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Brief Counsel

New direction for financial advisers' regime

15 July 2016

​Changes recommended to the legislation underpinning the financial advisers’ regime should produce a simpler system, easier for the public to understand and more modern to the extent that it will permit robo-advice.

But much will depend on the detail, most of which has yet to be finalised.

We outline the main reform directions.

Any exposure draft of the proposed legislation is expected to be released in the coming months. This will create the next opportunity to provide submissions.

The review

The recommendations are contained in the Ministry of Business, Innovation and Employment (MBIE) report following a review of the Financial Advisers Act 2008 (FAA) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA).

 The proposed new regime will:

  • remove the requirement that personalised advice be provided by natural persons and remove the distinction between class and personalised advice
  • remove the categorisation of financial products – all financial advice products will be regulated the same way
  • classify financial advisers into “Financial Advice Firms”, “Financial Advisers” and ”Agents”
  • require financial advice firms to be licensed
  • create new conduct obligations which apply to all types of advisers, including an obligation to place consumer interests first
  • require improved, simplified and standardised disclosure, and
  • prevent misuse of the Financial Service Providers Register by businesses not genuinely providing financial services in New Zealand.

The Minister’s aim is to introduce a Bill to the House by the end of 2016.  The Bill and regulations are expected to come into come into force before the next election in late 2017 (subject to transition provisions, which are still to be determined).

Firms, advisers, agents

Licencing: MBIE has proposed that anyone (or any robo-advice platform) providing financial adviser services must have a financial advice licence from the Financial Markets Authority (FMA).  These will be issued to Financial Advice Firms only, rather than to individual Financial Advisers or Agents.

As under the Financial Markets Conduct Act (FMCA), there will be flexibility on how prospective licensees will be expected to meet the licensing requirements, depending on their size, nature and the services they provide.

Financial Advice Firms will be:

  • able to engage Financial Advisers and/or Agents
  • accountable for their Agents (as with the current QFE Model)
  • required to establish processes to enable their Financial Advisers to meet their obligations (but a Financial Adviser would remain accountable for any advice given), and
  • required to ensure they do not incentivise their Agents to sell products without regard to their consumer’s interests.

Sole traders will be treated as financial advice firms.

Financial Advisers will:

  • be engaged by a licensed Financial Advice Firm
  • be accountable for compliance with their legislative and regulatory obligations, and
  • hold a restricted ‘financial adviser’ title and be registered on the FSPR.

Agents will be engaged by a licensed financial advice firm and be titled as ‘agent’.  They will be able to provide advice only where the financial advice firm is permitted to do so. 

New conduct obligations will apply to all advisers

MBIE has recommended new legislative conduct obligations that will require any person providing a financial adviser service to:

  • place the interests of the consumer first
  • only provide advice where competent to do so, and
  • ensure that consumers are aware of the limitations of that advice.

The obligation to put the interests of the consumer first will not require consideration of the full range of products on offer in the market.  Instead, it will require the adviser to consider the best product for the consumer from their suite and, if no product is genuinely suitable, to advise the consumer on that basis. 

Financial Advisers and Agents must put consumer interests ahead of their own despite the financial incentives that may be offered to them by providers. 

Code of Conduct will apply to all advisers

The Code of Conduct will apply to all advisers and will prescribe:

  • standards of conduct, client care and competence, knowledge and skill
  • requirements specific to particular parts of the industry or products or services, consistent with identified sub-specialisations (for example, different standards will apply to general insurance advice than apply to investment advice), and
  • continuing professional development requirements and prescribed methods, such as courses.

The Code of Conduct is likely to contain specific conduct requirements for providers of robo-advice platforms.

More meaningful disclosure

All providers of financial advice will be required to disclose information on matters such as their remuneration, the nature of the service they can provide, and the products and product providers they consider when advising.  Disclosure regarding conflicts of interest and conflicted remuneration (e.g. soft commissions) will also be required in a prescribed format.

Financial Advisers and Agents will be required to ensure that consumers are aware of the limitations of their advice, and that Agents are not individually accountable for their advice.

Adviser commissions will be retained

MBIE has not recommended banning adviser commissions because, in an environment where people are already reluctant to pay for financial advice, doing so would have increased costs and further limit access to financial advice.

MBIE recognises that commissions do create conflicts of interest.  The FMA’s investigation into insurance churn, which Chapman Tripp has discussed here, revealed that commissions and overseas holidays were the most influential factor in financial advisers recommending a switch in life insurance.

MBIE has targeted these ‘conflict of interest’ concerns via the new obligation to place the consumer’s interests first by requiring better advisor disclosure and by enhancing the FMA’s reporting and enforcement powers.  Reporting requirements could include details of complaints, dates of replacement and new business, and details of any commissions received, including soft commissions.  

FSPR misuse to be addressed

MBIE has taken on board industry and regulator concerns that offshore firms with no connection to New Zealand are misusing the register by establishing superficial operations here. 

MBIE has proposed that entities will be able to register on the FSPR only if they are or will be:

  • in the business of providing financial services, not just back-office administrative services, from a place of business in New Zealand, or
  • in the business of providing financial services to New Zealanders, or
  • otherwise required to be licensed under any other New Zealand legislation.

