The new, slimmer, fitter, Financial Advice Code is quite an update on the consultation document we saw last. The much more focused style, using plainer language, and pitched at the level of principles makes it a much more accessible document. That is ideal. The financial advice industry can spend a lot of time arguing over how to meet these principles, but the document should be readable by clients, and allow them to use it to judge whether the service they are getting meets the Code.
The broad approach to treating clients fairly, and acting in their interests brings in wider business practice, not just advice given. This approach is present in several of the standards, but show up especially well in standards one, two, and four. That fits well with the current conversation about conduct, especially some practices highlighted by the Australian Royal Commission.
There is quite a lot of detail to unpack in each section. One worth spending time on is the subject of conflicts of interest. Here the entire wording is 'standard' not 'commentary' and there is a direct quote from the relevant section of the law. Along with all the debate around the law, MBIE's long review, and their recent comments on commission, we should see clearly the role of commission in this standard, and the importance of avoiding conflicts where possible, and managing them where it is now. That connects really well with the next standard, which is headlined as dealing with client understanding, but under that heading then correctly identifies that explaining the risks and consequences of scope limitation as the main task in meeting that standard.
I was delighted by the use of an insurance example, but disappointed by the detail in the example. Apologies to Code Working Group members that may feel this is nitpicking, but my compliance consultant and I went over this one, and … the example is flawed. It states that a comparison is excluded, but then goes on to state that there ARE things in the current policy that MAY NOT BE covered under the new policy, thereby implying that the old policy has been reviewed and, worse, the adviser is uncertain of the cover being offered under the new policy being recommended. Surely, if no comparison is being done, this wording should be the other way around, along the lines of, “It is possible that the new policy may not provide cover that is provided under the old policy but, because no comparison has been completed, such circumstances, if any, have not been identified.” I also note that the example doesn’t include any comment on what limitations on the product range, if any, that apply, being the first bullet point under the Code Standard – another major omission, I suspect, noting that this point is explicitly covered in the bank term deposit example provided under Standard 5. I note that Katrina Shanks and Simon Hassan picked up the same point as you can reference at this link.
Clearly a great deal of discussion has focused on the shift in competence requirements, dealt with in standards 9 through 12. However, given the, now extended, timetable for implementation in conjunction with the reduced requirement, and the transition period, there is plenty of time to meet the required standard. It is compliance with the first eight Code standards, and particularly standards three, four, and five, that should be the focus. More on those soon.
A more detailed reflection on the draft is available to Chatswood clients to contribute to the work they may be doing in formulating their contribution to the consultation process.
The International Association of Insurance Supervisors feels that commission is probably an integral part of insurance advice. Like most of the people I know, I think the same way. But fee-based remuneration is bound to get a bit of attention due to the new, draft Financial Advice Code. I shall write more on that later today. But quite a few advisers already see a role for fees as a part of a balanced remuneration strategy. If you would like to explore that world, please drop me a line. I am aiming to get a few of us together for lunch and ideas sharing.
Consultation is now open on a draft code of professional conduct for people who provide financial advice to consumers.
Code Working Group chair Angus Dale-Jones says the Group has been working to create a workable and robust code that will help ensure the availability and quality of financial advice.
“Our role in developing the Code is to set minimum standards of ethical behaviour, conduct and client care, and competence, knowledge and skill that will apply to anyone who gives financial advice to a retail client,” says Mr Dale-Jones.
“Earlier this year we consulted on the key concepts and high-level approach, which gave us a clear indication of what people wanted to see in the Code. As part of this consultation we also conducted a survey of consumers’ experiences with financial advice, which provided some useful insights on what consumers expect and how a Code of Conduct could improve outcomes for consumers.
“We received a lot of feedback on the need to set robust and achievable competence standards, and have taken this feedback on board. The draft Code proposes to set competence equivalent to the learning outcomes in the New Zealand Certificate in Financial Services (Level 5), approved by the New Zealand Qualifications Authority in 2014.
“We have also taken a principles-based approach to ensure the Code is flexible and works for all the different types of businesses that provide financial advice, including small firms.
“We’re now seeking feedback on the draft Code, and want to hear from people about what they think of the proposed standards and how they will work in practice.
“We want to encourage feedback from all parties who will be affected by the Code, including anyone who is representative of the financial advice industry as well as consumers of financial advice. We will be holding a live chat session during the consultation period and people can also submit feedback via our online submission form,” says Mr Dale-Jones.
The Code is technology-neutral and will apply to robo-advice, as well as financial advice given by people. It sets out 12 proposed standards and supporting commentary. It includes requirements to treat clients fairly and act in their interests, act with integrity, manage conflicts of interest, take steps to ensure the client understands the advice, give advice that is suitable for the client and meet standards of competence, knowledge and skill.
