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FMA: No hard lines on KiwiSaver incentives

KiwiSaver providers can offer incentives to entice customers to their schemes, so long as they do not distract the customer from making good decisions about KiwiSaver.

Wednesday, March 8th 2017, 6:00AM 9 Comments

by Susan Edmunds

That’s the ruling in the Financial Markets Authority’s latest guidance note.

It replaces a 2012 document that had the unintended consequence of reducing the amount of advice being given on the retirement savings scheme.

The FMA’s previous focus on personalised advice only being offered by those eligible by law to give it scared some providers off advice completely.

Liam Mason, the FMA's director of regulation, said, “We have revised and updated our guidance to clarify how the different categories of advice can be applied to ensure customers are getting the help they need. We recognise advisers and providers should be confident they are acting within the rules.”

The FMA is also issuing a consumer guide, telling people to think about whether they were being pressured and what their options were before they moved to a new scheme.

Mason said the FMA would look at the incentives offered by providers, although it would not draw hard lines. Of interest would be the size of the incentive and how they were sold.

The FMA said that incentives could achieve good outcomes when they encouraged them to get the best out of KiwiSaver.

“We may be concerned where there is a combination of a high-value incentive and an effort to influence a customer to make a significant decision,” the FMA said.

“Our concern would centre on whether the value of the incentive was such that the customer was focused on that.”

It was something that submitters were concerned about.

Glynns Financial Services wrote in its submission: “I have had one mortgage client told that she has to implement new life insurance, income protection and transfer her KiwiSaver in order to get a discounted interest rate and cashback.”

Mason said the main goal of the guidance was to help New Zealanders get the information they needed to make good decisions about KiwiSaver.

The guide makes clear the limits of what can be provided within class advice boundaries.

It says that customers can be told to be in KiwiSaver, to choose a contribution rate that is enough to get the member tax credit, to choose the right type of fund and the correct tax rate.

“A rule of thumb is that you have moved from class to personalised advice when you cannot answer a customer’s question without knowing about their personal financial situation or goals.”

In their submissions, ANZ and BNZ both asked for the guidance to be held back until after the financial advice legislation is updated.

The bill currently out for consultation would remove the class and personalised advice designations completely.

Both said, if the guidance note was issued before those changes were enacted, there could be confusion or “change fatigue” for front-line staff.

The FMA acknowledged that the law changes would effect the guidance, which would have to be reviewed. “In the meantime, this guidance recognises there is an opportunity to remove an identified barrier to New Zealanders getting the help they need to make good decisions about KiwiSaver.”

Mason said the new bill would put more responsibility on the individual adviser to make sure the type of advice they were offering was right for the customer.  It would be a more nuanced approach than the class versus advice delineation.

Tags: FMA KiwiSaver

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Comments from our readers

On 8 March 2017 at 9:06 am Brent Sheather said:
How embarrassing to be an FMA employee and have to say things that are patently ridiculous to anyone with half a brain. To wit: determining an individual’s asset allocation i.e. what type of fund to buy and providing a calculator that would help the customer choose their contribution rate “is not advice”. So if mum and dad waltz in to Westpac with a mortgage and $50,000 on their credit card and are told that “KiwiSaver is a good financial decision”, that’s not a problem because it is “not advice”. That makes sense, not. How can the biggest financial decision in many people’s lives not require advice?

Page nine of the KiwiSaver document gives some examples of class advice including “recommending a particular fund for people based on risk appetite”. In contrast when I determine asset allocation for an individual based on risk appetite this is “advice”. Inconsistent law. Mr Mason was quoted as saying “we have revised and updated out guidance to ensure customers are getting the help they need”. He might have added….”under pressure from vertically integrated organisations”.

One expert in this field emailed me last week and said wouldn’t it be poetic justice if thousands of NZ’ers received “no advice”, bought into growth KiwiSaver funds when they had mortgages and credit card debt and were buying a house in five years time then the markets crashed. A class action suing the FMA and the CFFC would be hilarious.

We can add to these nonsensical determinations, obviously constrained by the reality of government sanctioned light handed regulation of vertically integrated organisations, to the growing FMA library of embarrassing comments which include “If you can only sell high cost products, good for no one, that is putting your clients interest first” and “not disclosing transaction costs to investors is best practice”.

