New FASEA code could spell trouble for SMSF trustees

First published in the Financial Review on 29 November 2019. 

Changed adviser rules could lead to self-managed superannuation funds missing out on valuable advice.

Changed adviser rules could lead to self-managed superannuation funds missing out on valuable advice.

Will SMSF trustees have trouble buying or selling shares early next year? With the new Financial Advisers Standards and Ethics Authority (FASEA) code of ethics for brokers and financial advisers taking effect on January 1, it’s a question many trustees are asking.Recently I received a tip from my adviser and bought some shares in a small ASX-listed gold exploration company operating in Africa. It was a $17 million capital raising, fully subscribed, and I have no objection to my adviser receiving a 3 per cent placement fee.

I won’t know how good the tip is, but I’m happy to wait and see. It’s more speculative than most of my investments as an SMSF trustee, but as a small portion of a well-diversified portfolio, I’m happy to take that risk. It also dovetails with my investment strategy. That’s one of the many benefits of having an SMSF: I’m in control and can make investments like this if I choose to do so.

However, many brokers and financial advisers are worried that they won’t be able to suggest investments such as this to their SMSF clients under the new code of ethics when the markets open on January 2. Would I have lost this opportunity to invest in this speculative African gold explorer because my adviser feared the potential legal consequences if the investment fails? At face value, long-term relationships between SMSF trustees and their brokers and financial advisers are in doubt.

Standard 3 of the new code says: “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” This is a very strict standard and differs from most similar standards for other professions, such as accountants and lawyers, which usually require professionals to disclose and manage conflicts rather than to avoid them altogether as the only option. This wording of the code makes it even tougher: “Do not read down any of the provisions of this code by reference to any other provision of this code.”

The other difference is that this code has the force of law rather than being a professional code voluntarily adopted by a professional association to protect the public. As the Treasurer announced last month: “Australian Financial Services licensees will also be required to take reasonable steps to ensure their representatives comply with the code. The Australian Securities and Investments Commission (ASIC) will be able to take action against licensees that fail to do so.” Dealer groups and other licensees may be exposed to potential sanctions or compensation claims if clients’ investments turn sour and their representatives have not complied with the new code.

I’m sure all licensees will try to ensure that all their representatives comply with the code. The downside risk of not complying is obvious, with the huge remediation bills that have been disclosed by major licensees in recent months. But complying won’t be straightforward because the code is very strict and the recently released guidance has added more confusion than clarity.

Grave concerns have been raised that the FASEA consultation process on both the code and the guidance was inadequate and that the situation is unworkable. We fully support high ethical standards and advisers always acting in the best interests of their clients. But it is essential that higher standards are workable and understandable. FASEA’s code of ethics and guidance fall short on these essential criteria – and trustees are the potential victims.

Most SMSFs have a significant exposure to Australian equities and other listed securities. The last thing needed on January 2 is disruption to the capital markets because stockbrokers and financial advisers are unsure how to comply with the new code while still meeting the needs of their clients to buy and sell securities or to provide advice. There are many small listed companies that rely on raising capital from SMSFs and other retail investors.

There would be greater certainty if the nature of conflicts that need to be avoided was clearly spelt out. Does accepting a brokerage or placement fee constitute a conflict? What about if the adviser owns the same shares? Does a materiality threshold apply? Avoiding all conflicts without exception is a high bar that doesn’t apply elsewhere.

As an SMSF trustee I want to keep receiving valuable advice from stockbrokers and financial advisers. I expect all fees and charges to be clearly disclosed and I’m comfortable paying a fair and reasonable amount for the services provided. It would be preferable for any conflicts to be disclosed and managed rather than avoided altogether. Otherwise, SMSF trustees might miss out on valuable advice and services that will help them better prepare for retirement.


Opinion piece written by
John Maroney, 
SMSF Association