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Why good conduct matters

As financial advisers contemplate their future and move from being individually registered and or authorised under the Financial Advisers Act 2008, to being licensed under an entity as part of the Financial Markets Conduct Act 2013, we thought it might be an opportune time to look at what is meant by ‘good conduct’ as it relates to financial services.

We think applying a lens of good conduct across your business will really benefit future licence applications and help when identifying areas within your business that need good controls or development.

Below is an extract from the FMA’s publication A guide to the FMA’s view on conduct which was released last year. We recommend that all clients contemplating the future strategic direction of their advice business read through the whole report.

What does the FMA say about Good Conduct?

Good conduct matters because at its most basic level, conduct is how people behave. Standards, systems, processes and controls are all necessary, but they are predictable and can be exploited by behavior.

Conduct is what the customer actually experiences.

Customers must be confident that their interests are being properly considered; that they are getting the right financial products and services at reasonable cost; and that they understand them. When this is the typical customer experience, it not only creates investor and public confidence in the fairness and transparency of specific businesses, but in the market in general. Good conduct ultimately creates more depth in financial markets and resilience when markets experience shocks or turbulence. Good conduct is good business.

What is good conduct?

At its core, good conduct means focusing on customers. The result is good customer outcomes. ‘Good’ does not mean that customers are insulated from risk or that a product always makes money (not least, because a ‘positive’ result is not necessarily the result of good conduct). Rather, it’s where the outcome is within a range appropriate to the product and understood by the customer. Consistently good outcomes require sound systems and controls, being disciplined about meeting compliance obligations, and good disclosure. Most importantly, it needs to be part of an organisation’s culture, including setting clear expectations and, crucially, leading by example.

Crucial because, in all workplaces, people look to examples set by their colleagues, and especially their leaders, to sense whether formal conduct expectations are real, or just rhetoric. They also observe whether there are clear consequences, including for the leadership, if those expectations are not met.

In other words, conduct is what actually happens regardless of systems, controls and formal rules.

We believe the following factors form a good conduct profile. We will use this when we address conduct issues.

  • The provider has the skills and experience to competently provide an appropriate service or product to the customer, and can meet professional standards of care.
  • The cost of the provider’s product or service is reasonable (and does not reduce the return or benefit customers get from it, to the point where the customer’s need is not met).
  • The customer’s interests are served as well as the provider’s business interests, and any arrangements with related parties are transparent.
  • The provider’s culture encourages and recognises good conduct, from the leadership down, and customers can therefore be confident the provider will consistently act in the customer’s interest.
  • The provider will act with integrity, fulfil their responsibilities and obligations, and act honestly and fairly (for directors, this is deliberately consistent with the requirements of the Institute of Directors’ Code of Practice for Directors)
  • The provider’s checks and balances support good conduct, and identify and address poor conduct (including complaints and disputes resolution).
  • The provider can convincingly demonstrate all of this in a clear, concise and compelling way. Internally (for example in a code of conduct), and externally.

What next?

While most financial advice businesses will be thinking, that’s exactly what we do, the key will be how you demonstrate or evidence this is the case.

Moving forward, the businesses which will not only survive in the future but actually thrive, will be the ones that put customer outcomes at the heart of their products and services.

At Strategi we will be working with all our clients over the next few months as they make key strategic decisions about how to best adapt to the upcoming changes and thrive in the future.