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Brief Counsel

Draft code of conduct for AFAs released

01 April 2010

The draft Code of Professional Conduct for Authorised Financial Advisers (AFAs) has been released for consultation. 

The draft Code contains a succinct 21 proposed standards relating to ethical behaviour, client care, continuing professional training and competence, knowledge and skills.   Each standard comprises an overarching principle and additional provisions that contain detail about its application.  The draft Code also introduces several new concepts, including a definition of “wholesale client” (together with certain exemptions for advice to wholesale clients), and recognises different qualifications and designations held by advisers. 

The Code Committee are conducting a roadshow of seminars around the country, following which submissions on the draft Code are due by 5pm, Friday 7 May 2010. 

Different qualifications

The draft Code contains a schedule of qualifications and designations that have been recognised as satisfactory alternatives to the various unit standard sets within the National Certificate in Financial Services (Financial Advice) (Level 5).  The only unit set that must be obtained by all AFAs relates to knowledge of the draft Code and advisers’ legislative obligations.  This change should ease the transition for some advisers - but there are still omissions (which should be identified in submissions), little discretion in the standard and little, if any, recognition of foreign qualifications. 

Exemptions for wholesale advisers

The draft Code exempts AFAs who advise wholesale clients from five of the 21 standards, primarily those relating to disclosure.  This is a positive move, but the definition of “wholesale client” is very limited - covering only Crown organisations and entities registered as financial service providers under the FSPA. This will not relieve advice to all institutions.

However, we anticipate that wider relief may still be granted for wholesale advisers in changes to the Financial Advisers Act being considered as part of the Select Committee’s consideration of the Financial Service Providers (Pre-Implementation Adjustments) Bill.

“Personalised financial advice” vs “non-personalised financial advice”

A distinction is drawn between “personalised financial advice” and “non-personalised financial advice”.  Personalised financial advice is advice given to a client, other than a wholesale client, where the AFA has considered the client’s financial situation, needs, goals or tolerance for risk, or where the client might reasonably have expected the AFA to have considered those factors.  When personalised financial advice is given, it must be suitable for the client and the basis for it explained.  When non-personalised advice is given to clients who are not wholesale clients, a statement that the advice has not been personalised is required with a warning the advice should not be relied upon.

Commissions and other benefits

The draft Code does not ban commission payments, but the ethical standards prohibit AFAs from stating or implying that they are independent if (among other things) they or a related person will or may, directly or indirectly, receive a benefit from a person other than their client for providing their services or selling a product.  AFAs who are not advising wholesale clients are also required to disclose to their clients any employment arrangements, contracts or other relationships that may affect their independence. 

Disclosure of obligations

The draft Code contains a number of other disclosure obligations, which largely mirror the proposed disclosure regulations under the FAA.  The only additional requirement is that AFAs  who don't just advise wholesale clients must disclose their qualifications and experience. 

Continuing professional training

The proposed minimum 20 hours of continuing professional training (CPT) every 12 months has not changed, but now only half of the CPT must be structured learning (i.e. part of a registered training programme or a structured continuing development programme managed by a professional body).  The suggested compulsory areas of learning have not been included in the draft Code.

Draft code does not address matters in the Supplementary Order Paper (SOP)

The draft Code was prepared on the basis that the Financial Service Providers (Pre-Implementation Adjustments) Bill will be enacted unamended, and does not address the changes in the March SOP relating to investment management decisions and introducing the investment broker regime.

Application of the Code

AFAs will be required to comply with the spirit of the Code, as well as the precise terms of the Code Standards, and ensure their conduct and performance is consistent with the purpose of the Act (to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers) at all times.

Timing

Following submissions, the amended Code is expected to be presented to the Commissioner for Financial Advisers for approval in early June.  The Code must then be forwarded to the Minister of Commerce for approval and finalisation.

A copy of the draft Code and the associated information document released by the Code Committee is available here.

For further advice, or help with preparing your submissions, please contact any of the lawyers featured.

Our thanks to Pippa Tasker, Solicitor, for preparing this article.

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