#1 June Exam Wrap-up
This is the first of a 6-part series of insights into the FASEA adviser exam.
Some 600 advisers sat the first round of FASEA exams this month. Even though the specific content of future exams will continue to change across and within the next 8 sittings or so, there are some valuable takeaways that can be applied to every exam.
Firstly it is important to understand the significance of the exam curriculum published by FASEA.
- Financial advice regulatory and legal obligations
- Applied ethical and professional reasoning and communication
- Financial Advice Construction
I interpret this as:
- Know the rules that existed pre-FASEA (i.e. Ch7 Corporations Act, Privacy Act, AML / CTF, TASA)
- Know the new Financial Planners and Advisers Code of Ethics 2019 plus Explanatory Statement) really well; and be able to recognise breaches and potential breaches in any personal advice situation
- Know how to construct personal advice lawfully and ethically that is genuinely in the best interests of the client by any definition
In your exam preparation, the first step is probably the most challenging. That is, knowing the pre-FASEA rules.
A large part of it is contained in ‘Vol 4 & Vol 5’ of the Corporations Act (ref. FASEA reading list). The reading list reference looks innocent enough but there is a lot of it.
Even though every adviser was expected to have known all of this for the past few years, my experience to date is that most don’t. And then there’s the other legislation mentioned above.
Many advisers have missed the fact that the Tax Agents Services Act 2009 also contains its own Code of Professional Conduct which binds every adviser by way of membership of the TPB. There is a lot of examinable information relating to tax financial advisers on the TPB site.
Expect a question on privacy because it is paramount for clients. Know the requirements for inter-office transmission of personal information, as well as local and overseas outsourced services (e.g. para planning, investment and audit services) plus third party referral situations.
Because financial advisers are ideally placed to detect suspicious individuals, organisations, beneficiaries and financial transactions, focus on suspicious matters that must be reported to Austrac. It is not only about money laundering and terrorism financing issues. It also includes tax evasion, superannuation and Centrelink fraud.
The new Financial Planners and Advisers Code of Ethics 2019 is FASEA’s pride and joy. It will feature prominently in every exam so know both the code and the Explanatory Statement inside out. The latter contains some helpful examples in the Appendix.
It is also vital to understand where and how the Code of Ethics extends adviser obligations in the Corporations Act. And don’t forget to read FPS003 Professional Year Policy and FPS004 CPD Policy. They too will feature in an exam..
When looking for ‘applied ethics’ examples, focus on the long and unflattering history of the financial advice industry. Consider the structure of the industry, where advisers and planners are employed, and the various pressures that advisers work under in different employment environments.
Focus on where the law has changed in response to society pressure and government policy e.g. conflicted & banned remuneration, fee for service and product switching. More to come later!
Finally, some words of warning for financial advisers who specialise in one area only, e.g. risk insurance advisers. This is an exam for all advisers.
This means exam scenarios, from which several questions will subsequently flow, are likely to cover a multitude of situations. Whilst it is doubtful that the exams will be over-technical, it will help to understand the basics and terminologies of all relevant advice disciplines.
#2 Understanding how the adviser exam is generated
What became obvious in the first FASEA adviser exam sitting is that the content of the exam over the duration of the June exam period changed.
Exams written in different venues on different days were similar but different. The reason for this is the way in which exam questions are generated.
The adviser exam process was contracted out to Australian Council for Educational Research (ACER) and there is a very good reason that the adviser exam is sat via dedicated computer rather than via printed exam papers.
It allows questions to be easily generated digitally from a ‘question bank’ via an algorithm directly onto the screen in front of each adviser.
Typically, exam question banks of this nature consist of a variety of questions in a number of ‘degree of difficulty’ categories.
It is therefore possible that each adviser sitting an exam on the same day could be presented with a different exam. However, these exams contain open ended questions that may require human intervention to assess, so these may be some practical limits.
Notwithstanding, there is not a lot to be gained by trying to share the contents of any given exam because the questions are always changing, albeit subtly. And, as the question bank grows, there will be many more options for individualising exams.
The question bank will continue to grow because examiners have plenty of question fodder, given the chequered history of the financial services industry over the past decade or so.
There’s no shortage of dodgy schemes, deception, fraud, other illegal activities, spectacular collapses, licence cancellations, adviser banning and incarcerations that can be used to construct scenarios and questions.
Whilst a positive result in this exam is very achievable, it should not be taken for granted. The only way to approach it is to put in some serious reading time to gain a good general knowledge across all areas of the curriculum.
However, who said that advisers can’t work smart as well as hard in the exam preparation. Working smart will be the subject of the next article.
#3: Short Cuts to understand BEFORE taking the exam
Working smart can help put structure and logic into your adviser exam preparation.
