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CHAPTER 3

CHAPTER 3. Ethics and Compliance. Introduction. Sound financial advice is important to Australia’s economy Financial advice is subject to regulation Many reviews have examined how the industry should be structured

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CHAPTER 3

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  1. CHAPTER 3 Ethics and Compliance

  2. Introduction • Sound financial advice is important to Australia’s economy • Financial advice is subject to regulation • Many reviews have examined how the industry should be structured • The compliance framework depends on statutory law, common law and ethics • All participants need to work to meet stakeholder expectations

  3. Sound Advice is Important • All sectors benefit from individuals managing their money well • — Government • — Business • — Financial markets • — Individuals and families

  4. Regulation and Structure of the Financial Planning Industry Licensees: To maintain their securities licence, licensees have to meet a stringent set of requirements. In addition, they are required to monitor, supervise and control the actions of their authorised representatives to ensure that they are meeting their obligations and responsibilities. Where the licensee is a Principal Member of the Financial Planning Association, it is bound by the Association’s Code of Ethics and Rules of Professional Conduct, as are individual members.

  5. Industry partners: While licensees and their authorised representatives make up the public face of financial planning, there are a number of other important service providers that work within the financial services industry. These other ‘partners’ within the industry are also governed by the law, regulations and industry standards — and often through significant contractual arrangements.

  6. Potential Conflicts of Interest There can be some very interesting entanglements of these different players, as one large business may consist of insurance and non-insurance product providers, banking, licensees, stockbroking, research, technology and in-house training. Where licensees are also product providers, their responsibilities to the client and their responsibilities to the business could be in conflict.

  7. Current Regulators • The Reserve Bank of Australia (RBA), with responsibility for monetary policy, financial system security and payments system regulation • The Australian Prudential Regulatory Authority (APRA), responsible for the prudential regulation of deposit-taking institutions, life and general insurance and superannuation • The Australian Securities and Investments Commission (ASIC), responsible for market integrity, consumer protection and the regulation of businesses

  8. Current Regulators • The Australian Taxation Office (ATO), responsible for administering taxation law and for regulating certain self-managed superannuation funds, and • The Australian Competition and Consumer Commission (ACCC) which administers the Trade Practices Act

  9. The Role of ASIC in the Financial Services Industry • Licensing regime • Audit programs • Enforcement, including enforceable undertakings and banning of advisers • Obtaining an AFSL is one of the areas that the Financial Services Reform Act has changed • Requirements to gain such a licence have been significantly strengthened under the FSRA • Directors are held personally responsible if their statements are proven false

  10. Financial Advisers • Most financial advisers work within large, highly controlled licensees such as those associated with multi-business financial institutions, the banks or insurance companies. • Financial advisers may be salaried employees, or running their own businesses and sharing client fees or product. commissions with a licensee. • Licensees may be individuals or companies, as can authorised representatives of licensees. • Financial advisers must either be licensed themselves or be authorised to represent a licensee.

  11. Roles • Financial advisers may: • source clients, develop marketing campaigns, establish ‘centres of influence’ and referral networks, run seminars and workshops, produce newsletters, etc • determine the types of clients they will source, for example retirees or small business owners • explain to clients the financial planning process and how they run their business

  12. prepare and provide a Financial Services Guide, Privacy Statement and other documentation • interview, collect data and administer risk tolerance assessments • analyse client information, develop strategies and recommendations, prepare a written Statement of Advice (SOA) • present the plan, answer questions, obtain closure on sale • assist with implementation of the SOA

  13. schedule first review and detail their ongoing communications with clients • schedule and provide annual reviews • seek referrals, and • manage their own office and relationships with their licensee and other suppliers. • The financial adviser has a direct professional and ethical responsibility to the client to act in the client’s • best interest

  14. Financial Planning Association (FPA) • Code of ethics • Rules of professional conduct • Diligence • While advisers and licensees may not be members of the FPA, its Code of Ethics and Rules of Professional Conduct will form part of the ‘industry standards’ that courts will use to judge the behaviour of advisers and licensees

  15. Reviews: Wallace • A number of commissions, in particular the Wallis Commission, made recommendations for far-reaching changes in the industry. • Prior to July 1998, the industry was regulated in a split fashion. • In July 1998, as part of the recommendations from the Wallis Commission, there was a reorganisation of the regulatory authorities with the express purpose of simplifying and strengthening the regulatory environment and ensuring clear demarcation between the regulators.

