The Australian Securities and Investments Commission (ASIC) has proposed a change to the new financial adviser professional standards legislation to allow code monitoring bodies to proactively collect information from advisers and licensees.

Code monitoring bodies will be established under the Corporations Amendment (Professional Standards of Financial Advisers) to monitor individual advisers’ compliance with the proposed industry-wide code of ethics. From January 1, 2020, all financial advisers must comply with the code, and be covered by a compliance scheme administered by a code monitoring body. A code monitoring body cannot be an Australian financial services licensee, nor an associate of a licensee, and must be approved by ASIC to carry out the function. Its accreditation can be revoked if it fails to operate effectively.

In Consultation Paper 300: Approval and oversight of compliance schemes for financial advisers, published in early May, ASIC says the professional standards legislation currently only permits code monitoring bodies to request information if they are conducting a reactive investigation.

But ASIC says it is proposing to “amend the law to confer a power on a monitoring body to request information from AFS licensees and authorised representatives in order to carry out its proactive monitoring activities”.

Game changer

This changes the game for code monitoring bodies, which were at risk of being perpetually behind the game if they could only request information if they believed a breach had already occurred and they were investigating it.

With power to request information proactively, monitoring bodies will be in a much stronger position to oversee advisers and licensees for compliance with the code of ethics and to potentially identify issues before they become actual problems for adviser, licensees or consumers.

But proactive surveillance is also a more resource-intensive activity than acting after the event and raises issues about the capability of existing organisations to fulfil the role. Both the Financial Planning Association of Australia (FPA) and the Association of Financial advisers (AFA) have indicated their intentions to become code monitoring bodies, and both will need to acquire significant additional resources to carry out the role as envisaged in the ASIC consultation paper.

Both associations will also need to renegotiate relationships with existing members if they are to fulfil the monitoring remit. ASIC says conflicts of interest can arise where an association carries out the dual roles of seeking to attract and retain members while at the same time “fully and robustly pursuing instances of possible non-compliance with the code and imposing appropriate sanctions”.

“This is particularly acute where the entity acting as the monitoring body also carries out other functions, such as lobbying and industry representative work,” it says.

“We therefore consider it important that there is some degree of independence and impartiality within monitoring bodies at both the governing and operational levels.”

Challenging members’ beliefs

Taking on the role of monitoring body will challenge some members’ beliefs that professional associations should exist primarily to aggrandise financial planners and their businesses, rather than to serve the public interest and protect consumers’ interests in the name of building and fostering trust and confidence in the profession.

Taking on the monitoring role should also put to rest any doubts that members may harbour about how serious a professional association can and should be about member discipline.

ASIC says compliance schemes should be made enforceable by monitoring bodies entering into legally binding agreements with all the advisers covered by a scheme, and they should develop processes for resolving disputes that arise with those advisers.

ASIC says that where a monitoring body detects, investigates and proves a breach of the code of ethics (and after an adviser has been given the right of appeal) it should have a range of sanctions available to it, including:

• warning or reprimanding the adviser;
• requiring the adviser undergo additional training or counselling;
• requiring an adviser be subject to additional supervision;
• taking corrective action, such as requiring the adviser to undertake rectification or implementation of directives within a reasonable period of time determined by the monitoring body
• requiring the adviser be independently audited
• ordering the financial adviser to redo work for the consumer at no cost, or to reduce or waive the costs for its work; or
• in extreme circumstances, revoking the financial adviser’s membership of an industry association and/or coverage by the compliance scheme.

This final step would effectively mean an adviser could no longer practice as a financial adviser (unless they sought and gained coverage by an alternative scheme), because a legal condition of being allowed to do so is to be covered by a compliance scheme.

ASIC says the aim of the penalties is not to secure redress for the consumer, because that is covered by other mechanisms, including internal and external dispute resolutions schemes. Rather, the penalties are designed to make breaching the code of ethics a significant and meaningful offence.

“Appropriate sanctions have the potential to deter financial advisers from breaching the code and develop their ability and willingness to comply with the code in future,” it says.

“They are therefore an important tool that can be used to improve the ethical behaviour of financial advisers.”

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