So there are two parts to preparing for the adviser exam. They are acquiring knowledge and applying knowledge.
There is such a lot of reading to go through so it makes sense to prioritise. So try applying the 80/20 rule as follows:
These are the really important bits that you need to know inside out. At the minimum these include:
- Financial Planners and Advisers Code of Ethics AND Explanatory Statement
- Disclosure and conduct obligations
- Best Interests Obligations
- TPB basics for tax financial advisers PLUS the Code of Professional Conduct
- AML / CTF basics and resources for financial planners
- Privacy as it applies to financial advice situations
At the minimum, you should have a good general knowledge of everything else on the FASEA suggested reading list. Your level of understanding needs to be good enough so that if you see it in an exam question, at least you will recognise it and be able to make some educated decisions.
Tip: Reading the Corporations Act will get you a good night’s sleep but the way to absorb the important stuff is to use the Regulatory Guides where possible. These guides exist where ASIC deems the subject matter to be important. RG121, RG175, RG244 and RG246 should be your best friends. And like best friends do, they provide helpful summaries of the important bits and many very useful examples.
For this, NOTHING BEATS PRACTICE!
Sitting in workshops and presentations is helpful but doing is learning!
In my 10-part program, I have created over 240 practice questions in multiple choice true-false and open-ended formats where you can test and apply your knowledge and check your answers. You will get to practice on every topic.
And just when you think you have exhausted yourself, I have another multi-question mock exam for you to attempt. This will be made available to you prior to sitting your adviser exam.
#4: A practical approach to preparing for an ethical advice exam
The aim of the adviser exam is to ensure every advice provider has the knowledge and ethical reasoning ability to be able to navigate their way through the obstacle course of incentives, conflicted remuneration, competing priorities and work pressures to achieve great advice outcomes for clients.
Therefore, a very important part of your exam preparation should be to practice recognising Ch7 Corporations Act breaches and Code of Ethics breaches in a wide variety of adviser-client situations.
It starts by being able to identify illegal and unethical behaviour and unfortunately, there is a long unflattering history to call upon.
These behaviours include baseless product switching, over the counter super & insurance selling, SMSF property scams, hawking, inducement, early super release schemes, inappropriate margin lending, and so on.
Whilst many of these practices are being quickly being consigned to history, I am not certain that all advisers recognise the fact that cookie-cutter (one-size-fits-all) advice and client over-servicing, even in small doses, are also on the no go list. In RG175.255 & RG175.403 respectively, ASIC makes it quite clear neither is permitted.
Doing the right thing relies on an ethical mindset and having advice processes in place that reflect this mindset. After all, an adviser’s advice process is the engine room where all client recommendations are generated. If it is flawed, so is the advice.
ASIC provides specific guidance on advice processes in RG175.254 and clearly sets out its expectation that advice providers must have advice processes that ensure compliance with the best interests duty.
Also noteworthy is subsection (d) of this same section, ASIC clearly expects that advice providers focus on providing advice that is not product specific, whether or not it is in combination with product advice.
Adding to the importance of getting the advice process engine room right, the new Code of Ethics weighs in on the issue in Standards 7-9, which specifically highlight areas such as money, consent, ‘good faith’ product recommendations and record keeping.
Not only does this suggest the need for regular and honest assessment of adviser advice processes, it also demonstrates that the new Code of Ethics isn’t the only show in town. The Corporations Act (from which the Regulatory Guides are derived) is alive and well and continues to play a big role in shaping good advice.
So, to identify Licensee and adviser behaviour to be avoided and at the same time prepare for the exam, there are a number of places to look for examples:
- RG175 Licensing: Financial product advisers—Conduct and disclosure has over 20 helpful examples in section E – “Acting in the client’s best interests and related obligations”
- RG244 Giving information, general advice and scaled advice has many helpful examples plus a very useful Appendix starting at page 37
- Explanatory Statement to the Financial Planners and Advisers Code of Ethics 2019, contains examples and case studies
- ASIC News Centre – Media Releases https://asic.gov.au/about-asic/news-centre/find-a-media-release/ a good source of relevant real life examples that had resulted in licence cancellation and adviser banning and, in some cases, custodial sentences.
- Royal Commission Final Report is listed on the FASEA extension reading list. Volume 2 of that report contains many real life examples that could be drawn upon (e.g. selling of superannuation through CBA branches p79; Aon Hewitt non-consent super switching p263)
#5 Key Knowledge areas to understand BEFORE the exam
This is an ethical advice exam. One of the key knowledge areas will be to know the interrelationship between the Chapter 7 Part 7.7A Best Interests Duty (BID) and the new Code of Ethics.
At first glance, the Code of Ethics appears to be adding an ethical overlay on top of the Part 7.7A Best Interests Obligations.
