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Brief Counsel

Commissions safe for now but big changes possible for financial advice industry

26 November 2015

The Options Paper released yesterday for the review of the financial advisers regime provides three scenarios for change ranging from modest to sweeping.

However the “no commissions" bullet seems to have been dodged – for now. 

We outline the reform proposals.

Structure of Options Paper

Because of the risk to New Zealand’s reputation created by the misuse of the Financial Service Providers Register (FSPR), particularly by off-shore controlled providers, the Government wants to clean up this area ahead of any further changes to the framework.  Hence it has set an earlier date of 29 January 2016 for feedback on this issue.

The submission date for the broader reform proposals is 26 February 2016.

The options for change are presented both as “discrete elements” and in the form of three reform “packages”, each of which is more radical than the one before. For an effective summary see the Snapshot on pages 7 and 8 of the paper.

Broadly, the Ministry of Business, Innovation and Employment (MBIE) is satisfied that the two Acts – the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 – have lifted professional standards.  But it considers that there is distinct room for improvement.

Discrete elements

The paper identifies eight broad areas for reform, with a range of options under each one. We identify the preferred options below with an “*”. 

Amending the rules on who can provide what advice

Option One*: remove the distinction between personalised advice and class advice.

Option Two: remove any distinction based on product category.

Option Three: restrict the provision of certain complex or high-risk services to a sub-set of expert advisers.

Option Four: require clients to opt in to wholesale client status.

Allowing advice through technological channels, including robo advice

Option One*: allow financial advice to be provided online by a licensed entity.

Option Two: adopt a hybrid regulatory model for financial advice through non-traditional means – broadly this would add the option to speak to a qualified adviser.

Amending the ethical and client-care obligations

Option One: extend ethical requirements (place customer interests first and manage conflicts of interest) to all advisers.

Option Two: clearly distinguish between advice and sales so consumers know when an adviser is not required to put the consumer’s interests first.

Option Three: create a suitability obligation under which a product cannot be sold unless it is deemed suitable to the customer’s needs.

Option Four: ban or restrict conflicted remuneration (commissions, soft commissions, sales targets with bonuses).  MBIE states that this “is not currently a preferred option”.

Increasing competency requirements

Option One: require advisers to meet minimum entry standards.

Option Two: create a stepped pathway to adviser roles.

Option Three*: require Continuing Professional Development.

Option Four*: set competency standards through the licensing process.

Tools for ensuring ethical and competency compliance

Option One*: move to an entity licensing system where businesses must ensure that their employees comply with the relevant requirements (and, potentially, with a greater role for industry bodies). This would be akin to a compulsory QFE model.

Option Two: move to an individual licensing regime supported by a Code, like for AFAs.

Option Three: registration, like the RFA model.

Option Four*: align the regulatory powers under the FAA with those available under the Financial Markets Conduct Act - e.g. more reliance on administrative tools and less on litigation and criminal sanctions.

Improving disclosure requirements

Option One*: require all advisers to have the same disclosure requirements.

Option Two*: streamline disclosure to make it more meaningful to consumers.

Option Three: make further information available on the FSPR or other portal/websites.

Consumer access to dispute resolution

The only option* includes:

  • requiring financial advisers to inform customers at the time of a complaint which dispute resolution scheme they belong to and how to access it
  • greater reporting of cases, and
  • mandatory professional indemnity insurance.

Measures to help consumers locate advisers

Options here include providing more consumer information and/or making the industry terminology more transparent – e.g. renaming QFE advisers.

Areas where there are no proposed changes

The paper does not suggest changes to:

  • the financial adviser or financial adviser service definitions
  • the exemption for professionals
  • the territorial scope, and
  • the regulation of brokers or custodians.

Option packages

The paper seeks responses to three packages of options, with the first being more minor and the others having increasingly more significant changes.

​Package 1: minor changes with improved consumer focus ​Package 2: competency and ethical obligations for all advisers.

Package 1 plus:
​Package 3: sales/advice distinction as well

Package 1, plus items 1 to 3 in package 2, plus: 
​Current boundaries about who can provide what advice retained ​Competency and ethical obligations for all advisers ​“Salespeople” subject to suitability of product sold obligations and required to inform the customer that they are not obliged to put the customer's interests first
​All advisers to put the consumer’s interests first, manage conflicts and not to claim independence if they are aligned to a provider ​Distinction removed between “class” and “personalised” advice  ​Financial advisers to advise only in their areas of competence
​A simple and common form of disclosure to apply to all advisers, including detail on commissions, sales targets and soft commissions ​All financial adviser businesses to be licensed and responsible for ensuring employees comply with competency and ethical obligations ​Salespeople able to sell only the financial products of a single product provider with whom they are aligned
​Terminology made more meaningful for consumers  A subset of “Expert” Financial Advisers created to advise on complex matters. Category 1 and Category 2 distinction would go. Individually licensed to provide a quality mark and subject to a Code  ​Potentially increased role for industry associations to help their members with compliance
​Licensed entities able to provide “robo-advice” online  ​RFAs would have increased compliance obligations – ethical, disclosure, competency, and licensing  obligations

Misuse of the FSPR

Options include:

  • stronger registration requirements
  • extending the grounds for deregistration
  • amending the territorial scope of the legislation to require a legitimate connection to New Zealand
  • requiring trust and company service providers to register
  • limiting public access to all or parts of the FSP Register, and
  • converting the current Register into a non-public notification list.

Chapman Tripp commentary

There is a lot to digest in the Options Paper but it is apparent that MBIE has taken on board the feedback it received in the first consultation round and has some constructive suggestions. 

A move towards allowing entities to provide “robo-advice” will be welcomed in some quarters, as will an overhaul of the disclosure regime and terminology. However the prospect of broader remuneration disclosure, conflicts management, licensing and competence standards may be less well received by some advisers already feeling the regulatory burden of the recent reforms.

A potential distinction between sales and advice was signalled in the Issues Paper but the indication in “Package 3” that salespersons would be limited to selling the products of a single aligned provider will narrow the potential opportunity for those seeking a low compliance option.

The possible removal of the “class” vs “personalised” divide is also likely to provoke discussion, particularly in light of the recently released report in which FMA committed to reviewing its October 2012 guidance note on the sale and distribution of KiwiSaver (see our earlier commentary here).

Chapman Tripp submitted on the Issues Paper and will be submitting on the Options Paper also.

Next steps

There is a lot on the table as some of the reform proposals would, if implemented, greatly affect many providers.  As we have indicated in previous publications, the review is a unique opportunity to influence the future shape of the financial advisory industry.  We urge you to engage in the policy-making process and will be happy to help.

Final recommendations will be with the Minister by the end of July 2016.

For further information, please contact the lawyers featured.

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