[Breaking News] Commissioner asks for Code to be revised

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The Commissioner for Financial Advisers David Mayhew is not satisfied that the draft Code is consistent with the Financial Advisers Act and he has directed the Code Committee to revise it.

Tuesday, August 17th 2010, 12:22PM 3 Comments

He says the Draft Code of Professional Conduct for Authorised Financial Advisers is not consistent with the Act in three areas - the background to the Code, Code Standard 5 and Code Standard 8.

Mayhew says while it is a matter for the Committee as to how it complies with the direction, he is not directing it to undertake further consultation or receive submissions.

He says the background to the Code, provides an overview of the scope and aims of the Code, including a description of the financial advisers who are required to be authorised under the Act.

"It is my opinion that this description needs to be revised in order to accord with changes to the Act that came into force on 1 July 2010."

The second area to be revised is Code Standard 5 which says: An AFA must not provide financial advice to a retail client in relation to a financial product that is not offered to the public if the AFA is a related person of the product provider of that financial product.

This standard has altered in the course of consultation, becoming progressively narrower in response to concerns raised.

Mayhew says he can see that the Committee took a decision to limit the application of this standard to financial products that are not offered to the public on the basis that public offerings have their own consumer protection rules.

"The concern I have is that the standard as written may leave AFAs and consumers with the impression that the Code is endorsing the provision of advice on wholesale products to retail clients in any case where the product provider is not a related party of the AFA."

He says in respect of securities, which make up a majority of category one products, this will in most cases be inconsistent with section 38(1) of the Act which says:

(1) An authorised financial adviser

(A) must not recommend to a person that that person acquires securities if-

a. When the securities were or are offered for subscription, the offer was or is illegal; and

b. The illegality has not been remedied

c. A knows or ought to know that, when the securities were or are offered for subscription, the offer was or is illegal.

Mayhew says if securities are not "offered to the public" then the offer of those securities to a retail client would be illegal in the great majority of cases.

The third area to be revised is Code Standard 8 which says: When providing a personalised service to a retail client as AFA must take reasonable steps to ensure the personalised advice is suitable for the client.

The additional provision Mayhew is concerned about provides relief from this standard where a client instructs an adviser not to determine the suitability of the personalised service provided.

Mayhew says consistency with the Act requires it to be very clear that, where a client has sought personalised advice but has then opted out of an assessment of suitability, the client has a clear understanding of whether the service provided remains a personalised service by reason of taking into account the client's particular financial goals; or whether it becomes a class service.

"At present the draft standard refers only to personalised services and in my view is potentially confusing in this regard. I direct the standard be revised to address this."

The Code Committee is meeting later this week and will also make a few other changes, of a minor nature, that Committee members have identified as desirable.

Mayhew says he would like to be provided with a revised draft Code as soon as practicable.

Read Mayhew's letter here.

We will have more on this story soon.

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