However, on a closer reading it does far more than that. The devil is usually in the detail and this is the case with the Explanatory Statement to the Code of Ethics.
The ethical platform is laid down in Standard 2 in a two-part statement, “You must act with integrity and in the best interests of each of your clients”
It demands that advisers act ethically to the highest professional standards, but it expressly binds advisers to do, or not to do certain actions.
Here is just one of many examples.
This one is found in Paragraph 36 of the explanatory Statement:
“You should take into account your client’s express wishes but these do not override your duty to give advice that is in the client’s best interests.”
This effectively removes a long held belief by some that the client is always right; and that advisers should give demanding or misguided clients what they want, regardless.
Indeed it is an adviser’s job to help clients to achieve the outcomes they want, but not always via the means the client wants.
As all advisers know, clients are sometimes prone to acting on impulse and reacting to peer pressure and greed; and all too often it can override caution and common sense.
This interpretation of the code prevents an over-obliging adviser from taking advantage of an insistent client, and / or appeasing demanding or misguided clients with inappropriate advice that would not be in their best interests. In other words, it expressly obligates advisers to save clients from themselves.
The Code reinforces advisers as professionals with the training and experience to know the risks, problems and liabilities that can await clients down the track; with a duty to steer them in the right direction.
The following are some example of situations that are likely to be addressed by this statement (this is not an exhaustive list):
- Agreeing with insistent clients to proceed with a SMSF, knowing that it is inappropriate advice, and without sufficient inquiry into their relevant circumstances
- Acting for both spouses in separation and divorce proceedings
- Willingly over-gearing greedy clients into margin lending products when it is clearly inappropriate to their relevant circumstances
- Recommending over-risky superannuation investments to achieve an over-ambitious client retirement target where the client clearly doesn’t understand the risks
- Willingly going along with client wishes and allowing them to getting themselves into trouble as a result of a range of ‘bar-b-que’ advice received from friends and relatives
#6: Handy tips on how to prepare for your exam
No adviser should take the FASEA exam lightly. It is not a tick and flick exam. I have yet to speak to an adviser who came out of their June exam brimming with confidence.
The exam requires a significant amount of reasoning ability, not only base knowledge. So rote learning isn’t going to cut it.
The reason is that most questions in the exam are case study based. In other words, there are many scenarios which contain a set of circumstances, from which a series of questions flow.
To add to the degree of difficulty, you can expect an academic treatment of a profession practice exam. In other words, the persons setting the exam are more likely to have a PhD rather than an authority to practice as a financial adviser.
So it is very important to get the feel of the type of questions you will encounter by studying the practice questions published by FASEA in the PDF document “The Financial Adviser Exam Practice Questions” Version 1.0, May 2019.
Because this is an exam for all advisers in a variety of employment situations, you will be confronted with examiner-created situations you have never encountered before.
You will see artificial scenarios that seem overly long winded and sometimes confusing. You may be asked questions where you have to choose ‘the most likely’ from a range of possible options.
And yet you have to prepare!
So my answer to this challenge is to be ready for anything and everything. The best preparation for a challenge of this nature is to know your stuff.
Know the rules and how to apply them, and know how to construct personal advice knowledgeably and ethically, that is genuinely in the client’s best interests by any definition.
How to prepare
The answer is to learn the base knowledge and then practice, practice and practice. And when you think you have done enough practice, do more practice.
Change your mindset
I have heard some older advisers say, “I have been in the industry for 25 years and if I can’t pass this exam, no one will”. That attitude will not get you through this exam.
The reason is that although many advisers will have a general, intuitive understanding of the advice rules, only a relative few will know it to examination standard.
A large part of preparing for this exam is to change your mindset and adapt to what is clearly a rapidly changing advice landscape. Resistance will be useless if you want to stay in the industry. If you hang onto past practices, you risk going the way of the dinosaurs.
Whilst, I disagree with the compressed time frame for existing advisers to pass the exam, and the brutal consequences for those who don’t pass by the end of next year, I do believe that this exam has a lot of merit.
The intense and focused preparation; plus the sitting and passing this University standard exam under strict exam conditions may ultimately be a blessing in disguise, both for your education upgrade and overall improved knowledge as an advice professional.
Finally, my advice to every adviser going into their exam is:
- Study in detail every document, example and (candidate) video related to the adviser exam that FASEA has released
- Prepare and practice well for the exam, then learn and practice some more
- Don’t be fooled by the prospect of an open-book exam. In my experience, they are the most difficult because it is so easy to waste time searching for information. It is best to have a good working knowledge of the subject matter going into the exam
In the exam:
- Manage your exam time well
- Stay calm
- Take the time to read every question properly
- Don’t walk out of the exam if you finish early. Use the extra time wisely