The Financial Advice Code – Consultation Draft
Last Friday the Code Working Group released a consultation draft of the financial advice code – the Code of Professional Conduct for Financial Advice Services – and a supporting consultation paper. The Code will apply to all regulated financial advice given to retail clients when the new financial advice regime takes effect. This is now likely to be in the second quarter of 2020.
Thoughts on the Code
The draft Code takes a principles-based approach. The Code Working Group has done this intentionally, so the Code is flexible and will work for different types of businesses. I think this is the right approach – the alternative would have been a set of more prescriptive rules, which wouldn't have worked as well.
I really like the draft Code. Why do I like it?
- It's much simpler
There are 11 standards – down from 18 in the current code – although I'd argue it could be 10 (which would be a nice round number) because I don't think we need a separate standard for resolving complaints. To me it could be covered in the commentary to Standard 1.
As you'd expect, the Code draws heavily on the current code. But it's half the length – less than 3,500 words compared to about 7,000. It's a well-written document which is easy to follow. I think it's much more approachable and accessible than the current Code.
Some of the simplicity comes from removing the grandfathered competency alternatives. It needs to be pointed out these will still live on, both through the recognition of existing AFAs' competence and through the discretion to meet the minimum competence standards in other ways.
- It's consistent
The draft Code dovetails nicely into the proposed statutory duties, which of course was probably always going to be the case. It's also possible to neatly map much of the proposed Code against many (but not all) of the standards in Financial Service Council's new Code of Conduct. This is good news for financial advice providers who are FSC members and who will be looking to develop processes which address both Codes (and cover FMA expectations at the same time).
- It's neutral
The same standards will apply to individuals (whether advisers or nominated representatives), firms of all sizes, and regardless of the delivery platform. The Code Working Group could have developed different standards for different circumstances, but they've largely avoided doing so.
- Submissions have been listened to
The draft Code is quite different from the original consultation document released in March. One key change is it no longer refers to "good advice outcomes." This has removed the potential implication products need to perform well.
The draft Code is also more high level than the proposals originally consulted on, some of which would have gone to the detail of an organisation's processes. However, the reality is some of these requirements are likely to be considered during licensing instead. Record keeping also falls into this category – record keeping requirements are not in the draft Code, but will probably be a licensing consideration.
Where the Code could be criticised
Setting aside philosophical debates about "client first", conflicts of interest and the like (these had their place, but the ship has sailed) the biggest practical criticism probably stems from the lack of detail. While I think the Code Working Group has taken the right approach, and many of the concepts in the draft Code are familiar, it does mean financial advice providers will be left to make significant judgement calls about whether their processes meet the Code's requirements. Providers who have been waiting for the draft Code to start planning are probably no more informed than they were last Thursday.
I can see Standard 9 – which covers suitability – causing some practical headaches, particularly for class advice. The commentary just says that sometimes "it may be reasonable to conclude that the financial advice is suitable where the client's circumstances include particular characteristics." Standard 9's wording also leaves room for debate about exactly when a product comparison is needed for replacement product advice.
Standard 6 protects client information – not a feature of the current code. Data protection is an increasingly topical area, but I think the Standard probably goes too far. I would like to see an ability to disclose client information to regulators in the exercise of their functions on a confidential basis (not when just required by law). Providers normally cover this off in client agreements, and there are potential Privacy Act complications, but I still think this would be of value.
Standard 6 would also prevent the use of client information in an anonymised form. This is a change from the initial proposal, and feels unnecessarily restrictive to me.
One final question is whether the competence standards go far enough. In broad terms they expand the current AFA-level qualifications to cover all providers. There is a case for imposing a higher standard in some areas, which the Code Working Group acknowledges in its commentary as an area for future work. Perhaps the Code Working Group was wary of impacting on the availability of advice – which would have been inconsistent with the statutory objective.
There is an online Q&A session at noon on Wednesday 24 October (register here), and the Code Working Group is accepting submissions (here) until 9 November. This is likely to be the last opportunity for providers (and others with an interest) to influence the Code.
The Code Working Group anticipates submitting the Code to the Minister of Commerce and Consumer Affairs for approval in early 2019. In the meantime, providers will be looking to understand the licensing requirements – which could now be where the real detail will lie.
Get in touch!
Anthony Harper's specialist financial services team works with financial advisers and financial advice businesses of all sizes on compliance matters, including business structuring advice, disclosure, and conduct. We also have extensive experience in FMA licensing matters. If you have any questions about the reform, or need advice on your own obligations, please get in touch: