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Brief Counsel

Five year fitness test for financial advisers regime up next year

17 October 2014

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​The Financial Advisers Act 2008 (FAA) had a difficult birth, requiring several Supplementary Order Papers and a highly unusual eleventh hour “Pre-Implementation Adjustments Bill”.

Partly in acknowledgement of the risks implicit in such a process, a clause was inserted into the Act promising a review by the Ministry of Business, Innovation and Employment (MBIE) within five years of the Act’s commencement.

MBIE plans to initiate public consultation on this next year for completion before 1 July 2016.

This is an important chance to drive change in those parts of the FAA regime which have caused confusion or frustration.  We will be engaging fully in the review and urge you to do likewise.  

A brief history

The new framework came into effect fully on 1 July 2011, having been delayed as a result of industry input about the unworkability of the FAA and the companion Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) in their original form. 
This feedback culminated in a substantial re-working of the FAA and FSPA prior to commencement in the shape of the Financial Service Providers (Pre-Implementation Adjustments) Bill (which was eventually split into two acts amending the FAA and FSPA).
The result was a workable regime, but one which reflected a slightly muddled policy underpinning – a mixture of both investor protection and occupational regulation.  This has led to some challenges, which the review will provide a one-off opportunity to address.

Areas for improvement

We have chosen to produce this commentary to coincide with Money Week 2014, organised by the Commission for Financial Literacy and Retirement Income, and with the launch this week of the Financial Markets Authority (FMA) survey of New Zealanders’ attitudes to investment.
Commenting in Good Returns on the survey results, Simone Robbers said public confidence in financial advisers had improved in the last four years but that AFAs still had to find “their value proposition and the sweet spot where the business model works and the consumer outcome is optimal”.
The review of the FAA has the potential to assist that process.  Topics which we believe should form part of the agenda are set out below.  No doubt there will be many others.

Alignment of FAA requirements with new market opportunities under FMCA

It is important that the FAA allows advisers to advise clients on the exciting new capital raising opportunities created in the Financial Markets Conduct Act (FMCA) through the new small offer exemption and equity crowd funding and peer to peer lending platforms. 
But this is made difficult because AFA Code Standard 6 requires Authorised Financial Advisers to “assess and review” financial products to a level that provides a reasonable basis for a recommendation.  Meeting this requirement, while straightforward for IPO or listed stocks which are supported by offer documents and/or broker research, is much more problematic for small offers that are exempt from the normal disclosure requirements – which is where the advice is really needed.
A possible approach would be to relax the statutory duties under the FAA for offers under the new exemptions, possibly up to a maximum value and with investor consent. 
This would facilitate a discussion along the lines of “I know very little about this company but its directors and management have a good track record and if you have a spare $5,000 it wouldn’t be a bad investment for you”.  The alternative is that these types of conversations – which, if well controlled, have their place in financial markets – will simply not happen.

Investment planning service – boundary issues

The definition of “investment planning service” in the FAA gives rise to a range of boundary issues affecting AFAs, and non-AFAs who voluntarily elect to apply AFA Code Standard 8 (which requires an up-to-date understanding of the client’s “financial situation, financial needs, financial goals and risk profile”).
Anomalies include: 
  • non-AFAs being effectively debarred from recommending plans involving solely category 2 products (e.g. layered bank term deposits) should they voluntarily consider the Code Standard 8 matters when tailoring their advice
  • non-AFAs being unable to recommend a plan to a client based on class goals and financial circumstances and on that client’s needs and risk profile, but being able to give other class advice to that client
  • QFE advisers who are not also AFAs being prohibited from providing any advice which may constitute a plan, after considering the Code Standard 8 matters (which may be required or contemplated by the adviser’s QFE Adviser Business Statements), and 
  • AFAs finding that any financial advice or discretionary investment management service tendered in compliance with Code Standard 8 is automatically deemed to be an investment planning service within the terms of the FAA, and therefore beyond the categories in their authorisation.

From a policy perspective, we question whether these are the right settings.

Certainty of boundary between personalised advice, class advice and no advice

In October 2012, the FMA issued a 27 page guidance note setting out its expectations for the sale of KiwiSaver scheme memberships within the requirements and spirit of the FAA.  While provided in the context of KiwiSaver sales, the principles were expressed to be relevant to other financial products (though not universally so given KiwiSaver’s unique characteristics). 
FMA scrutiny is appropriate if KiwiSaver sales practices have been questionable.  But we suggest that the necessity for a 27 page guidance note to determine whether financial advice has been provided indicates the degree of complexity in the Act’s distinctions around the boundaries which is unhelpful to those seeking to comply. 
Anecdotally, we understand it has had a negative impact in some instances – with advisers reluctant to provide any form of assistance in relation to KiwiSaver in case they fall on the wrong side of the boundaries which the guidance note attempts to draw.
A starting point may be to revisit the exemptions in section 14 and section 10(3) of the FAA, which set out those scenarios that do not constitute (respectively) a financial adviser service or financial advice.  Regulatory certainty may be highly preferable here.  After all there may not be much difference in effect between “I recommend this product to you in your circumstances” (personalised advice), “I recommend this product generally to all my clients” (class advice) or “Here is some information which recommends this product” (no advice). 

Keeping pace with technological change

It is now possible to identify potential product needs for customers and to advise on those products through online channels, without any need for human involvement.  Take, for example, the client who books an overseas trip by credit card and receives an automatically generated email about travel insurance for their particular journey and profile. 
At present, this advice could be construed to amount to personalised advice to a retail client and would therefore need to be provided by an individual because under the FAA such advice cannot be given by an entity.
We believe licensed entities should be able to give personalised financial advice on simple products, as in Australia.  The rest of the FAA provisions would continue to apply (for example, the duty of care, diligence, skill and disclosure).  But those obligations would attach to the entity rather than any particular individual.

A look to Australia?

There has been huge debate across the Tasman on the so-called Future of Financial Advice (FOFA) reform wind-back, which included watering down the previously proposed ban on some forms of commission-based sales and “conflicted remuneration”. 
We strongly urge MBIE to use the review to look at the FOFA process as there may be some significant policy learnings relevant to the New Zealand environment. On the vexed question of commissions, we consider that the current regulated standards and remuneration disclosure requirements are appropriate and that a ban would be likely to lead to a significant decline in advice being sought.

From here

We are encouraged that INFINZ has already convened an industry discussion on the review as this indicates a high level of interest. 
Chapman Tripp has closely followed the debate around the FAA from inception to final passage.  We will monitor the review process, and publish on key developments as they occur.
For further information please contact the lawyers featured.