Analysis doesn’t require analysts, says FMA

Advisers don't need to use third-party analysis of listed companies to be able to recommend them to clients, the Financial Markets Authority says.

Wednesday, December 21st 2011, 11:02PM

by Niko Kloeten

The FMA has released a guidance note in response to confusion amongst advisers over Code Standard 6 (d) of the Code of Professional Conduct for Authorised Financial Advisers, highlighted recently by the initial public offering for Energy Mad.

This part of the code requires advisers "make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation, or analysed by another person upon whose analysis it is reasonable, in all the circumstances, for the AFA to rely."

Advisers were concerned they might be in breach of this section if they recommended Energy Mad to clients, as due to its small size it had no analyst coverage.

However, the FMA said third-party analysis isn't a prerequisite.

"We do not expect an AFA in every case to obtain detailed written ‘analysis' or ‘research' of the type performed by securities, investment or financial analysts (written research) before making a recommendation about a financial product.

"Nor do we expect AFAs to review all material that is publicly available. In each case professional judgement should be applied as to what information is material and relevant to inform the client's decision making process."

For initial public offerings the FMA expects advisers to consider the financial product's registered prospectus and investment statement.

For listed securities it expects advisers to use material information released by the issuer (such as information released as part of an issuers' continuous disclosure obligations), or information available on NZX or another exchange on which the product is listed.

The FMA said it expects AFAs to "exercise reason and professional judgement" in deciding on whose analysis they can rely.

"For example, it will be reasonable for an AFA working within a dealer group to rely on analysis and/or portfolio asset allocation or direction provided by the dealer group's investment strategist or investment selection committee; or for a sharebroker working in a firm that does not provide an internal research capability to rely on analysis provided by a reputable independent research house.

"Subject to the considerations in the paragraphs above, an AFA may also refer to information provided, or funded, by the issuer of the financial product, provided the client is made aware of the source of the information.

"None of the above derogates from an AFA's personal obligation to understand the financial product and apply his or her own professional judgement as to the suitability of any recommendation."

Niko Kloeten can be contacted at

« Advisers at risk from tax avoidance trapKiwiSaver mismatch a 'huge challenge' for advisers »

Special Offers

Commenting is closed

© Copyright 1997-2020 Tarawera Publishing Ltd. All Rights Reserved