Codes of conduct risk creating financial advice duopolies

Mike Taylor writes that codes of conduct are only effective when those who sign up genuinely appreciate the consequences that follow a breach.

While it is always dangerous to draw parallels between very different callings or professions, financial planners might find some value in examining the codes of conduct which apply to Australian journalists.

I use plural “codes” because Australian journalists can, if they are members of the Media Entertainment and Arts Alliance (MEAA), adhere to one of the longest-existing codes of ethics in the industry. As well, if they work for Rupert Murdoch’s News Limited, Fairfax or the Australian Broadcasting Corporation they may adhere to in-house codes.

In the experience of this writer, the MEAA code of ethics has represented a benchmark throughout his career, but as union coverage has declined throughout the industry, in-house codes have possibly become more pertinent.

All of this is relevant to the financial planning industry because, notwithstanding the tenor of the recently released Australian Securities and Investments Commission (ASIC) consultation paper (CP 191) and the broad response of the industry, licensee-based codes should not be lightly dismissed.

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In journalism, the simple facts of the matter are that while the Australian Journalists Association was once seen as both a trade union and a representative body for the calling/profession of journalism, the MEAA, which evolved out of the old AJA, is not so broadly recognised. Hence, the old AJA code of ethics, now overseen by the MEAA, is less relevant as a whole-of-industry standard.

It follows that just because bodies such as the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) can now claim to be broadly representative of the financial planning industry, this may not be the case in the future.

Further, there is evidence in journalism and in other professions/callings that codes of ethics administered by those controlling remuneration are more quickly activated in the event of a breach than those administered by organisations more distant from the coalface.

That is why ASIC was right to canvass “whether it would be appropriate in any circumstance to consider a code sponsored by a single Australian Financial Services (AFS) licensee or dealer group, or a small number of licensees or dealer groups”.

The consultation paper added, “We propose that our existing policy settings for code administration and enforcement would be maintained and apply to all code applications”.

Of course, there will be plenty of licensees and dealer group heads who will view the prospect of developing their own code of conduct and having it approved by the regulator with distaste.

Such an exercise will seem time-consuming and vexatious and something better left to organisations such as the FPA and the AFA.

However, as reports in Money Management this week make clear, there are those in the industry such as MyAdviser managing director Philippa Sheehan who believe there is a need to look more deeply at the issue.

Sheehan made clear she believed financial services licensees needed to recognise that they were the ones responsible and liable for the advice delivery by their representatives.

“Therefore licensees should have their own code,” she said. “The associations should work with us to help guide us in creation of our own codes.”

Sheehan warned that the approach currently being pursued by the industry risked creating a duopoly between the FPA and AFA and suggested this would create complexity for licensees as some advisers sought to sign up to differing codes.

“Licensees are responsible for their advisers, they take the enforceable undertakings, and they are responsible for implementing the compliance of advisers, so it would be a lot easier if we weaved our code into that,” Sheehan told Money Management.

Those who might disagree with Sheehan should also consider the degree to which bodies such as the FPA and AFA are likely to be able to identify breaches of their code and then discipline the culprits.

At best, they might act to banish a member but that planner might, potentially, continue to operate as an authorised representative.

Codes of ethics and codes of conduct are almost always a good thing. It cannot harm any industry to have practitioners seeking to adhere to the highest ideals when it comes to standards of practice.

However they are only truly effective when breaches result in meaningful consequences.

There is nothing in ASIC CP 191 which speaks to seriously meaningful consequences.