Feedback sought on new broking services regime

A new regulatory framework for “broking services” under the Financial Advisers Act (FAA) has been proposed through a Supplementary Order Paper (SOP). 

This will restore an ability for organisations to perform registry (and probably custody) services.  But many investment managers and advisors will still be required to be individual persons – creating a potential compliance issue for unit trust managers, self-managed KiwiSaver schemes, organisations providing investment advice to product providers and/or investment management services for wholesale clients, and for foreign advisers. 

Submissions are due on 15 April 2010.

Principal design features

The new broker regime will apply to the receipt, holding or payment of client money or property in relation to acquiring or disposing of financial products on behalf of a client – functions previously prohibited for organisations under the FAA.  Broker disclosure and conduct requirements will be broadly the same as those for financial advisers under the current regime, except with additional money-handling obligations similar to those currently imposed on Authorised Financial Advisers.  However, these will fall primarily on the organisation that is the broker, not individual employees, and employees will not need to be separately registered as brokers.

Investment management decisions will be expressly included in the advisers’ regime.  This means advisers who decide which financial products to acquire or dispose of on behalf of a client (i.e. have a discretionary mandate) must be individuals. 

There is an exception for investment managers appointed by the product provider.  However, the relief does not currently extend to the product provider itself (i.e. unit trust managers and self managed KiwiSaver schemes), nor to organisations locally and internationally that provide investment advice to product providers or investment management services to wholesale product providers. This is problematic for them because in almost all cases it simply is not practical to replace these organisations with individuals.  It is also inconsistent with the Unit Trusts Act which prohibits unit trust managers being individuals, instead requiring they be companies.

The SOP proposes that the Securities Commission have the power to exempt brokers from both the disclosure and conduct obligations, but it still does not grant the Commission the power to exempt financial advisers from their conduct requirements (only disclosure).

Chapman Tripp comment

Allowing organisations to perform broking services is a step in the right direction.  Ideally, it should be accompanied by an amendment that allows organisations to perform discretionary management services and give advice, provided the individual responsible within the organisation complies with the Act.  Liability could be allocated in such cases to the organisation, but in default to the individual. 

Key problems still to be addressed

Other changes that we believe should be made to the FAA through further amendments to the Bill include:

  • relieving persons who advise solely wholesale clients

  • narrowing the definition of financial planning service so that it applies only to the advisers who analyse an individual’s future income and expenditure and develop a plan or alternate plans designed to seek to deliver the client’s retirement or other significant long term goals

  • enabling QFE employees and nominated representatives to advise on category 1 products issued or promoted by any member of the QFE’s group of companies, not just those issued or promoted by the QFE itself, and

  • exempting qualified overseas advisers and offshore financial service providers from the regime’s more prescriptive requirements (including registration and authorisation), or granting exemptions where these requirements are addressed through their local laws (e.g. dispute resolution schemes).

For further information, or for help with your submissions on either the Financial Service Providers (Pre-Implementation Adjustments) Bill 2009 or the SOP, please contact the lawyers featured.

Our thanks to Pippa Tasker, Solicitor, for writing this edition of Brief Counsel.

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Related topics: Financial services regulation; Finance

Financial services regulation; Finance

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