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Brief Counsel

Submissions due on authorised financial adviser ethical behaviour and client care

16 December 2009

Submissions on the second consultation paper issued by the Code Committee for Financial Advisers (Committee) are due by 5pm on Friday 18 December 2009.  The consultation paper outlines the proposed minimum standards of ethical behaviour and client care for Authorised Financial Advisers (AFAs).

The paper raises three key ethical behaviour and seven client care principles, under which 35 standards are proposed.  The ethical behaviour principles are:

  • placing the interests of clients first and acting with integrity

  • independence, objectivity of advice and management of conflicts of interest, and

  • good conduct.

The paper seeks feedback on the contentious issue of commission payments under the requirement that AFAs must be independent and objective unless any limitations have been communicated to the client and safeguards are in place. 

One proposal is that, where an AFA receives a trail commission or monitoring fee, they must provide ongoing proactive advice.  The paper also notes that some overseas regulatory bodies have considered stopping financial advisers from accepting commission payments, and asks whether this approach would be appropriate in New Zealand.  However, the Committee has indicated in recent presentations that it is unlikely to be banning commissions. 

The proposed safeguards include recommending the client get independent advice where an AFA is not independent.

The client care section seeks to provide practical processes and standards for interacting with clients, based on the following seven categories:

  • professionalism

  • suitability (which requires an AFA to take reasonable steps to ensure the services provided are suited to the client’s needs, financial position and risk profile)

  • compatibility and capacity

  • effective communication (which requires an AFA to provide advice to a client in writing and in a form that is easy to understand)

  • effective dispute resolution

  • compliance with legislative obligations and the Code, and

  • custody (which requires an AFA to take reasonable steps to protect client information and property).

If the financial services offered by the AFA are not suitable or there is insufficient information provided by the customer to decide, the proposed standards would require that service must be denied or restricted.  This removes the ability of a customer who is aware of any limitations to elect to proceed.

While commending the approach taken by the Committee in many respects, Chapman Tripp partner, Tim Williams suggests consideration is given to the following five points:

  • the “suitability” requirement would impose an obligation to inquire and assess the client’s needs, even when it is unnecessary and irksome to do so.  AFAs are likely to receive many specific questions which do not require knowledge of the client’s circumstances to be answered properly, such as would it be a good time to purchase company x’s shares, are company x’s shares fairly priced, is a takeover offer fair or what do you think of this IPO

  • the “client first” obligations are potentially infinite if they are not constrained by reasonable expectations arising from the nature of the engagement, and by a limitation of a reasonable effort for the agreed cost.  They also don’t adequately deal with situations where a fair middle ground needs to be reached between clients with different interests (such as allocating IPO allocations between clients)

  • the “suitability” obligations fail to cater appropriately for advisers who advise on specific topics as part of an overall presentation, and do not account for the lesser protection needed for institutional clients

  • certain standards are too prescriptive for some circumstances, for example requiring in all cases general advice and other communications to be in writing, and lack suitable materiality thresholds.  While a worthy objective, is it really suitable to discipline advisers for a lack of courtesy? and

  • certain standards will effectively prohibit customers seeking advice from overseas financial advisers.

A copy of the consultation paper, which includes details on how submissions can be made and particular questions for submission, is available here.

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