Adviser conflict code ‘impossible to comply with’

Conflicts between the Financial Planners and Advisers Code of Ethics and the Corporations Act make the Code impossible to comply with in terms of conflict of interest, according to the Stockbrokers and Investments Advisers Association (SIAA).

Responding to draft guidance from the Australian Securities and Investments Commission (ASIC) around managing conflicts of interest, the SIAA said that Standard 3 of the Code of Ethics requires advisers to avoid advising, referring or acting for a client where there is a conflict of interest of dispute.

“This makes the Code impossible to comply with in practice,” it said.

“The draft guidance identifies that the key obligation is to manage conflicts of interest appropriately by using a combination of avoiding, controlling and disclosing them – not avoiding them in every instance,” the SIAA said.

“SIAA has noted in multiple submissions on Standard 3 of the Code that avoiding any conflict of interest is impossible under the Code, given that the test in Standard 3 has no element of materiality or proportionality.

“Every time an adviser is paid (regardless of form), they are potentially conflicted, so for the Code to promulgate that conflicts have to be avoided altogether is clearly unworkable,” it said.

“While outside the ambit of this consultation, we reiterate the importance of changes being made to the Code to ensure there is consistency between the provisions of the Code and this draft guidance.”

The SIAA also urged ASIC to amend its guidance in a manner which acknowledges the difference between stockbrokers and financial advisers, noting the illustrative example of an “adviser recommending a client investment in a company the adviser holds significant shares in”.

“We consider that this is not necessarily an example of a conflict. Greater clarity on what ‘significant’ means would be necessary to provide context.

“We also consider that there may be many situations where an adviser has a significant investment in a listed stock that they may later recommend to their clients as an investment. This is not uncommon. Owning recommended stock aligns the adviser’s interests with those of the client and ensures that the adviser has ‘skin in the game’,” the SIAA said.

It also pointed to the example of advisers avoiding “remuneration structures that rely solely on commission-based pay (i.e. When no salary or other remuneration is paid.)

“Remuneration structures that rely solely on commission-based pay (i.e. when no salary or other remuneration is paid) is a common remuneration structure for stockbrokers,” it said. “The provision in the guidance should be amended to take this into account rather than being presented as a prohibition on this type of remuneration structure.”