QAR must ditch current Code of Ethics Standard 6
The Quality of Advice Review (QAR) has been urged to remove Standard 6 of the Financial Adviser Code of Ethics while being warned of the danger that under current proposals stockbroker research reports are at risk of being counted as ‘personal advice’.
The Stockbrokers and Investments Advisers Association (SIAA) has urged the removal of Standard 6 of the Code of Ethics as being one of the elements vital to making the delivery of advice cost-effective, alongside greater clarity around satisfying the best interests duty.
The SIAA ha urged a consultation process with all professions to determine what ‘good advice’ will look like, stating “there will be a need to have a ‘bright line’ between the circumstances in which a relevant provider provides advice that is subject to the best interests duty and one in which a call-centre operator provides ‘good advice’. The ‘bright line’ will need to take into account the limitations inherent in advice provided by a call-centre operator who is not subject to the Code of Ethics, best interests duty and education and professional standards that apply to relevant providers.”
However, it is on the question of extending the definition of ‘personal advice” that the SIAA has raised most concern arguing that “the capture of broker research by personal advice definition would result in a number of unintended consequences that will negatively impact consumers”.
“We are concerned about possible unintended consequences of removing general advice, particularly for stockbrokers and investment advisers,” the SIAA has said in a submission responding to the QAR proposals. “General advice is an important advice category for SIAA’s members. The provision of general information or advice enables an adviser to educate or provide research to clients who may express an interest in certain investments.”
“Research reports on listed securities comprise general advice as they include an opinion or recommendation to ‘buy’, ‘sell’ or ‘hold’ a security. Stockbrokers and investment advisers, including online brokers who currently provide only general advice or no advice, hold information about their clients.”
The submission said that firms increasingly utilised CRM systems to tailor and personalise client communications but that, under the QAR proposals, “it appears that broker research circulated to clients may fall within the category of personal advice”.
“This should not be an intended outcome of the proposals. We consider that any reform of advice definitions and obligations must reflect the current policy setting that does not include the circulation of broker research within the definition of personal advice,” the SIAA submission said.
“The capture of broker research by the personal advice definition would result in a number of unintended and undesirable consequences that will negatively impact consumers.”
“Currently, these clients receive information and general advice. If that general advice is re-categorised as personal advice, and personal advice obligations are activated, two outcomes are possible,” it said.
“Either the cost of providing personal advice will need to be included in the online broker service, thus driving up the cost of the service for clients, or online brokers will be forced to halt the provision of research recommendations to online clients due to the concern that the provision of such research will be considered to be personal advice.”
“The reformulation of personal advice to ‘good advice’ would still result in a cost increase. Neither alternative is in the interests of clients, and in the latter case reduces the amount of useful research and education that clients receive.”
Surely there is a simpler solution to the stockbroker “buy/sell/hold” research problem. Just change it from an action recommendation, to a valuation assessment, such as “under/over/fair”. Consumers could then decide themselves whether to buy/sell/hold based on their personal circumstances such as other investments held, timeframes, risk tolerance, tax position etc., in conjunction with licensed financial advice if needed.
Buy/sell/hold recommendations stem from stockbrokers being paid by transactions. Stockbroker research is provided for free or a fraction of its real cost, as a marketing tool to generate transaction revenue. This model incentivises stockbrokers to recommend excessive investment transactions, often to the detriment of consumers. It is a long standing problem that should have been fixed ages ago. There is no way stockbrokers should be given a special carve out from regulatory reforms so they can return to their bad old ways.
Standard 6 of the code requires you to consider the broader aspects of the advice including other family members something considered beyond the capabilities of Robo Advice. The banks are going to love it if this standard is removed…
Bank staff providing Advice won’t need to adhere to FASEA under the current QoAR proposals. They get a carve out as employees of a body corporate.
Yes, you are correct Peter, but who needs pesky staff when a computer can do the job without needing a salary, superannuation, time-off and a lunch-break! 🙂