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Brief Counsel

Submissions sought on proposed disclosure regime for financial advisers

09 July 2009

Submissions are called for by 12 August on the disclosure regulations to be implemented under the Financial Advisers Act 2008 (Act).  

Details of the proposed regime were released last week by the Ministry of Economic Development (MED) in a discussion document, which is available here. This Brief Counsel comments on the proposed disclosure regime, currently scheduled to come into force in December 2010, and identifies one area in particular where more detail may be desirable – namely, disclosure by Qualifying Financial Entities (QFEs).

General approach

MED indicates a preference for short, targeted disclosure and suggests that no content beyond that prescribed be allowed in a disclosure statement. Submissions may observe that this precludes other helpful material or information included out of caution.

The discussion document suggests that the level of disclosure required of “authorised” advisers should recognise that consumers already have the assurance of a minimum level of qualification and integrity through the authorisation process.

Timing of disclosure

The Act already allows disclosure to be provided after advice is given where it is not practicable to provide it before – telephone advice being an example.  MED considers that this (coupled with the Securities Commission’s exemption powers) provides sufficient flexibility to deal with this scenario, but wants industry feedback, including on areas where problems could still occur despite the ability to provide “post facto” disclosure.  Feedback would be desirable for persons who make presentations to large audiences or give opinion recommendations or guidance through the media (and are not journalists) on this point.

The regime

All financial advisers performing a financial adviser service will have to disclose certain standardised, general information, as well as category-specific information depending on whether they are:

  • “authorised” advisers
  • “registered” advisers (who are not authorised), or
  • employees and agents of QFEs.1

General disclosure requirements

MED proposes that all disclosure documents contain a “guiding statement” outlining the purpose of disclosure (in a prescribed form), as well as the adviser’s contact details, status, complaint and dispute resolution arrangements and contact details of the Securities Commission.

MED is seeking comment on whether the additional disclosure requirements – which vary depending on the category of adviser – should be under headings, and if so whether they should be in the form of answers to questions (similar to the approach for investment statements).

Disclosure by authorised advisers

Given MED’s view that the authorisation process provides assurance to consumers as to the standard and regulatory treatment of authorised advisers, it does not propose requiring disclosure on all matters listed under the Act.  Nor will disclosure statements need to explain what it means for an adviser to be “authorised”.  However authorised advisers will be required to disclose:

  • that they are authorised and the class of their authorisation (if applicable)
  • what services they can provide (and any limits)
  • how they are paid for their services, including fees and other remuneration for both the individual and their organisation
  • other material interests, relationships, or associations that could reasonably be considered to influence the advice, and
  • adverse disciplinary action taken against them by the Code Committee.

Status and competence

MED is seeking submissions on the extent to which a “status” disclosure – essentially a statement as to authorisation as well as the range of (and any limits on) services the adviser can provide – is appropriate, and whether it should be in a mandated form.  The rationale is that disclosure will help consumers differentiate between advisers, and provide comfort that the adviser is qualified to advise on the product(s) concerned. 

Remuneration

MED views details of the remuneration and other incentives an adviser may receive as “the most important part of the disclosure statement for the client” – a tacit acknowledgement of some opaque practices of the past and one of the main drivers behind the regulation.  The emphasis here is on full disclosure, to allow informed decision-making by consumers.  The Act does not prevent advisers from having certain relationships, interests or associations, but those influences must be clearly disclosed.

MED has tabled three disclosure options (and has sought views on whether there are other options):

  • disclosure of the maximum commission and/or fee the adviser (and their associated organisation) could receive, as a single figure
  • disclosure of the possible ways (on a product-by-product basis) in which the adviser could be remunerated, but not the amount, or
  • an indication of the services an adviser can provide from a prescribed list and the maximum fee or commission associated with each product or service offered, as well as disclosure of other possible fees and remuneration which are not product-specific.

MED is also seeking submissions on whether the use of prescribed wording would enhance consumer understanding about different remuneration structures and the influence these can have on the advice given.  A related question is whether disclosure statements should include a mandated statement declaring whether the adviser is “independent” or “unaligned” (based on prescribed criteria). 

Other influences

MED is seeking submissions on whether disclosure should be required of other, non-financial influences, that is, material interests, relationships or associations (and again, on whether prescribed wording should be required). Brokers may consider submitting that any requirements acknowledge the effect of Chinese Walls and the duties of confidentiality that arise from some mandates.

Disciplinary proceedings

Authorised advisers would have to disclose any disciplinary action taken against them during the past five years for a breach of the Code of Professional Conduct (currently being developed by officials).  Disclosure of criminal convictions or adverse findings by a court or the Securities Commission would be required only if the Commission requires it as a condition of authorisation – again demonstrating MED’s belief that consumers should take comfort from the authorisation process. 

Tailored disclosure through exemptions

Through its general power to grant exemptions in relation to disclosure obligations under the Act, the Securities Commission can require different disclosure for different classes of authorised advisers, financial adviser services or clients.  MED is seeking submissions on what alternative compliance procedures may be appropriate candidates for exemption.

Disclosure by registered advisers

The disclosure requirements for registered advisers who are not part of a QFE will be lighter than for their authorised counterparts.  MED is, however, considering whether they should be able to elect to provide the same level of disclosure as authorised advisers.

Arguments for this are that it would encourage transparency in relation to potential conflicts of interest (one of MED’s key priorities) and may be seen by consumers as a step toward increased professionalism in the sector.  Arguments against are that this may create of confusion over the standard of adviser and a potential disincentive for registered advisers to seek authorisation.  

Disclosure by QFEs

MED gives little detail on the disclosure expected of QFEs, instead pointing to the primary mechanism for regulating QFE disclosure being through terms and conditions imposed by the Securities Commission upon the granting of QFE status.  However, QFEs will also be required to disclose their dispute resolution arrangements and whether they provide any other licensed services. 

The Securities Commission is currently undertaking its own consultation on QFE regulation (including disclosure) through a recently released staff paper.2  To facilitate comparability, the Commission has said that it would expect the disclosure requirements to be consistent with those applying to individual advisers – but gives no guidance on the detail. 

Wholesale advisers will be pleased to know that advice to wholesale customers is one of two areas the Securities Commission has identified as a possible candidate for exemption (the other being advice given to frontline advisers by research staff) – on the grounds that compliance costs would be unreasonable or would outweigh the benefit of disclosure.

The Securities Commission’s consultation notwithstanding, the lack of detail here may make it difficult for the industry to provide meaningful input.

Next steps

If you wish to make a submission or would like further information, please contact:

Tim Williams, Bradley Kidd, Frank McLaughlin, Penny Sheerin or Emma Harding.

Footnotes

  1. In the case of employees and agents of a QFE performing a financial adviser service in the course of the QFE’s business, the disclosure obligation falls on the QFE itself, not the employee or agent.
  2. See http://www.seccom.govt.nz/downloads/seccom-staff-paper-regulating-financial-advisers.pdf

Contacts