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What's good advice from an RFA?

Non-AFA advisers are being warned that while what counts as a good advice process for them might be a “grey area” at the moment, they should expect to have to follow a set procedure soon.

Wednesday, September 14th 2016, 6:00AM 4 Comments

by Susan Edmunds

The issue is in the spotlight because the Financial Markets Authority is looking at the processes of risk advisers who have high rates of replacement business.

It will look to determine whether the advice given to clients was acceptable.

But unlike AFAs, who have a six-step process to follow, RFAs have so far not had a set framework they must comply with when offering advice. They do not have the same requirement to document their recommendations.

That has left some wondering what benchmark the FMA will consider as “good” advice.

Barry Read, of compliance firm IDS, said the only requirement in legislation or regulation for RFAs was that the advice they gave was given with care, diligence and skill.

"The parts of the code that apply to AFAs, giving advice in writing, keeping records, client suitability, they don't directly apply to RFAs. The client-first obligation doesn't apply to RFAs, either."

He said some non-AFA advisers could be left worried about how to navigate the "grey area".

An FMA spokeswoman said it provided information that stated what is expected of RFAs   -  that they must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. “This is the main criteria for determining what good practices are for a RFA but is certainly not all.”

She said other general requirements would include assessing the product’s suitability for the client’s needs, explaining the key features and any limitations of the product, clearly articulating any limitations on the service being provided, acting with care, diligence and skill, not engaging in misleading or deceptive conduct, ensuring advertisements are not misleading, deceptive or confusing, and complying with disclosure obligations.

The FMA also offers more specific examples of what might be expected when dealing with insurance replacement, including an expectation that key exclusions and limitations in the product would be highlighted.

Read said most of the advisers he dealt with kept good written records to show they had met these obligations. But other sources said not all RFAs would be in that position.

Industry commentator David Whyte said it seemed inevitable that when the new Financial Advisers Act came into force, all advisers would have to follow some sort of set process, in the same way AFAs currently do.

“Whether they want to be a financial adviser or work as an agent, either way they are going to have to meet an as-yet undefined standard of conduct, process and behaviour, whether that’s the six-step process or something a little more succinct, they’re going to have to have something, I don’t think they’ve got any choice.”

Financial advice firms would have to be able to show the FMA their agents were following an acceptable process, and financial advisers would have that obligation as a matter of course, he said.

“I don’t see any way around it. You’ve got to be able to display to the regulator on request.”

Tags: Churn financial advisers registered financial advisers

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Comments from our readers

On 14 September 2016 at 10:06 am Tash said:
A process is not advice! Advice is the resulting recommendation following a full examination of a number of pertinent facts and desired outcomes. Following a prescribed six step or other process to the letter does not guarantee good advice, just as failing to follow a prescribed does not guarantee bad advice.

There may be relatively fewer legislative advice requirements for RFAs but this does not mean they are legally absolved from giving proper, accurate and appropriate (good) advice. Even ignoring the FAA requirements of due care, diligence and skill, not to mislead etc contractual relationships leading to the ability to bring civil proceedings/civil liability for poor advice, inevitably arise when an adviser agrees to provide something to a client. These contractual relationships and their terms can be oral, the law does not require these contracts to be in writing. Sensible advisers would of course be careful to detail the terms in writing but the absence of written provisions does not result in no obligation/liability.

Clients who suffer loss as a result of unacceptable advice will most likely have contractual recourse against the adviser to make good their losses - these could be huge in an insurance context! In addition, advice so poor as to be negligent (does not comply with that expected of the average adviser) could result in an action under the law of Tort in addition to contract.

Let's start stopping the confusion. RFAs are not exempt from providing good advice and it is not about process. One cannot legislate good advice by legislating process!!!
On 14 September 2016 at 11:52 am w k said:
what do you think will be the likely outcome if a car salesman was to tell a motor mechanic what process to follow, what should be done, etc. when fixing a car?
On 15 September 2016 at 8:32 am Backstage said:
Finally Tash, well summed up. In addition some of the regimented process (6 step) attempts to capture information that is not relevant to the clients request or interest. For example when I am discussing key-person covers knowing what the insured persons credit card debt or mortgage payments are have nothing to do with the final outcome, especially if their company is to be the owner of the contract. Your final comment sums it up wonderfully, ie: One cannot legislate good advice by legislating process". Their are plenty of laws surrounding the industry currently that all advisers need be aware of and ensure their process complies or assists to meet existing regulations for consumer protection. Also often overlooked is we are in this business for a relationship, not a transaction much like a GP. In fact much of our remuneration structures ensures we have satisfied clients... nice work Tash!
On 25 September 2016 at 5:27 pm RiskAdviser said:
Well said Tash! A process is not advice but a process can assist with consistency and competency of that advice. Especially when it comes to not missing critical issues like advice on business replacement and comparison of covers.

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