  16. Reviews: Rippol • 2009 investigation into the reasons for a number of high-profile crashes: Storm Financial, Opus Prime. • Recommendations included: • — Fiduciary duty for advisers • — Improved disclosure • — Strengthened ASIC • — Elimination of commissions • — Tax-deductible financial planning fees • — A professional standards board

  17. Reviews: Henry • A comprehensive review of studies taxation system. • Recommendations included: • — 28% corporate tax rate • — Resource rent tax • — Super guarantee levy to 12%

  18. Reviews: Harmer • A review of measures affecting retirees and pensioners • Recommendations included: • — Increases in the rate of single full pension • — Improved single pensions relative to married • — Pension payments tied to increases in actual pensioner cost of living

  19. Reviews: Cooper • An examination of the governance, efficiency, structure and operations of superannuation. • Recommendations included: • — A national no-frills superannuation fund ‘My Super’ • — Strengthening of member choice • — Easier comparisons of different types of fund • — Review of lending arrangements

  20. Reviews: Bowen • A report by the Minister responsible for financial services and superannuation • Described overriding principles • — Financial advice must be in the client’s best interests • — Financial advice should be within the reach of those who need it • Three reforms apply from July 2012 • — Ban on commissions and volume-based payments • — Statutory fiduciary duty for planners • — Flexible charging and opt in review services

  21. The law • The common law, the Corporations Law (including the Financial Services Reform Act) and the Financial Planning Association’s Code of Ethics and Rules of Professional Conduct form the core of the regulatory environment within which financial advisers work, but many other laws and regulations also apply.

  22. Law of contract • Elements of a contract • — Offer and acceptance • — Consideration • — Intention to create a legal relationship • — Capacity to contract • — Genuine consent

  23. Discharge of contracts • Breach of contract • Contract management

  24. Law of Agency, Licensing and Employment • Agency: • Agency law derives from common law and establishes the relationship between principal and agent, whether expressed or not. A contract of agency is formed when one person (or company) who is the principal gives authority to another person (or company) to act on his or her behalf. • That is, the agent is given the power to bind the principal to agreements with third parties.

  25. Licensing: • The provision of a licence to provide financial advice is done under statutory law. In a financial planning context, therefore, the licensee (the principal) authorises the financial adviser (the authorised representative) to act for it as an extension of its licence, which was granted to it by ASIC under the terms and conditions stated in the Corporations Act and the Financial Services Reform Act.

  26. Common Law • Common law is based on precedent — ie, the decisions of previous judges over time. • The relationship of a financial adviser to a client is based on the expectations of the client and those of the wider community that the professional can be trusted. With this expectation of trust comes a high level of responsibility on the professional’s part to constantly warrant that trust by being reliable, confidential, careful and concerned.

  27. Fiduciaries • This fiduciary relationship is recognised in law and, if broken, has legal consequences for the professional involved. • Therefore, if a financial adviser gives advice to a client, the client should be able to reasonably rely upon that advice.

  28. Education and Training • Education and training are important in building a professional and competent service industry. • Under the Financial Services Reform Act and RG146, education for financial advisers must be competency based and cover both generic industry and specialist knowledge and associated skills. • Licensees must ensure that advisers’ competencies are maintained, updated and developed.

  29. ‘Know Your Client’ Rule • Financial advisers are bound by a fiduciary relationship with their clients, regardless of whether there is a formalised agreement or contract between them. The core of this fiduciary relationship is that the adviser must always put the client’s best interests first. • Reasonable basis for advice.

