protection of public interest: The goal is to safeguard the interests of clients and the public, ensuring trust and integrity in financial advice.
Standard 12 in practice
If a financial adviser witnesses behavior inconsistent with the Code’s values and standards, they have an ethical obligation to address it. They could do this by bringing it to the attention of the advice provider (or licensee) or by referring it to the Australian Securities and Investments Commission (ASIC) for review by the Financial Services and Credit Panel (FSCP).
A referral itself is not a confirmation of wrongdoing. It simply initiates an appropriate reviewed by the panel and gives the provider the opportunity to submit additional information as part of the determination. The process is anonymous and has no lasting implications for the adviser concerned, ensuring they are free of prejudice and subject to free process.
Summary
Professional standards are important, but they don’t mean much unless those in the profession actively uphold them. All advisers are custodians of their profession, and therefore, all are responsible for ensuring that clients receive advice that adheres to the values and principles outlined by the Code.