By Jayson Forrest - Managing Editor - IMAP Perspectives
IMAP calls for FASEA Standard 3 review
The IMAP Regulatory Group, chaired by Jenny Mulders of QRC Consulting, has written to FASEA CEO, Stephen Glenfield, outlining existing structural problems with the FASEA Code of Ethics, and calling for calls for a review of FASEA Standard 3.
This standard became a legal requirement for all financial advisers from 1 January 2020.
In the nine page letter to FASEA, dated 6 May 2020, the IMAP Regulatory Group said that while it supported the Code’s intentions as a way of assisting the move towards professionalisation, it identified four key problems with the current Code. These are:
- The conflict between certain standards and established law and regulatory policy;
- Inconsistency between the Code and FASEA’s guidance, particularly in relation to the way a Code Monitoring Body may adjudicate a matter under the terms of Standard 3;
- Inconsistency in the manner in which the Code must be applied between members of the advice profession; and
- The lack of a materiality test.
“In sending the letter, we wanted to set out IMAP’s position, particularly on Standard 3 of the FASEA Code of Ethics, which we believe is structurally flawed,” says IMAP Chair, Toby Potter.
“Importantly, we think it appropriate to note the differences between Standard 3 and the way in which conflicts are required to be addressed by other professions, like law and accounting, which have had considerably longer experience in addressing this issue.”
The IMAP Regulatory Group is seeking a review of Standard 3, which it believes is not only important for professionals working in the managed accounts sector, but for all financial advisers.
“Standard 3, as it currently sits, imposes a significant burden on the provision of advice. It contradicts another standard in the FASEA Code of Ethics, as well as established law,” Potter says.
In its current draft, FASEA Standard 3 says: ‘You must not advise, refer or act in any other manner where you have conflict of interest or duty.’
However, the IMAP letter comprehensively outlines the inconsistency of Standard 3 with Standard 7 of the Code, which says:
‘The client must give free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged.
‘Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with acting for a client, that derive from a third party other than your principal.
‘You must satisfy yourself that any fees and charges that the client must pay to you or your principal, and any benefits that you or your principal receive, in connection with acting for the client are fair and reasonable, and represent value for money for the client.’
In sending the letter to FASEA, we wanted to set out IMAP’s position, particularly on Standard 3 of the FASEA Code of Ethics, which we believe is structurally flawed.”
Contradictions within the FASEA Code of Ethics - Standard 3 vs Standard 7
The IMAP Regulatory Group has highlighted a number of contradictions with the FASEA Code of Ethics. For example, while Standard 3 contains a blanket ban on conflicts, Standard 7 acknowledges that either or both the adviser and the licensee may receive benefits from the client.
And while Standard 7 requires that these are “fair and reasonable and represent value”, the submission adds these considerations are, in effect, a requirement for the adviser to exercise judgement about ‘fairness’, ‘reasonableness’ and ‘value’, which is consistent with existing legislation, but which is inconsistent with Standard 3.
“We believe that the impracticality of Standard 3 must be resolved through legislative amendment. This amendment should ensure that Standard 3 is drafted so as to be consistent with the general legal principles that apply to the operation of the Best Interest test,” the IMAP Regulatory Group’s letter says. “Standard 7 operates by reference to obligations and rights created in the Corporations Act and a redrafted Standard 3 should be worded in a similar way.”
IMAP proposes two alternative amendments that would be consistent with the principles of law and which it believes, would achieve the outcome intended by the Hayne Royal Commission. They are:
Option 1
Where a relevant provider has a conflict of interest or duty, they must:
- Disclose the conflict;
- Implement appropriate measures to manage the conflict;
- Explain clearly why the conflict will not result in a breach of the Best Interests Duty; and
- Obtain the client’s express consent to the adviser’s handling of the conflict, or alternatively
- Avoid the conflict by refusing to provide the services.
Option 2
You must not advise, refer or act in any other manner where you have a conflict of interest or duty, unless the conflict of interest or duty can be adequately managed and the client is not disadvantaged by the conflict of interest or duty.
To read IMAP’s letter to Stephen Glenfield CEO FASEA , click here to download PDF
Click here to view the worked example prepared by the IMAP Regulatory Group.
The IMAP Regulatory Group includes representatives of The Fold Legal, Holley Nethercote, Implemented Portfolios, Macquarie and Praemium, and is chaired by Jenny Mulders of QRC Consulting.