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Concern expected at entity licensing proposal

Forums on the Financial Advisers Act being held next month are likely to be dominated by questions about potential licensing of entities, rather than individual advisers, it has been warned.

Friday, January 8th 2016, 6:00AM 3 Comments

by Susan Edmunds

David Whyte

One of the suggestions in an options paper released by the Ministry of Business, Innovation and Employment (MBIE) is that once the Act is overhauled this year, advisers could be regulated via their businesses, rather than individually.

That would seem to be in line with the Financial Markets Conduct Act’s licensing approach.

But industry commentator David Whyte warned it was likely to be contentious. At the moment, authorised financial advisers are regulated directly by the Financial Markets Authority (FMA).

The FMA is holding a series of forums in Auckland, Wellington and Christchurch in February to discuss the options for the review.

Whyte said the idea seemed to have “appeared out of nowhere” and was fraught with danger. “I suspect there is a number of people feeling nervous about this, it is going to be a major point of discussion.”

He said it would be a cost-effective way for the FMA to regulate the industry, particularly if reforms brought a much larger number of advisers under its remit. It has been suggested that all advisers, including those who are not currently authorised, should be required to meet conduct and competence standards.

But Whyte said it would not be as effective,  or as useful to improve consumer confidence in the industry, as individual authorisation.

Adviser Murray Weatherston said the purpose of the Financial Advisers Act when it was originally implemented was to create individual regulation, albeit with the late addition of QFEs.

“Now they want to license entities and have the entities do it.”

He said it would be hard for small firms who did not have extensive written process manuals and back-office operations.

Weatherston said it probably seemed a neat solution to extend entity licensing across the board in the financial services industry but it would be a big change for the advice sector.

“They’ve never explained why they should go away from what was a fundamental tenet of the financial advisers act, individual authorisation. Lawyers aren’t regulated by their law firms, they’re dealt with by the law society as an individual, doctors are regulated as individuals, dentists the same. With accountants, it’s not the accounting firm that gets into trouble, it’s the accountant.”

He said the only benefit that could be seen from entity licensing was that it was easier for the regulator.

Tags: Financial Advisers Act

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Comments from our readers

On 12 January 2016 at 5:14 pm Tash said:
What does 'entity licensing' mean in a world where hundreds if not thousands of advisers are sole traders/one man bands with no employees?
Regulation must take account of reality - there are relatively few 'entities' employing advisers.
On 14 January 2016 at 2:59 pm RiskAdviser said:
Well put Tash, add to that the entities that 'employ' advisers usually do so on a self-employed contract basis rather than as an employee, making the contractor an entity too... Which sort of missed the point on trying to make it easier for the regulator.

And so where do dealer groups fit in this as a number of them have contracts for supply though the dealer group's 'managing agency' structures,

Careful here, we'll have the dealer groups becoming pseudo QFE's by association. If this is where it goes, probably one of the best unintended consequences I've seen with government legislation.

An idea that isn't well thought out and to make work will have too many holes and double speak to be effective. Keep it simple, the current rules 'register' the individual and where there's more the two 'registered' individuals involved, register the managing entity (employed or contracted it's the trading brand that's important)
On 14 January 2016 at 4:59 pm TripleA said:
The TripleA agrees that the regulators need to think carefully about the impacts of "entity licensing". About 70% of our members are sole operators with a further 23% in adviser firms of between 2-10 advisers. Around 60% are AFA's with two thirds over 50 years of age. Entity licensing will create quite significant costs that will likely advantage large organisations such as banks etc over small adviser firms. The result may well be a solid reduction of genuinely independent advisers in the market place over the coming years and that wouldn't be in the best interest of the consumer.

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