Look harder at those transitional conditions, they are tougher than you think

I don’t think industry or advisers appreciate the impact of the two transitional FAP licensing requirements covering record keeping and internal complaints processes. People glance at them and think ‘that’s covered by what I do now’. It probably isn’t. Look closer:

Quote: “Records will be adequate if they clearly demonstrate (together with your systems, process and controls) how you, and any person engaged by you, and the regulated financial advice given to your retail clients by you or on your behalf, met the requirements relating to financial advice and financial advice services in the Financial Markets Conduct Act 2013, the Financial Markets Conduct Regulations 2014 and the Code of Professional Conduct for Financial Advice Services.”

This contrasts with the requirement in the current AFA Code of Professional Conduct which states “The information required to be recorded under this Code Standard in relation to each retail client must be sufficient to demonstrate compliance with Code Standards 5-10.”

So, in transition, which could be as early as next week for some adviser businesses, record-keeping expands from just looking at how your records demonstrate compliance with six Code standards to such records being able to demonstrate compliance with all of the relevant legislative, regulatory and new FAP Code provisions.

To quote from the submission completed on the proposed conditions by my compliance guru, Rob Dowler,

It is also useful to see it stated bluntly that this (record keeping) requirement is about demonstrating compliance rather than necessarily otherwise supporting good client outcomes, albeit one hopes that complying will assist in delivering good client outcomes, even while noting that it is entirely possible to deliver good client outcomes without otherwise maintaining documentation to prove compliance.”

The requirement for an Internal Complaints Process also extends beyond that outlined in the AFA Code to now require “complaints to be dealt with in a fair, timely and transparent manner”, which is entirely reasonable, but is again, an extension of the AFA Code requirement.

It is crystal clear that in this age of heightened focus on conduct these two conditions simply express an FMA expectation that these are standards that all financial service providers, not just transitionally licensed FAPs, should be focused on meeting.

MBIE announce updated timetable for implementation of new regime for financial advice

The Government has today announced that the new regime for financial advice will come into force in June 2020. The Government has also agreed on the licensing fees and FMA levies that will apply in the new regime and new requirements for registering on the Financial Service Providers Register.

You can view the media release here: https://www.beehive.govt.nz/release/new-advice-safeguards-will-protect-consumers

You can view updated timelines, the Cabinet papers and Regulatory Impact Statements on our website: www.mbie.govt.nz/faareview and related pages

Now is the time for industry to familiarise itself with the new requirements and complete preparations for the coming changes. This includes determining how you will operate in the new regime and how you will comply with the legislation and the new code of conduct for professional advice services, and obtaining transitional licences when applications open.

MBIE will soon be consulting on the draft disclosure regulations that will apply in the new regime. We encourage you to review the draft regulations when they are available and to provide any feedback on how you think they will work for you.

MBIE updated timelineJune29

LATEST: New Financial Advice Code Approved

The new Code has been approved. Here are the links you need: 



New Code


Code of Conduct - and Fees for No Service

An interesting discussion yesterday about whether a service standard should be included in the new draft Financial Advice Code. There is a widespread belief that providing ongoing advice service should be part of the Code, and some attempt should be made to define the service, and place it in the Code.

Defining the service is a tough ask. I am not in favour of the Code requiring certain types of service, charge, or economic activity. That was rejected by MBIE in drafting the law and if you like innovation, flexibility, and freedom, then you probably think that was a good idea. I am also concerned as to how we would define the service, at what thresh-hold level of renewal commission we might require it, and whether we might bind an adviser to a situation where they were required by the Code to provide a service that was uneconomic, in the case of very small renewal commissions.

But the problem is real, as illustrated from Australia, is when a financial adviser receives a payment for no service given. Plainly, this is wrong. I recently had my neighborhood gym charging me for personal training, with a trainer that had left the business. Unnoticed for some months, I was not happy when I found out. Consumers are like that. In Australia, such advice fees were charged in some cases, even on the accounts of people who had been dead some time. It is not a good look.

But there is a solution, possible with relatively little complication to the admirably principles-based design of the Code.

