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Disclosure disclosed

Thursday, April 14th 2011, 7:09AM 4 Comments

by FMA

Recently, we’ve been fielding a range of questions on disclosure so I’d like to address some of them here for you. By way of background, the financial advisers regime establishes new rules around disclosure and client information – the Financial Advisers Act (the Act), the Disclosure Regulations and the Code of Professional Conduct. They all fit together, broadly as follows: - the Act sets out the disclosure obligations, for all financial advisers and QFEs for personalised services to retail clients. It includes the requirement that disclosure should not be misleading, deceptive or confusing and the consequences of non-compliance. - the Regulations set out the detail of the largely prescribed disclosure statements for AFAs, RFAs and QFEs.  RFA disclosure is more basic, reflecting the lower risk of Category 2 products.  When the Commission developed the QFE disclosure requirements, our starting point was AFA disclosure - aiming for equivalence. For example both have the primary and secondary disclosure structure. Then we had to take into account differences such as varying advice models and that the QFE provides the disclosure on behalf of their advisers, compared to the individual nature of AFAs' and RFAs' statements. - the Code is about conduct. The relevant Code Standards go further than the box-ticking approach of the regulated disclosure templates. Rather they ask the adviser to really think about what the client needs to know in order to make an informed decision. Although compliance with the Code is compulsory for AFAs, the 'if not, why not' section of the Act requires Category 1 QFE advisers to provide similar customer protection so the Code should be the textbook for those advisers too - a responsibility of their QFE to ensure. I encourage all advisers to aspire to the conduct sections of the Code. In fact, I know many already do because as professionals they ask not "what do I have to do to comply" but rather "what else can I do for the benefit of my clients?" On timing, until the disclosure requirements of the Securities Market Act are repealed on 1 July, they remain in force and advisers who currently have disclosure obligations under that Act must maintain compliance with them. Then the Financial Adviser Act disclosure regulations kick in (1 October for Christchurch advisers taking advantage of the extension). If you become an AFA before 1 July then, as soon as you receive your licence, you also have to comply with all of the code standards, including those relating to the provision of information to clients. Many ask why there are two disclosures for AFAs, primary and secondary, and why can't they be given out at the same time? It's because when a client seeks financial advice, their first decision is which adviser to choose. RFA? QFE adviser? AFA? Then which RFA? Which AFA? etc. So the primary disclosure is designed to help them make that first decision, for example by setting out which financial adviser services an adviser is authorised to provide. Once they have chosen their adviser, then the real work needs to be done to arrive at the right advice and product outcome for the client. Only then is an adviser in a position to give the required detail, including specific costs, of the recommended service to the client. That's when the secondary disclosure statement comes into play. The period of time between the primary and secondary disclosures will be dependent on a number of factors such as extent of product research required, selection of product for the client etc. We also get asked by AFAs why they can't add additional information to their primary disclosure statement? The primary disclosure statement in particular is meant to be succinct, relevant and comparable. Allowing other material to be added risks compromising this objective when there are other ways (eg business cards, brochures, websites, conversations) for advisers to get across their credentials and marketing messages, including qualifications which advisers ask us about most. We're trying to get the investing public familiar with the minimum entry standards required of AFAs. We all know it's hard to get people to read fine print, let alone understand it. Therefore we all have an obligation to find ways of making it as easy for them as possible. Shortly we'll have some guidance up on our website covering disclosure. This will cover some of the themes above plus a few more. It is essential for all advisers, if they haven’t already, to familiarise themselves with the disclosure regulations and to do this well in advance of 1 July to ensure adequate time to get ready for the new requirements.  Here’s the direct link to the regulations or search under regulations on www.legislation.govt.nz. In a principles-based regime such as this, as well as the information required to be disclosed under the regulations, professionals will make judgment calls in the context of their clients' needs and arm their clients with sufficient information to help them make informed investment choices.
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Comments from our readers

On 17 April 2011 at 8:40 am Simon said:
This is all pious platitudes. You cannot regulate for ethics to be introduced into what is basically an ethics-free zone.
On 19 April 2011 at 12:37 pm Adam Smith said:
I hope Mel will be prepared to answer hypotheticals.

An AFA is a member of a share Club. Each member takes it in turn to make the monthly share purchase recommendation. The AFA's turn is coming up.

As well the members at each meeting discuss whether to continue holding its current portfolio or make any changes, and also discuss a large number of other possible purchases. The AFA historically has expressed opinions and made recommendations about particular shares.

The members of the Club are all ordinary kiwis. There are no habitual investors etc.

The question is - does the AFA have to make any disclosures to the other members of the Group? If so do what record keeping obligations of the Code apply?

Mel's answer might well trigger some supplementary questions.

Thanks in advance
Adam
On 20 April 2011 at 9:49 am Mark said:
Adam

I don't work for the Securities Commission, but advise in this area.

The advice you refer to will not be provided to a "client", assuming the shares are puchased collectively for the purpose of the same business, see section 5A of the FAA.

As a result, the FAA does not apply and disclosure is not required.
On 20 April 2011 at 1:46 pm Adam Smith said:
Thanks Mark.

At first blush, that makes the situation clear - but only with respect to the share club's own purchases/sales.

But what happens if another individual in the group takes notice of the AFA's opinion or recommendation and purchases/sells on the individual's personal account? The section 5A exemption does not apply.

This new fact situation is analogous to an AFA finding herself at a BBQ - where after discussing partners, babies, the weather and thenetball, general discussion turns to the state of the sharemarket.

I have always assumed the Act applies and the AFA should keep her mouth totally shut unless she has provided disclosure to all people at the BBQ.

Is this right. If so, is this an intended or unintended outcome of the regulatory regime?

Once again thanks in anticipation
Adam
Commenting is closed

 

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