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Brief Counsel

Comments sought on regulating and supervising financial advisers

14 July 2009

The Securities Commission wants submissions by 30 July 5.30pm on the regulation and supervision of financial advisers, in particular Qualifying Financial Entities (QFEs), under the Financial Advisers Act.  The aim is to ensure that the same standards are met and maintained by advisers performing similar roles, regardless of whether or not a QFE is responsible for them.

It is anticipated that the first applications for QFE status will be processed from the last quarter of 2009 and for potential Authorised Financial Advisers from mid 2010.

Role of QFEs

QFEs have a key frontline compliance role under the Act.  A QFE will be responsible for:

  • ensuring that its employees and agents (including those that are AFAs) are competent and comply with their obligations under the Act, including being authorised if required
  • the advice given by its financial advisers
  • providing the Securities Commission with an annual report
  • training its employees and agents, and
  • ensuring that persons who sell its products, but for whom the QFE is not responsible, do not hold themselves out as being the QFE’s nominated agent. 

The QFE will be accountable to the Commission for its employees and agents.  AFAs employed by a QFE will remain personally liable in respect of their conduct and disclosure obligations under the Act.  They will also be directly supervised by the Commission.

Who might apply to be a QFE?

Any entity (even those outside the investment sector) who employs or engages someone as an employee or agent to perform a financial adviser service might apply to be a QFE.

However, entities will need to weigh the costs of becoming a QFE (fees and levies) against the efficiencies of obtaining QFE status (centralising the management of regulatory and reputational risk).

Applying for QFE status

Broadly an entity applying for QFE status will need to have in place processes to identify training needs and the ability (i.e. sufficient resources) to train and monitor its employees and agents. 

The Commission will provide published guidelines detailing the QFE application process and setting out what will be required to support an application. 

QFE status will be granted for a specified period of time, and may be subject to terms and conditions.

Who will be classified as an agent of a QFE?

“Agent of a QFE” is not defined in the Act.  The Commission suggests that agents of a QFE could include:

  • contractors
  • employees of related companies
  • franchisees and their employees, and
  • stand-alone product distributors.

The Commission proposes to require each QFE to establish and maintain a list of agents it has assumed responsibility for (the QFE’s nominated agents). 

Authorisation

Persons will need to be authorised if:

  • they are an agent of a QFE and they give advice on, or make investment transactions in relation to Category 1 (complex) products issued by the QFE.  Employees of a QFE giving such advice or making such transactions will not need to be authorised, and/or
  • they provide a financial planning service or give advice on, or make investment transactions in relation to Category 1 (complex) products that are not issued by the QFE. 

There will be a streamlined authorisation process for AFAs who are employees or agents of a QFE.  In considering such applications, the Commission will particularly take into account whether or not the QFE will maintain a large degree of control over the adviser (i.e. whether or not the adviser will have much discretion in relation to the advice provided).

The Commission will likely require as a term and condition of authorisation for an employee or agent of a QFE a restriction on the AFA’s area of practice to the products (or a subset of those products) for which the QFE is responsible. 

Supervision of financial advisers and monitoring of unregistered advisers

There will be a need periodically to apply for the renewal of authorisation or QFE status.  Application or renewal processes may include onsite inspections and interviews by Commission staff.  Renewal applications will be assessed against the then current eligibility criteria.

Where the Commission identifies advisers or QFEs as posing a higher risk of non-compliance or where particular concerns have been identified or there have been complaints raised, the Commission may undertake onsite inspections and interviews in addition to requiring written information.

The Commission anticipates dealing with many issues through constructive dialogue, followed by imposing additional terms and conditions on an AFA or a QFE or by taking other enforcement action.

To maintain the integrity of the wider regulatory framework under the Act, the Commission will monitor unregistered financial advisers and other possible illegal financial advice activity.

Interpretation of “financial planning service”

Persons providing financial planning services will need to be authorised and registered under the Act.  The Commission proposes to approach the interpretation of a “financial planning service as involving more than merely doing a basic needs analysis for a particular product or combining two products where one product is ancillary to the other (such as life insurance taken out at the same time as a loan to cover the outstanding loan)”.

Details of where submissions should be sent and a copy of the discussion paper Staff Paper on Regulating and Supervising Financial Advisers are available here.

The Registrar of Companies has been appointed as the Registrar of Financial Service Providers and will be providing further information about registration of advisers in due course.

For further advice or assistance with preparing a submission, please contact the lawyers featured.

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