Feature

 The Financial Advisers Act 2008 has been reviewed and is set to change. 

While the details of the changes are still to go through a parliamentary select committee process, preliminary work has begun on a draft new code for financial advice services. 

The aim is to ensure the quality and availability of advice across the entire financial sector. To me, that’s all about focusing on good advice outcomes for retail clients. It means shaping advice standards so that people can realistically get the financial advice — simple or complex — that they need.

The existing code applies to 1,800 Authorised Financial Advisers (AFAs). The new code is far wider. 

It will cover advice on almost all financial products — including advice on insurance contracts, renewals and variations. It reaches all advice situations: full advice, partial advice, a recommendation or opinion from a customer service representative to buy or sell a financial product, and even advice given in a brochure or on a website.

So what are the key differences? 

First, there will be no “class advice” or “category 2 products”. There will just be regulated financial advice: everyone giving advice to retail clients - including those currently known as AFAs, registered financial advisers (RFAs) or qualifying financial entities (QFEs)  - will need to comply with the new code.

Second, the AFA, RFA and QFE labels will go. 

Third, licensing for all retail client advice will be at the firm level. Those licensed businesses will be able to give advice directly (for example on their website) or through people they engage as: 

  • financial advisers, who are to be registered individually on the FSPR (in addition to the licensing and registration of the financial advice provider business that engages them) and are personally subject to disciplinary action by the Disciplinary Committee, or 
     
  • nominated representatives, who are not required to be registered individually and are not subject to disciplinary action, because the business itself is expected to have processes, controls, and limitations in place (in effect to exercise a high level of control over the advice outcomes).

Wide-reaching code

The code will apply to all regulated financial advice given to retail clients, regardless of the extent to which an individual adviser is involved. It must provide for minimum standards of professional conduct including minimum standards of:

  • general competence, knowledge, and skills that apply to all persons that give financial advice,
     
  • particular competence, knowledge, and skills that apply in respect of different types of financial advice, financial advice products, or other circumstances,
     
  • ethical behaviour, and
     
  • conduct and client care.

The code must also provide for continuing professional training for persons that give financial advice, including specification of minimum requirements that a person must meet for the purpose of continuing professional training.

These components are similar to the current code, but are now to be re-engineered to apply to the whole advice service, not only to the occupation of AFA. This means that organisational capabilities, processes and corporate behaviour become as relevant as the individual’s personal competence, knowledge, and skills in ensuring the availability of quality financial advice.

Early progress of Code Working Group

The Code Working Group (CWG), appointed by the Minister of Commerce and Consumer Affairs, started work in August 2017 to produce a draft code for approval by the Minister. 

The CWG is required to consult extensively, including with anyone we reasonably consider to be representative of the financial advice industry or of consumers of financial advice. We view consultation as a critical component of the code design process, and will be seeking input from the widest possible range of affected and interested parties.

In October 2017, we commenced initial consultation through targeted focus groups representing a broad range of impacted stakeholders, to help prepare for subsequent wider consultation.

The CWG’s background document for those focus groups is available at www.mbie.govt.nz/faareview (under “Code Working Group”). It notes that we are deliberately centring the design, structure and requirements of the code around the recipients of advice (the retail clients):

When considering retail clients, we have in mind a very broad range of people seeking advice outcomes. It covers the full diversity of advice complexity from (for example) simple general insurance product advice to sophisticated,
multi-faceted planning.
The focus groups are being asked for feedback on three areas:

Principled code

First, on general principles that underpin the development of the code. These draft principles are:

  • Retail client understanding: the code wil be drafted on the  assumption that retail clients have basic knowledge but not the financial advice provider’s expert understanding,
     
  • Recognisable minimum standards: givers and receivers of advice must be able to easily identify and understand exactly what minimum standards apply,
     
  • Delineation between standards: minimise the number of different minimum standards by drafting them using a flexible, principles-based approach, and clearly define and delineate when a different  standard applies, and
     
  • Delivery agnostic: minimum standards should as far as possible be the same irrespective of the method of delivery of the advice, so that they work across the entire advice ecosystem of advisers, systems and processes.

Approach to minimum standards

Second, the CWG focus groups are considering what different types of financial advice, financial advice products or other circumstances may warrant different treatment when setting standards of particular competence, knowledge and skills. For example, different competence standards may be justified based on scope of advice, whether the advice is for a product or involves designing an investment plan, complexity, or risk to the client.

In respect of advice that involves designing an investment plan, the CWG is specifically asking for views on the extent to which the current code is a useful benchmark. Feedback on this point will help the CWG develop its thinking around competence and other standards.

Finally, the CWG is requesting focus groups to comment on other minimum standards, in particular whether there should be different standards of:

  • ethical behaviour, or
     
  • conduct and client care

in respect of different financial advice situations.

The input from the focus groups will be used by the CWG to develop its wider stakeholder consultation.

To register to receive updates on the development of the code and to be involved
in future consultations, go to: www.mbie.govt.nz/faareview



December 2017

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