The Code will sit within a wider regulatory regime that will include statutory duties, disclosure requirements and licensing. These changes are being introduced through the Financial Services Legislation Amendment Bill.
MBIE has just published an updated timeline for the implementation of the new financial advice regime.
MBIE's release below explains:
We have published on the MBIE website some updated factsheets relating to the new regime for financial advice, including updated expected timeframes for the new regime...
We know there has been some uncertainty and speculation about timing for the new regime. While we cannot give certainty about exact timeframes until regulations and the Code of Conduct are finalised, we wanted to share our latest best estimates of timeframes for the new regime. These updated timeframes take into account time needed for the Bill to complete its final stages in the House, and time to consult on and finalise supporting regulations and the Code of Conduct to ensure they are workable and do not impose undue compliance costs. We also want to allow for a bit more time than previously indicated for industry to apply for transitional licences given the Christmas holidays may fall during the transitional licence application period.
These timeframes are still indicative only and we will provide updated estimates of key dates once the Bill is passed. Regardless of when the Bill passes, there will be time built in for industry to prepare for the new regime.
In terms of next steps, you will see from the fact sheet showing the puzzle pieces that make up the new regime that:
the Code Working Group expect to consult on a draft Code of Conduct shortly, and
we also expect to be consulting later this year on licensing fees and levies.
We hope you will continue to engage and provide your input on these matters.
Looking through the reading material on the industry yesterday the wording of the RiskInfo poll on the impact of FSLAB caught my attention. Here is the question:
"Will the Government's financial advice legislation reforms improve access to high-quality financial advice?"
It seems simple, but includes two dimensions quality of advice, and access.
I must admit to struggling to answer. In the end I plumped for 'not sure', which might seem like a bit of a cop-out, but I'm genuinely not sure. I dobelieve that FSLAB will almost certainly improve the quality of advice on offer. It is already, with much more interest being shown by some RFAs in the process of developing effective statements of advice, for example. I also know QFE managers that are more focused on advice as they contemplate taking their QFEs through transition to licence-holder status. I also think it will reduce the numbers of people claiming to offer advice, and that may or may not be a bad thing - depending on how many that number is. If regulation and costs are too tough we could lose lots of good people. If they aren't tough enough the law will have failed too. The challenge for CWG, FMA, and MBIE in their various roles in the change is to come up with the 'Goldilocks' result: just right, and there are many different views about what that is. But I am quite unsure that greater accessto advice will result, and in my heart I suspect the answer is a modest reduction in access.
I have a model (which produces a Sankey chart) to enable me to experiment with different scenarios for the future numbers of advisers in different entities, I am yet to land on a 'most likely' case. If you work in distribution, or deal with financial advisers (of any type) I suspect that kind of variability creates a great deal of uncertainty and worry about how to invest for the future.
The guide you can find at this link, by Partners Life, is excellent for advisers considering submitting on the Code Working Group (CWG) proposals. I am very happy to publish links to other guides and discussion papers, so please send me them if you think they are worthwhile.
Philip Macalister's interview with Minister of Consumer Affairs, Kris Faafoi, is well worth listening to. The good bits really kick in at about 3.30 into the video. That is where Philip asks the minister about the Code Working Group, and the minister makes his expectations clear. Here is a small sample, but well worth watching the whole interview:
“My clear expectation was given to them at that first meeting that, along with the big players in the market who would serve the majority of consumers in the market, that small industry players who had voiced their concerns were to be consulted with as well, and that is still my expectation.”
He said he was primarily concerned that that the final product decided upon by the working group was for the benefit of consumers.
It is worth noting the three main parts of what is going on right now:
The law will go to select committee
The drafting of the Code
The consultation on disclosure requirements
At this stage I feel most comfortable with the last point. It is the interaction between submissions on the law and the drafting of the Code where the impacts on availability of advice for consumers, driven by competence requirements and costs that may weigh on advice businesses, could vary widely depending on choices made.
Te recent news round-ups have seen insurance in the news in ways we aren't used to, and would generally rather it wasn't seen, or in ways which look like they are going to be darned tricky to work with in the future. The round-up is based on calls, emails and txts, over the last couple of days from people who help me out by contributing / arguing / and questioning this stuff. The list is therefore:
Code working group (CWG) proposals for competence standards for most insurance planning services
The FMA's report on replacement business, and the comments on the same by various journalists and commentators
The use of private investigators by insurers
All have been getting plenty of work and are current subjects on which I have been preparing advice for clients. Do drop me a line if you want to explore these in detail.