In Code Standard One, in the commentary, we could add an illustration that it is never fair to receive a fee or commission when no service is provided and no reasonable attempt has been made to provide the service. That would leave the exact nature of the service, the value proposition, the form of charge and so on, with advisers. It would also clearly signal that fee for no service is unacceptable.

Code Working Group: new draft Code available for review and consultation

The new draft Code has just been released for consultation:

Read more about the consultation, including the draft code and link to the online survey.

Consultation closes on Friday, 9 November 2018.

Selected details from MBIE's media release:

11 October 2018

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.


Standards versus the need for differentiation

Achieving a common, compliant, standard is a necessary pre-requisite to differentiation. Achieving standard and failing to move on could be a recipe for disaster - as merely doing what everyone else does is likely to likely to lead to diminishing returns.

If you are some way off implementing the six-step advice process in your business, and you want to get licenced in the new regime, then you probably need to focus on that. It is a standard, and achieving it is a baseline for entry into the new regime. JP Hale has an article highlighting it at this link. It is necessary and good.

But when do standards fail us?

When we assume that the standard is all we need.

Differentiation is needed to stand out from the crowd. In a whirlpool of websites, listings, and minor brands the consumer has so many choices of provider. For insurance, consumers have many options: go direct with one of many providers, seek advice from one of many advisers, they can even just sit at home and ignore the problem for another year - and many choose just that. Speaking to different markets in a way which is unique and compelling should be the advisers' marketing goal.

A good practice is underpinned by effective standards, but it can be trapped by them if it fails to break out from that small beachhead. Tony Vidler develops this theme in his recent post. I like Tony's belief that many advisers have an advice philosophy, it is just that they may fail to articulate it.

I encourage advisers to explore their advice philosophy, identify it, and turn it into a vision for their business. Starting with a review of recent cases, and then a workshop with your people, you can quickly draw out the invisible rules that define 'how we do things here' and turn them into a charter for your customers. If documenting process sounds like so much busywork, when there are real clients to be seen, then the call to use your philosophy as a basis for marketing your difference is the antidote.

Being clear about what makes your business good makes finding new clients easier.




Lots of comments

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:

  1. Code working group (CWG) proposals for competence standards for most insurance planning services
  2. The FMA's report on replacement business, and the comments on the same by various journalists and commentators
  3. 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.

FMA Review of Adviser Conduct in Life Insurance

The Financial Markets Authority has released the report on advisers investigated for replacement business. You should read their media release, and then the full report available via this link. Or look in their media centre, and you should see it as the most recent release.

Although you should read the report in full, some points worth highlighting are:

After a substantial investigation, starting with a big data approach to identify advisers with high replacement rates, followed by individual investigations, it could be fairly said that the very small numbers of problem advisers identified means that there is no widespread problem. The FMA states in the report that this is not a representative sample - the 24 advisers were chosen according to criteria designed to identify those with high rates of replacement business.

Even so, it would not do to close the file and say that there is no problem. Most of us would be able to identify life insurance sales practices that are poor. They are not the sole preserve off RFAs either. The FMA identify four AFAs out of the total, and I am personally aware that some of the problems of replacement business are replicated in QFEs as well - one of our staff has mystery shopped several different QFEs and found that the same conflicts of interest that may motivate one adviser to qualify for travel to an offshore conference work just as well on QFE staff too - even if the scale of the incentives may be smaller.

I also feel some sympathy for the FMA, and for AFAs who have been through the process. AFAs, bound by the Code, will have had a much rougher ride. RFAs, on the other hand, not being bound by the code, probably presented the FMA with a problem. They have very limited supervision tools open to them. I bet that some of the cases they wish they could do much more than just write a letter.

On the other hand, I also know of a couple of advisers in the process who were perhaps unfairly targeted, and feel that the FMA process did not properly take into account the role of the advice business in which they work, the actual advice process they followed, and the complexities specific to some of the insurance that they were dealing with.

But this paper is not really the end of this issue. I am sure that it will have helped the FMA advance its thinking considerably. As a learning exercise it has probably been invaluable, no matter that there are no prosecutions (yet). This report underlines what it means when the FMA says it has limited tools to manage RFAs. This report may also provides a basis for thinking about setting terms for licensing financial advice providers under the new regime. I see this as a warning about what needs to be addressed in risk advice before the full implementation of the new law and new Code.