Not long ago, we discussed Michelle Levy’s Quality of Advice review proposals paper and one of the most significant ideas therein – effectively scrapping the best interests duty and replacing it with an overarching obligation to provide “good advice”.
You can find a longer discussion about the potential ramifications of such a regulatory model (and which industry participants would benefit from it) here. But it’s worth noting that even if the best interests duty were removed from the Corporations Act, Levy says there would still be an effective substitute for measuring professional conduct.
That substitute is the Code of Ethics. While the Code (and the professional standards legislation) was removed from the QAR’s mandate earlier this year and therefore outside of Levy’s mandate, she nonetheless described it as “[covering] the same topics as the Chapter 7 best interests obligations and [using] some of the same terms, but … in different ways.”
Levy acknowledged the “undesirable” inconsistencies between the Code and the best interests duty, but as we’ve discussed many times here at NMP, problems with the Code run deeper than that. Over the years, the Code has been described by some advisers, association leaders and politicians as “unworkable”, “built wrong from the ground up”, a “huge challenge” and an impediment to the provision of scaled or limited advice.
One of the most prominent criticisms of the Code pertains to Standard 3, which prohibits “[advising, referring or acting] in any other manner where you have a conflict of interest or duty.” In a recent online update, AFA CEO Phil Anderson described this wording as “idealistic but completely impractical,” arguing that “it is impossible to remove all conflicts of interest.”
He likened the Standard to “[stopping] a surgeon from recommending an operation and also doing the operation” or preventing a barrister “from recommending litigation and then pursuing that on behalf of the client.”
While FASEA conceded the Standard could be reworked and opened consultation on the matter in late 2021, ultimately no changes were made before the professional standards body was shuttered at the end of that year. Fortunately, Minister for Financial Services Stephen Jones has indicated that the Code, along with other aspects of the professional standards framework, are due for a review in 2023.
In his update, Anderson said he was “very pleased” consultation on the Code was going ahead, but argued Standard 3 isn’t the only problem that needs addressing.
“One area of the Code that I think also needs to be looked at,” he explained, “which has not got much attention but simply fails to reflect reality, is the introduction. In the first sentence it talks about financial advisers refocusing from providing commercial services to acting as professionals.
“I think many advisers would find this offensive, and would have in 2019, when it was issued.”
He also highlighted a sentence which contrasted the “ethos of the market” – which, according to the legislation, “legitimises the pursuit of self-interest through the satisfaction of others’ wants” – with the ethos of the “profession,” which “aims to secure the public good through the subordination of self-interest in favour of serving the interests of others.”
Anderson said: “I am not sure if the author of this has seen a medical specialist recently. What they charge gives no indication that they have subordinated self interest. And if you check the ATO statistics from the 2019/20 year for the highest paid occupations, the top three spots are taken by medical professionals.”
He added: “It is clear that medical and other professionals are well paid. This is something that we should expect and should not oppose. It is a reality that they should expect a reasonable return on their investment in their qualifications, skills and expertise. This reference to the ‘ethos of the market’ and ‘professionals subordinating self interest’ does not align with reality.”
Ultimately, Anderson said it was important these issues are addressed next year “and that we can all get behind it and encourage a strong emphasis on the behavioural outcomes that it demands.” Delivering the “Code of Ethics Version 2,” as he put it, is especially important given the role it will play if the QAR proposals become legislative reality.