In our submission, we stated that it would be preferable if FSP registration was required only if the firm was carrying on business in New Zealand (not on the basis of whether they have a ‘place of business’ in New Zealand).  The advantage of a ‘carrying on business test’ is that it requires a degree of business enterprise to be undertaken in New Zealand, such that an FSP cannot simply have a place of business here with little else.  It would also align with (for example) the same test in the Companies Act 1993 and the FMCA.

MBIE has not reached a final view on this issue and will report to Cabinet in September 2016 on whether complementary measures (such as more stringent registration criteria) could be introduced to curb misuse of the Register. 

Next steps

The Minister intends report back to Cabinet by September 2016 with a timeline for the legislative process, including the release of any possible exposure draft Bill.

The Minister will also report to Cabinet in September 2016 on the following issues that the Government has yet to decide on:

  • transitional arrangements, particularly those that might reduce the impact on existing advisers (e.g. meeting competency standards)
  • the membership and proceedings of the Code Committee, and the scope and powers of the Financial Advisers Disciplinary Committee, and
  • the FMA’s enforcement powers, monitoring and oversight.

MBIE has tentatively proposed immediate introduction of the consumer first obligation, with a longer transition period to comply with the new competency standards.  It expects to consult later on the transition arrangements.

Further work will also be done on considering options for improving dispute resolution scheme rules before the end of the year.

Chapman Tripp comment

The proposed new FAA regime contains a welcome range of improvements on the existing model and we think MBIE has done a commendable job of balancing a range of competing interests.

We offer below some preliminary thoughts on issues which could be addressed in the reforms.

Territorial Scope: The territorial scope of the new FAA regime remains unclear and should be addressed in consultation.  We recommend the FMA be empowered to create an “approved list” of offshore jurisdictions and grant exemptions so that qualifying providers are not additionally burdened with the licensing and conduct requirements of New Zealand law.  It may remain appropriate to retain a base level of conduct obligations, as with the current exemptions. 

Entity level licensing: Experience with FMCA licensing shows that this is an expensive process for entities of any size.  We would recommend requiring those with existing QFE licences to make only minor changes to their existing frameworks to reflect the new regime, or they could be simply grandfathered in.  A “regulatory sandbox” exemption could be considered for new entrants, as has been done internationally, to allow smaller firms to commence business for a short period without complying with the full licensing regime. 

Agents vs Salespeople: Consumers may not appreciate that Agents are subject to a lower level of professional accountability under the proposed FAA model.  Moreover, the title ‘Agent’ could be potentially misleading, particularly if the agent is only able to offer advice on the products of their Financial Advice Firm.  We prefer the designation ‘Salesperson’ as this better reflects their role.  The exception is the insurance industry where the term “agent” is well-understood.

Robo-advice platforms: These platforms depend on effective governance to ensure the data they receive and the algorithms they use produce appropriate financial advice.  For this reason, as we noted in our submission, close attention needs to be paid to robo-advice platforms at the system design phase, as well as in the ongoing monitoring, testing and review of these platforms as technology evolves.  This should be reflected in the licensing requirements that apply to Financial Advice Firms providing robo-advice platforms. 

Registers of all commissions and complaints: Some have suggested that there be a public register of all commissions and complaints.  We do not think this level of disclosure is warranted or likely to lead to better outcomes.  One dispute resolution service has said that the confidential nature of the dispute resolution process helps them to negotiate favourable settlements for the consumer.

Discretionary Investment Management Services: This is a category of financial adviser service that is partly regulated under the FAA and extensively regulated under the FMCA.  We support shifting the regulation of DIMS wholly to the FMCA.

Investment planning services: The boundary between investment planning services and financial advice is unclear and unnecessary.  We would endorse consolidating the two services, with any distinction left to competencies in the Code of Conduct.

Please let us know if you would like advice on how the proposals will affect your business, or if you would like to make a submission on the regime in due course.

Our thanks to Brendon Orr and Penny Sheerin for writing this Brief Counsel.  For further information, please contact the lawyers featured.

Quick Links

​New Zealand Government                                                                                     ​Date
Cabinet Paper on the proposed FAA and FPSA reforms ​12 Jul 2016
 
​Ministry of Business, Innovation and Employment (MBIE)                             ​Date
​MBIE Final Report on the review and operation of the FAA and FSPA ​12 Jul 2016
​MBIE Fact Sheet on the FAA and FSPA reforms ​12 Jul 2016
​MBIE Regulatory Impact Statement on the FAA reforms ​12 Jul 2016
​MBIE Regulatory Impact Statement on the FSPA reforms ​12 Jul 2016
 
​Chapman Tripp ​Date
Submission on the Review of the Financial Advisers Act 2008 Reform Options ​26 Feb 2016
Submission on Financial Service Providers (Registration) reform options ​2 Feb 2016
Submission on the Review of the Financial Advisers Act 2008 and FSPA 2008 ​13 Oct 2015
Brief Counsel on the FMA’s noted issue of churn in the life insurance industry ​1 July 2016
​Brief Counsel on the Reserve Bank’s view of digital disruption in banking ​27 Jun 2016
​Brief Counsel on the FMA’s full FSP register removal powers affirmed ​19 May 2016
​Brief Counsel on the scope of the review of the FAA Regime ​4 Mar 2015