As you may be aware, the Government has decided as part of the review of the Financial Advisers Act 2008 that there will be a universal code of conduct which sets out the minimum standards of conduct, competence and client care for persons giving regulated financial advice to retail clients.
The Government’s decisions around the new code of conduct will be reflected in the Financial Services Legislation Amendment Bill, which is expected to be introduced to Parliament later this year (a draft of the Bill is currently being publicly consulted on). To expedite development of the code, Cabinet has agreed that a Code Working Group be appointed to develop the code in parallel with the legislative process.
The Minister of Commerce and Consumer Affairs is now seeking expressions of interest for positions on the Code Working Group. The group will consist of at least seven members (with no more than eleven), with one member appointed as chairperson. This will include two members appointed based on their experience in consumer affairs or dispute resolution. Other members will be appointed based on their knowledge, skills and experience in the provision of financial services, or in other areas that will assist the Code Working Group to perform its functions.
Members of the Code Working Group will be appointed for a three year term, whereby its members will become the Code Committee under the new regime once the Bill is passed into law.
Interested parties can submit an expression of interest, or read the terms of reference and position description for the Code Working Group, at the MBIE careers centre website.
We encourage you to circulate this information to those you think may be interested in applying. Applications close at 5pm Friday 7 April.
The draft Financial Advisers Act has just been released on the MBIE website. An overview is here, the documents can be found at this link. Some of the key changes are outlined in this article on goodreturns. Feedback closes on the 31st of March.
Draft changes appear to leave a number of issues without adequate resolution, or perhaps a more generous interpretation might be that, resolution is entirely in the hands of the regulator.
We are worried that there may still be many people that can be "Financial Advice Representatives" that give no "Financial Advice". We are worried that there is not enough distinction between a "Financial Advice Representative" and a "Financial Adviser". We think that an ordinary person would assume that both give financial advice.
We are worried that given the absence of any differentiation the numbers of "Financial Advisers" will fall.
We are also concerned that there appears to be no mechanism to stop people who have been poor reps in one FAF moving to another to be poor reps.
More detailed review to be conducted during the week. Any clients wishing to discuss their submission should contact us.
David Whyte has a nicely provocative title for his article on goodreturns: "Client-first may be too big an ask for biggest players" - although I think the issue is as important for small advice businesses as it is for big ones. The article is long but well worth a read because the issue of advice versus no-advice is an important one. Highlights include his comments on the 'approved product list of one'.
Boundaries are critical in law. Does this law affect you or not? The answer should be clear to everyone - whether they are a financial adviser or not. Although in some respects, and I am surprised to find myself saying this, the article is not long enough.
More can be said on the definition of the boundary between sales and advice, and it is about more than just the 'biggest players' versus, presumably smaller, 'financial advisers'. Take this point:
"The NZ regulator chose to discard any suggestion that differences between selling and advising be enshrined in the review, in the mistaken belief that drawing such a distinction would favour one distribution model over another."
The distinction was certainly left out, but I am not sure that was the reason it was left out. Whether you agree with it or not - and my compliance adviser, and others in the industry have had some heated debates over the issue, I think that for those drafting the law at MBIE the decision was this: if you do not give financial advice, you are outside the regime. The distinction is that you cannot call yourself a financial adviser. They do not seek to prescribe what you can call yourself, but you aren't allowed to use the term financial adviser.
If you are a financial adviser, and you wish to switch from giving advice to providing an execution-only service, there are some concerns that switch - especially if it happens in the course of one meeting - may confuse the customer. They may wonder, am I still getting advice? Or they may not wonder at all - and simply assume that they are still getting advice. This is an issue which affects most financial advisers - nearly everyone, big business or sole trader, likes the ability to just make a sale, without advice, from time to time. In this case, process and labeling becomes more important. We are interested in exactly what guidance comes from the FMA on that point, but it is unlikely that we will see further detail in the draft law.
In some respects the new law will push further into the territory which is currently outside the oversight of the Financial Advisers Act. It is proposed that the FMA be granted the power to designate some activities as advice, which may be outside the regime right now. Refer to my previous post on that point for more detail.
From the cabinet paper the following proposal looks interesting:
I also propose that officials consider whether additional mechanisms to ensure the legislation is in practice capturing the activities that should be regulated. For example, one option could be to enable the FMA to designate activities as advice, subject to a set of guiding principles.
Why is this power proposed? Well, that is based on the issue described in the earlier section in the paper as follows:
39.2 It may be allowing some activities which are intended to be captured to go unregulated by providers using the strict ‘letter of the law’. An example from the FMA’s 2015 review of Sales and advice is the cross-selling of financial products, where consumers who intended to purchase one financial product, such as a credit card or home loan, were sold additional products, such as life insurance or KiwiSaver and this was not treated as advice.
Another excellent example could be the replacement of existing insurance policies. While preserving the exemption for execution-only business, the new power could grant the FMA the ability to define replacement narrowly (as it is right now requiring a choice: either advising on replacement, or warning of the risks of no advice) or it could designate that any sale where a client discloses an existing product must be advised. There is also room for an intermediate setting between these two, say, designating only those cases of replacement where there is a disclosed health condition which would affect the price or terms.
MBIE has released a summary of the review of the Financial Advisers Act - which you can access at this link: Download Faact
The key points I like are:
A determination that everyone that wishes to be called a financial adviser or to give financial advice must meet a client first obligation and abide by the AFA Code (albeit an updated one offering standards relevant to the area of advice being given).
A commitment to keeping the cost of the regime low.
Erasing some of the perceived boundaries between QFEs, RFAs, and AFAs. Instead focusing on competence to offer advice.
A focus on disclosure to manage conflicts of interest created by different systems for remuneration for advisers.
There are other expected changes such as requiring a greater connection to New Zealand for registration as an advice business in New Zealand. All the better to head off any problematic uses of representing the FMA as your regulator when, in fact, your business is entirely based in another country and is in no meaningful way regulated by a respected New Zealand authority.
Some areas leave questions open. The licensing regime for organisations could be great or could be terrible. We can only hope that when written it is done well. A similar concern applies to other areas where details must be worked out. However, I am optimistic that they can be worked out well. Some things I just simply do not like: why choose the word 'agent' for example.
It is important that the process of looking at reducing consumer harm from replacement (higher premium costs and possible disclosure problems) does not reduce consumer gains from replacement (such as lower premium costs, individually more suitable solutions, and market-wide a more competitive insurance industry). That is why we should take care not to focus too much on actions which are simply about reducing all kinds of replacement, and focus more on reducing just the harmful forms of replacement business.
The MBIE options paper suggests several proposed changes to the Financial Advisers Act which would require those currently operating as RFAs to meet the supervision requirements imposed on AFAs. There are a number of dimensions to being AFA-ready: education requirements are a pre-requisite, but the actual practice of Code-compliant advice is probably more demanding. Because business processes take some time to change it is probably best to start the planning process now so that you have more time to implement change over the next couple of years.
Following the release of the Options Paper the FMA jointly with MBIE are hosting a series of workshops to discuss options for improving the operation of the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
Workshops are to be held in Auckland (10th February), Wellington (11th February) and Christchurch (16th February).