Commissioner Kenneth Hayne’s recommendation for a new, separate disciplinary body for advisers could either result in the regulator’s code-monitoring bodies becoming completely marginalised or grant them vast new powers over advisers.
Central to Hayne’s recommendation for “a coherent system of professional discipline” is the requirement that advisers register with a new body that has the power to impose “serious disciplinary sanctions”.
While being careful not to be “overly prescriptive” on the relationship between the new disciplinary body and the existing ones – including AFSL holders, industry associations and ASIC – Hayne admits his solution could dilute the role of the proposed code-monitoring bodies.
“It may be that this new body is the most appropriate entity to perform the functions currently planned to be assigned to the code-monitoring bodies under the Corporations Act,” Hayne states.
‘A traditionalist, black-letter lawyer”
According to Deen Sanders, the former chief executive of FASEA and current partner in governance, regulation, conduct ethics and professionalism at Deloitte, Hayne’s expression of doubt regarding the future of code monitoring bodies “says a lot”.
While Hayne isn’t saying the proposed ethics monitoring bodies will be inadequate, Sanders believes, he is intimating that they may not fit the bill in their current form.
“He’s reflecting that there is a need for something more than that,” Sanders tells Investment Magazine’s-sister title Professional Planner. “[Hayne’s proposed body] either sits above those code-monitoring bodies and between ASIC, or it operates in replacement of those code-monitoring bodies. He’s certainly suggesting that there’s something further to be considered about the way the code-monitoring bodies will work.”
Hayne is clearly an advocate for ethics and shows support for the code-monitoring bodies in the final report, writing that they “will play an important part in setting the tone and the culture of those who act as financial advisers”.
Their role may be marginalised, however, if Hayne’s new disciplinary body does the job for them. If made to choose, Hayne prefers the surety of a standalone disciplinary body with legal powers over the collection of industry associations – such as the Financial Planning Association and the Association of Financial Advisers – that have applied to monitor ethics.
Sanders says it’s important to remember the character of Hayne, a “traditionalist black-letter lawyer and a past member for the High Court of Australia, someone who believes absolutely in the rule of law. It’s not surprising that he struggles to see the way codes of ethics might be able to inform practice in a way that changes behaviour. Not that he’s against codes of ethics…but his preference is for black-letter law.”
Sanders’ assessment of Hayne’s predilection for law rings true in his report.
“It is laws, and not codes of ethics, that are the proper repositories for basic norms of conduct,” Hayne writes. “While codes of ethics have a part to play in setting professional standards of behaviour, the industry must be conscious of their boundaries.”
ASIC’s decision on code-monitoring bodies is scheduled to be made by the end of the year. Sanders says Hayne’s recommendation – and the next federal election – will form a part of their thinking.
“It’s a matter for ASIC,” Sanders says. “It’s reasonable for them to consider whether they will operationalise those laws in full knowledge that Hayne’s recommendations have been agreed [upon for adoption] by both sides of politics.”
Why not us?
According to the leading code monitoring body potentates, their future role isn’t under threat. Rather, they see Hayne’s recommendation as an opportunity.
As it stands, there are several applications with ASIC for code-monitoring responsibility. Most notable is an alliance of six industry associations, led by the FPA, called Code Monitoring Australia (CMA).
During the inquiry, Hayne chastised these associations for their inability or reluctance to discipline advisers guilty of misconduct appropriately. He laid bare the root cause – associations struggle to act as both adviser representatives and disciplinary overseers. AFA head Phil Kewin confessed as much when he said there was “tension between the two roles”.
However, the new CMA alliance is not an industry association. It is a separate legal entity. It is made up of industry associations, but not one itself.
FPA chief executive Dante De Gori – who was pilloried on the stand for not meting out suitable punishment to disgraced former adviser Sam Henderson – says CMA can succeed where individual associations have failed.
“We’ve dealt with that [conflict], because the associations aren’t fulfilling the role; a separate legal entity is being appointed and approved by ASIC as the code-monitoring body,” De Gori tells Professional Planner. “The point that is being alluded to by the commissioner has been addressed by the fact that there’s a separate legal entity being established, so it won’t be the FPA or one of the six professional bodies in the agreement.”
Hayne’s recommendation doesn’t marginalise any new code-monitoring body, De Gori argues in a deft policy spin, it creates a role that body could not only fill but is suited to carry out.
“Why wouldn’t CMA – or any other code-monitoring body – become the new disciplinary body that’s being envisaged by the commissioner?” he says.
While advisers are under no obligation to maintain membership in an industry association, De Gori points out that registering with a code-monitoring body is a legislated requirement for advisers. “Nothing that’s happened in the last 24 hours changes that,” he says.
The new bodies will also have powers that the associations don’t, he says, including the ability to “remove people from practice”.
“If you have been found to be in breach of the code of ethics and you are, therefore, removed from the code-monitoring body, then you can’t practice,” De Gori explains.
Hayne notes a flaw in the idea, stating in his report that advisers will still be “free to switch between code-monitoring bodies”.