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Financial advice providers (FAPs) may have underestimated compliance risks buried in the revised professional code that came into force this month, a leading industry lawyer argues. The advisory sector had largely welcomed the updated Financial Advice Code for confirming current education standards and providing further flexibility around professional development, according to David Ireland, Dentons partner. But Ireland said the Code houses a “hidden danger” in new wording that requires advisers to have above-minimum ‘competence, knowledge, and skill’ in certain situations to meet advice suitability standards. “So FAPs now have a challenge to address in their financial advice processes and controls. With the new commentary added, it is no longer just about the suitability of the financial advice provided,” he said. “The FAP may need to demonstrate that the person providing the financial advice had sufficient competence, knowledge, and skill in addition to the minimum specified under Part 2 of the Code to ensure the financial advice was suitable, and FAPS will need to identify the advice situations where this might be required.” However, the Code is deliberately open-ended on what advice situations might trigger the higher competence clause, offering only a few broad examples. “… it may be knowledge in a specialised discipline such as in relation to a specific asset, legacy product, or foreign regulatory regime, or skills reasonably necessary to understand the client’s circumstances,” the new commentary notes. Ireland said the addendum to Code Standard 3 muddies the picture for FAPs, which will have to take account of the wording in their compliance processes. “The first task for FAPs is to try and work out what the new commentary means in the context of their business, bearing in mind that it appears to fundamentally change the way that ensuring suitability has been approached to date,” he said. “We think the additional commentary has added an undesirable element of confusion to Code Standard 3, and created uncertainty as to what is required to demonstrate compliance.” Dentons was the only law firm to submit on the revised Code consultation tabled last year, which attracted 21 responses overall. In its submission wrap-up published this May, the Code Committee acknowledged that “for many stakeholders, the proposed supplementary wording [about situation-based above-minimum competence etc] already goes without saying”. “The Committee, however, believes that there is value in setting out that cornerstone principle in the commentary to Code Standard 3, for the avoidance of doubt and also as a reminder that the standards of competence, knowledge, and skill in the Code are minimum requirements.” Approved by the Commerce Minister Scott Simpson this August, the remodelled Code officially came into effect on November 1.
