Informed consent is not new to financial advisers, but a new exposure draft is raising questions.
By Zilla Efrat
The concept of “informed consent” is back on the radar after appearing in the Financial Adviser Standards and Ethics Authority’s (FASEA) new draft code of ethics. There’s also talk of it being required for tax advice in the future. But what could it mean and how will it work?
As CPA Australia’s financial planning adviser Keddie Waller notes, APES 230 – issued by the Accounting Professional & Ethical Standards Board (APESB) – already has an obligation to seek clients’ informed consent but only for conflicted remuneration, where commissions or fees are based on the amount invested or influence the choice of financial products.
APESB CEO Channa Wijesinghe says: “APES 230 defines informed consent as a client’s voluntary decision to accept a financial planning service from an accountant that is given with the knowledge and understanding of the costs, benefits and risks involved, including the potential consequences of any proposed transaction, without coercion or inappropriate pressure by the accountant.
“It’s expected that accountants must carefully explain the information in a manner that is understandable to the client, bearing in mind the likely imbalance of knowledge between accountant and client.
“Informed consent also requires accountants to give their clients sufficient time to form an opinion about the information and any proposed transaction.”
Informed consent is already required in many other professions and industries
Wijesinghe notes, for example, that in the medical profession, obtaining informed consent from patients is mandatory before they receive treatment.
“There are potential legal consequences if medical practitioners perform treatment without a patient’s informed consent,” he explains.
“In the US, we understand that investment advisers are also legally obliged to obtain their clients’ informed consent whenever there are conflicts of interest between them and their clients, before executing any transactions.”
Similarly, Consumer Action Law Centre CEO Gerard Brody says there are many consumer protection regimes that stipulate providers obtain explicit informed consent from a customer.
“For example, under National Energy Retail Rules [which apply in NSW, Queensland, South Australia, Tasmania and ACT], energy providers have to obtain explicit informed consent before transferring them from another [electricity and natural gas] retailer or entering into a contract,” Brody says.
“This requires full disclosure of all matters relevant to the transaction, including each specific purpose or use of the consent. In addition, consent must be given either in writing, or electronically [i.e. recorded].
“There are similar requirements for telcos in the Telecommunications Consumer Protection Code, although this is just referred to as ‘consent’.”
Brody says that when it is recorded, informed consent can assist with dispute resolution.
“That said, it’s increasingly recognised that disclosure is an ineffective consumer protection tool,” he adds.
“This is because people are unable to consider all the information provided and so any ‘consent’ is not really informed. That’s why these sorts of rules need to be augmented with protections ensuring the consumer is treated fairly, and that any advice or product is suitable.”
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A step too far?
The FASEA draft code of ethics (open for consultation until 1 June 2018) has obligations under three of its standards to obtain clients’ informed consent. Advisers would also be required to ensure that all products are “presented in terms easily understood by the client”.
However, some critics note that certain products are simply not easily understood. Others worry that the code is too vague to be workable.
BFG Financial Services managing director Suzanne Haddan FCPA emphasises that obtaining informed consent can be difficult.
“You must look at clients’ experience on the matters you are dealing with as well as their language skills, literacy and numeracy,” Haddan says.
“One client might be an engineer who understands what you are asking him or her to sign. The next may be a newer Australian who hasn’t yet dealt with the superannuation environment others are familiar with. It’s not a one-size-fits-all situation.”
To ensure clients have fully understood what she has told them, under APES 230 obligations Haddan often asks them lots of questions or to repeat back what she has said. Diligently documenting meetings is also vital.
Is it even necessary?
On the other hand, Waller reveals: “The feedback from many [CPA Australia] members is that clients don’t always want to be educated and understand. They just want to be told what to do.
“I think FASEA is trying to empower clients and put them in the driving seat, but in practice is that actually going to happen?
“People seek [professional] advice because they are time-poor and want to outsource investment responsibilities to someone who is educated with expertise [in specialised areas].
“Australia also has relatively low levels of financial literacy and if you put that in context, how informed is your client going to be if you explain things to them, but they don’t understand some of the basic concepts? And how do you actually demonstrate that your client has actually understood everything, even if they have signed a piece of paper?”
Likewise, Andrew Albury, director MGD Wealth in Brisbane, says: “Many clients know nothing about financial services and that’s why they come to an adviser. They are not actually interested in the detail. In such cases, it will always be impossible to be satisfied they understand everything. So, does that mean we can’t ever accept an engagement under those circumstances?
“It could mean that in many cases we would have to walk away from giving advice because we are not convinced the client understands it. And in most cases, if they did understand it, they wouldn’t need the advice.
“It’s like me getting my car fixed. I don’t know the first thing about what’s under the bonnet, but does that mean I have to? If I don’t like the mechanic, I can take my [business] somewhere else. Clients can do the same with financial advisers.”
Too vague to work?
Albury says at a recent meeting with other accountants, the general consensus was that the FASEA draft code is so vague and open to so many different interpretations that it may be unworkable.
He also stresses that as an accountant and a member of a professional body (with its own disciplinary committees), he’s had to study ethics and “live and die by it” day-to-day.
“In the accounting profession, we have been operating under a formal or informal code of ethics forever. It’s only in the financial services world where informed consent is back on the agenda.”
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