  30. ‘Know Your Product’ Rule • Financial advisers offer a large number of • products and services, including: • development of a full financial plan • asset allocation optimisation • fund manager and product selection • stock selection • model portfolio development • lending • insurance and estate planning

  31. salary packaging • leasing • small business advice • DIY superannuation • budgeting • administration services • referrals • monitoring and review • annual review services, and • educational services, eg seminars, but not property

  32. Disclosures and Disclaimers • If a financial adviser makes a recommendation which leads to the transaction of a security and the client might rely upon the advice, Section 942 of the Corporations Act requires the financial adviser to disclose:

  33. — any commission, fee, or other benefit or advantage, whether pecuniary or not, direct or indirect, that the securities adviser may receive in connection with the recommendation • and • — any other pecuniary or other interests, whether direct or indirect, of the adviser that may be capable of influencing him or her when making the recommendation

  34. Financial Services Guide • The information required to be included is: • the name, ABN, registered and local address of the licensee and any associations • identification of the authorised representative and his or her capacity (including qualifications and experience) • a disclosure of the type(s) of advice being offered, including the range of securities and products and services, such as portfolio monitoring

  35. disclosure of the fees and charges and methods of calculation of the fees and charges for all services offered (including annual reviews) • a discussion of the client’s basic rights when obtaining investment advice, such as the right to know of any conflicts of interest, the right to receive advice appropriate to the client’s needs, the right to know the risks involved when investing • a comparison of the services offered with those offered by other dealers, and • the mechanisms in place for complaint resolution, both internal and through the external complaint resolution scheme, including response-time standards

  36. Ongoing Review • Completing annual reviews is as important as the production of the original plan and probably involves more work. A number of personal and economic changes can occur over a year and the impact of these changes on the client’s current and future financial situation must be assessed.

  37. Complaint and Dispute Resolution • All AFSL holders must have internal complaint management procedures in place and ensure that clients understand how to access them. • External complaint schemes • Financial Ombudsman Scheme (FOS) (formerly FICS)

  38. Insurance Regulation, Product and Advice • The changes in the regulatory environment (especially the Financial Services Reform Act) have seen ASIC taking over many of the responsibilities for administering the law and regulations with regard to life and general insurance • Insurance brokers • Insurance agents • Life insurance code of practice

  39. Privacy • The Commonwealth Privacy Act of 1988 introduced the process of more closely ensuring that customers’ privacy is honoured. This Act looked at the safeguards that must be in place when collecting, storing, using and disclosing personal information. This includes information regarding consumer credit, insurance claims, employment, and superannuation and social security information. Initially the main concern was clients’ Tax File Numbers (TFNs).

  40. Ethics • Compliance has to do with the attitude companies and their employees take towards the regulatory environment in which they operate. Ethics is the sum of the community and personal attitudes towards standards. • An ethical framework is supported by and reflective of community values, which include trustworthiness, honesty, integrity and diligence in respect of professional behaviour. • Ethical and legally compliant organisations will have formalised, effective corporate governance procedures.

  41. Attributes of a Professional Relationship People have certain expectations of professionals, including: • confidentiality • recognition of special educational and training requirements • a relationship based on trust • underlying values and principles • diligence

  42. The law says that financial advisers must ‘know the client’. The use of data-collection forms and the process of completing these forms is the methodology that is used to meet this requirement.

  43. The actions that financial advisers can take towards compliance are: • disregard • avoidance • minimal compliance • compliance • best practice

  44. Licensee Responsibilities • The licensee continuously needs to ascertain if its current business practices are meeting or exceeding requirements. • Where there are gaps, new procedures and processes will need to be put in place. • The licensee’s compliance system has to be fully documented.

  45. An implementation strategy must be developed, communicated to every person within the advisory group and successfully implemented. • T he whole process must then be monitored, reviewed and updated when necessary.

  46. Management Responsibilities They must ensure that: • the system reflects their values • they provide the necessary resources to support the system • they make business decisions within the compliance system framework, and • they support disciplinary outcomes from the system

  47. Comprehensive ongoing education is essential for all employees, and is a legal requirement for financial advisers.

  48. Issues for Financial Advisers • — Legislative changes • — Business management • — Court and tribunal determinations • — Taxation rules • — Superannuation rules • — Social security rates and rules • — Products and markets

  49. — Technology • — Professional indemnity insurance • — Remuneration and business practice • — Monitoring and review • — Use of support staff • — Mentoring and apprenticeship • — Paternalism and informed consent • — Client privilege

  50. Summary • Sound financial advice is important to Australia’s economy. • Financial advice is subject to regulation. • Many reviews have examined how the industry should be structured. • The compliance framework depends on statutory law, common law and ethics. • Complying to rules and regulations and putting your clients best interest first, is the key critical part of financial planning!

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