Ethics in the Financial Services Industry

In 2019 National Australia Bank (NAB) was taken to court by the Australian Securities and Investment Commission (ASIC) for charging ongoing fees to customers for financial planning services that were not provided (Australian Securities Investment Commission, 2019a). This is one example of a larger issue within the financial services industry of companies not complying with both the Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics and the Corporations Act 2001 (Cth) (the Act).

FASEA Code of Conduct

Under section 921U of the Act, the standards body is responsible for creating a Code of Ethics which relevant providers are required to comply with under section 921E (Corporations Act 2001 (Cth) s 921). In the financial advice industry that standards body is the Financial Adviser Standards and Ethics Authority (FASEA). From 1 January 2020, financial advisors are required to comply with the FASEA Code of Ethics, consisting of 12 standards and which exceed the legal requirements.

Standard 2 of the Code of Ethics requires advisors to act with integrity (Financial Adviser Standards and Ethics Authority, 2018). ASIC found that NAB had been charging ongoing fees when no financial planning services were provided. NAB was also found to have issued defective Fee Disclosure Statements (FDS), and in some cases did not issue them at all (Australian Securities Investment Commission, 2019a).

It is a requirement pursuant to section 962G of the Act that the fee recipient (financial advisor) must provide the client a FDS within a period of 60 days from the disclosure day for the arrangement (Corporations Act 2001 (Cth) s 962). Standard 7 of the FASEA Code of Conduct requires that clients be given a clear and simple explanation of all fees and charges the advisor will receive and provide their informed consent to all renumeration arrangements (Financial Adviser Standards and Ethics Authority, 2018). This is done in the form of a FDS, generally at the time the financial advice arrangement is entered into.

In 2012, ASIC introduced Future of Financial Advice reforms. This resulted in the amendment of the Act to include the requirement to provide an annual FDS, and an opt-in arrangement for advice (Corporations Amendment (Future of Financial Advice Measures) Act 2012 (Cth)). Opt-in arrangements require clients to agree to ongoing fee arrangements (OFA) every two years (Corporations Amendment (Future of Financial Advice Measures) Act 2012 (Cth)). The 2019 Royal Commission into Financial Services recommended that this be updated to require that OFAs be reviewed on an annual basis (Australian Securities Investment Commission, 2019b).

By charging clients ongoing fees when no financial service was being received, and by failing to provide clients with complete and accurate FDSs, NAB clearly breached both Standards 2 and 7 of the FASEA Code of Conduct. By failing to provide clients with FDSs, and by failing to ensure clients agree to OFAs, NAB was in direct breach of the Act.

Report 636, released by ASIC in November 2019, stated that financial planning clients could be at risk of receiving incorrect information about fees, and in some cases were charged fees even after the arrangement is terminated (Australian Securities Investment Commission, 2019b). Advisors who charge clients fees without ensuring the client fully understands what they are paying for have not acted in accordance with the FASEA Code of Ethics, and as such are not fulfilling their obligations to clients.

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Fee for no service conduct is being uncovered and reported more regularly throughout the Financial Services industry as a result of the 2019 Financial Services Royal Commission. Further regulation and requirements in the industry will increase transparency and consistency regarding disclosure documentation.

Current Documentation Requirements

When entering into financial advice arrangements, clients receive what can be an overwhelming number of documents including but not limited to Financial Services Guides (FSG), Product Disclosure Statements (PDS), Fee Disclosure Statements (FDS) and Statements of Advice (SOA).

A FSG must be provided in the event that a financial service is provided to a retail client (Corporations Act 2001 (Cth) s 941A). A PDS must be provided to clients when advisors recommend a financial product (Corporations Act 2001 (Cth) s 1012A). A SOA must be provided when personal advice is provided to a retail client and must include the statement of advice, basis on which the advice was given, contact details of the advisor, renumeration and fee disclosures (Corporations Act 2001 (Cth) s 946A). A FDS must be provided when there is an ongoing fee arrangement with a retail client (Corporations Act 2001 (Cth) s 962G). This statement must include details regarding the amount of ongoing fees paid, services the client is entitled to receive, details on services actually received (Corporations Act 2001 (Cth) s 962H).

Improving Ethical Behaviour Practices

To many people who are not financially literate, receiving this number of documents can be excessive and difficult to comprehend. I believe that financial services companies and financial advisors should work with regulatory bodies (FASEA and ASIC) to standardise disclosure documents in order to ensure consistency across the industry. This will give clients the ability to compare documents between financial services companies, and consequently make more informed decisions about the agreements they wish to enter into.

ASIC’s Regulatory Guide 245 details who must provide a FDS, how to prepare and FDS and when it must be provided (Australian Securities Investment Commission, 2017a). This guide should be reviewed regularly by advisors to ensure FDS documentation is prepared and provided to clients in accordance with regulations.

Many advisors may consider more regulated documentation a restriction within the industry; I believe it is the opposite. If documents such as the FSG, PDS and FDS were standardised, this would allow advisors to put more focus into documents such as the SOA. Additionally, it would leave less room for interpretation by clients. This would allow clients to better comprehend the services they have paid for and what they are entitled to.

Overall, I believe standardisation of required documentation would be in the best interests of the client. As a result, this would allow them to be confident that advisors are acting in their best interests, fulfilling the advisor’s duties under both the FASEA Code of Ethics and the Act.

Reference List

1. Australian Securities Investment Commission. (2011). Disclosure: Product Disclosure Statements (and other disclosure obligations) (Regulatory Guide No. 168). https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-168-disclosure-product-disclosure-statements-and-other-disclosure-obligations/
2. Australian Securities Investment Commission. (2017a). Fee disclosure statements (Regulatory Guide No. 245). https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-245-fee-disclosure-statements/
3. Australian Securities Investment Commission. (2017). Licensing: Financial product advisers – Conduct and disclosure (Regulatory Guide No. 175). https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-175-licensing-financial-product-advisers-conduct-and-disclosure/
4. Australian Securities Investment Commission. (2019a). ASIC takes court action against NAB for fees for no service and fee disclosure statement failures. https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-360mr-asic-takes-court-action-against-nab-for-fees-for-no-service-and-fee-disclosure-statement-failures/
5. Australian Securities Investment Commission. (2019b). Compliance with the fee disclosure statement and renewal notice obligations (Report No. 636). https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-636-compliance-with-the-fee-disclosure-statement-and-renewal-notice-obligations/