The FASEA Code of Ethics Standard is now in force as of 1 January 2020, and the challenge for advisers is not just to pass the exam but also to make the necessary changes to their business practices.
According to leading research house Lonsec, the Code now requires advisers to demonstrate that they are acting in their client’s best interest while avoiding even a ‘perception’ of conflicted recommendations.
“For advisers the FASEA standards are no longer an intellectual exercise. Despite the practicality issues, they are now the yardstick against which they will be judged by regulators, clients and the community,” said Lonsec CEO Charlie Haynes.
“The reality is that the only way an adviser can comply with the standards effectively and efficiently is to access quality investment research and technology tools that enable them to provide detailed product comparisons across all asset classes, including superannuation funds and investment options.
“This goes to the heart of Standard 9 of the Code of Ethics, which requires advisers to make recommendations with competence.”
Lonsec also foreshadowed that conflicted remuneration, even if an adviser considers it to be minor, manageable, or largely irrelevant, could put licensees in breach of the standards.
Standard 3 of the FASEA Guidelines states that an adviser is in breach “if a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income could induce an adviser to act in a manner inconsistent with the best interests of the client.”
This means that all conflicts, even a preference to use an in-house practice or dealer group product, could be viewed as an inducement to act in a way that isn’t in the client’s best interest.
“Avoiding even perceived conflicts is now a requirement for advisers, so practices should strongly consider moving to a conflict-free environment to safeguard their position,” said Mr Haynes.
“Lonsec is now offering to solve this and help advisers moving forward by acquiring the investment management rights from existing portfolios and to manage the investment process on behalf of the adviser without ongoing conflict.”
Standard 6 also raises the bar for advisers, stating: “Where your clients indicate they only wish to invest in ethical or responsible investments, you will need to consider whether limiting your product recommendations in this manner is appropriate.”
According to Lonsec, meeting this standard means going beyond recommending branded ‘ethical’ products to understanding exactly what the product invests in and whether this indeed aligns with the client’s expectations.
“Advisers now have a legal responsibility to ensure their client’s preferences are taken into account,” said Mr Haynes. “For example, if the client doesn’t want fossil fuels in their portfolio, simply recommending an ESG product probably won’t be sufficient from now on. The adviser needs to have a complete understanding of the product’s underlying investments and its process.
“That’s why Lonsec is introducing a new sustainability rating and will provide data on how individual investment products stack up against the United Nation’s 17 Sustainable Development Goals. We want to give advisers all the tools and information they need to deliver advice that they can clearly demonstrate meets the FASEA standards and their best interest duty.”