Oh dear, again. Even I'm embarrassed, again. The FMA are doing some good things but clearly they need help. The issue is important because dumb regulation impacts advisors (I fortunately have nothing to do with KiwiSaver), impacts investor outcomes and at best makes us look silly overseas. At worst it makes us look corrupt.
On 8 March 2017 at 10:00 am Barry Read said:
Brent I think you miss the point. Financial Advice is an opinion or recommendation to buy, hold or sell a financial product. An Investment Planning Service is taking into account a persons circumstances and needs to design a plan to meet financial goals and then offering Financial Advice on products or services to achieve the plan. You seem to be arguing that all financial advice should be a planning service? Advice all depends on the circumstances it is given and the question it is trying to answer for the consumer. If a client walks into a bank and says should I be in KiwiSaver then their circumstances such as debt etc come into play then a planning service should be offered by a suitably qualified adviser. But if they walk in and say I am in KiwiSaver and I just want to know which fund I should choose, then the bank staff should be able to provide assistance in answering the question in relation to that product and fund choice. If they starting questioning the client on if they should be in KiwiSaver at all and what about their mortgage etc, the client might just say stuff this I just wanted advice on fund choice I'll go elsewhere. Product providers should be able to help clients with product decisions without requiring full planning service (Though they should explain the difference, which the new act should better differentiate) being completed. We shouldn't assume all consumers want or need full personlised advice or planning services.
On 8 March 2017 at 10:21 am Licensed Adviser said:
I think everyone in missing the point. Go to the commerce commission website. Under "What is illegal"
"A person or business taking advantage of their dominant position in a market for an anti-competitive purpose".
The Banking industry is dominated by 4 big banks who are leveraging their market power to dominate another sector - KiwiSaver.
On 8 March 2017 at 10:21 am Steven Popodopolus said:
Does anyone actually understand that guidance note?

No wonder there are almost no "independent" advisers left.

And Barry, "which Fund" has to take personal circumstances into consideration, ie time till they need to draw down, personal tolerance to risk?
On 8 March 2017 at 11:08 am Pragmatic said:
Kiwisaver is an absolute 'sleeper' and something where today's consequences will be felt well after many have left the industry.

Getting the right advice around retirement savings is - in a way - more important than dealing with 'today's issues', and something that the Regulator should be taking an active stance on... although: before you take a position on something, I guess you've got to have a vision that extends beyond the next 3 years... just saying.
On 8 March 2017 at 11:23 am w k said:
@barry. are you saying that there should be two advisers then? one with the product knowledge and another to provide investment planning rather than just having an adviser who do both. is that cost effective from the business standpoint?

if you want to build a house, would you rather speak to someone who has the experience of building a house hands-on or someone with the technical knowledge but doesn't know how to build a house?

just saying.
On 8 March 2017 at 12:46 pm Barry Read said:
W.K The adviser who can provide the investment planning service can also include the product advice or recommendation. The first adviser is product advice or information only to allow the client to make the product decisions based on their own opinion or needs, but with advice on the features of the fund and suitability to classes of people.

Steven the adviser can offer the client a process for deciding on the fund using those questions without it being a planning service, such as is described in the guidance. If they start asking will this be enough for my retirement then the scope of the advice could change and become personlised or a planning service is required. This highlights the issue of Class Advice Only services being conflicted because the adviser may want to get a sale and steer the client away from personlised or planning services.

The Guidance on Class Advice on transferring providers runs really really close to personlised advice. In that circumstance if the client asks the adviser what should I do (Stay with current provider or move to the one you distribute) the adviser can't answer that question without stepping over the line. I think the guidance has gone a step to far in this case.

Also Class Advice advisers (RFA and QFE) don't have to disclose remuneration or how they selected the provider they are offering. Yet there is no guidance on this matter. Why is an adviser offering Class Advice on this provider?
On 8 March 2017 at 1:38 pm Steven Popodopolus said:
...I guess that is my point Barry, it makes no sense at all to provide advice and be encumbered with the compliance overhead and risks when you can give Class advice only/information only non-personalised advice for Kiwisaver and achieve the same outcome? If you can simply provide questions for the client that meets the criteria for fund selection, then why not how much do you need in retirement?

What is the problem that is trying to be solved should be the first starting point of any legislation.
On 10 March 2017 at 5:14 pm RiskAdviser said:
I think many are missing the point, there are many people in KiwiSaver through default means, these people don't value KiwiSaver so don't seek advice.

Until they are asked, are you in KiwiSaver? or Do you want to be part of KiwiSaver?, even the basics are not understood.

Get the basics right, a reasonable fund selection risk/growth, the right tax rate and make them aware of maximising their 'free money' if they're below $20 per week and ensure that there is a reasonable timeframe on house buying, if it's and option, with an appropriate defensive approach

Personal opinions aside on providers and funds, the regulator has determined KiwiSaver providers are fit for purpose. Once these people see their balances growing, they will take the job of seeking and taking advice more seriously. When it's starting or it's a pittance they won't.

Those with larger balances, because they have been in a while, should be seeking advice from an appropriately qualified investment adviser. Maybe a threshold should be introduced for seeking that advice, >50 or >100k we know they need far more than that to retire on, it's still early days for many.

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