29/04/2020

Referrals can certainly get financial planners into hot water especially now with the new FASEA Code of Ethics.

Celebrity chef Pete Evans has been fined more than $25,000 by the Therapeutic Goods Administration (TGA) over claims he made about a product called a "BioCharger". We won’t detail the extravagant claims he made about the product, but would rather use the story to highlight that referring people to a person or product can carry material risks and is not something to be undertaken lightly, particularly when you are paid for the referral.

Take FASEA’s Code of Ethics, in particular Standard 3 “You must not act in any other manner where you have a conflict of interest or duty”.  Does the Code apply to corporates?  Can a Corporate Authorised Representative (CAR) receive reward from the referred business for referring the client to that referred business?

It would seem that the answer lies in the FASEA Guidance Paper dated December 2019 v1.0 under the heading “Theme 3: Clarifying Referral Fees”.

The Guidance Paper says “Financial Advisers cannot receive referral fees directly from a third party for advice and services provided to their client, even if these are non-financial products”.

Note however that the Guidance Paper also says that the Code in general does not apply to the broader business structures which employ the adviser.

The reference to a business structure which employs the adviser (advisers are formally called in the Corporations Act ‘the relevant provider’) is not supported by the law and can be ignored. The Guidance Paper should have restricted its summary to those persons who are governed by the Code being relevant providers (individuals) who meet the definition in s.910A of the Corporations Act.

Nothing turns on, and there is no change to the application of the Code, if a company employs the individual adviser or simply contracts with that adviser.

In the answer to FAQ 2 the Guidance Paper says: “Where the adviser’s remuneration is related to the referral fee received via the Licensee structure or CAR and is paid directly to the adviser, the adviser will need to demonstrate compliance with the Code in the same manner as any other form of remuneration received.”

So this demonstration of compliance is dependent on two requirements – firstly that the adviser’s personal remuneration is related to the referral fee and secondly that the referral fee is paid ‘directly to the adviser’.

So if the referral fee is paid to the CAR and is not passed on to the adviser but is used by the CAR to meet its financial obligations or is distributed, say, to a beneficiary of a trust that the CAR is trustee of, then no breach of the Code would seem to exist.

Also if the contract between the CAR and the adviser (perhaps as part of the tripartite Authorised Representative Agreement) makes clear that the CAR is not obliged to and will not pass on any referral fee to the adviser personally then again no breach ensues.

It would seem on the face of it that you cannot be in breach of Standard 3 by following this advice given that FASEA itself admits that the Code has been prepared so as not to apply to those business structures in which event the use of the referral payment by the business structure could reasonably have been assumed by the draftsman of the Code and to have been therefore implicitly approved.

Referral fee to adviser – bad; referral fee to CAR – good.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.