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FARs - where's the accountability?

It is appropriate for financial advice providers to be accountable for their financial advice representatives, because they are simply acting as a conduit between the provider and the client, the Ministry of Business, Innovation and Employment says.

Wednesday, March 29th 2017, 6:00AM 16 Comments

by Susan Edmunds

Submissions close this week on the draft of the Financial Services Legislation Amendment Bill.

MBIE issued a document with questions and answers about the bill, which sets out new designations: Financial advisers, financial advice providers and financial advice representatives.

Representatives will work for providers in much the same way as QFEs currently operate.

One of the questions in the MBIE document was: Why are financial advice representatives not personally liable?

MBIE said it was because those representatives would be bound by processes, controls and limitations set by the provider, which would control the outcomes for customers.

“The processes, controls, and limitations in effect mean that the provider is controlling the advice outcomes for consumers, and a financial advice representative is essentially acting as a conduit between the financial advice provider and the client. This is what makes it appropriate for financial advice providers to be accountable for their financial advice representatives. “

PAA chief executive Rod Severn said the designation was inappropriate.

“A crucial objective of this regulatory review is to put the client’s interest first: in our view the proposed FAR structure just simply doesn’t meet the grade. It’s simple: you offer advice if you are personally accountable; if you are not personally accountable, you don’t offer advice. Why should the public accept anything less than accountable professionals when dealing with their financial well-being?”

He said the recommended representative designation would only muddy the waters.

“It will create further public confusion and diminish the understanding of the value of advice. How can we say that someone who is not personally accountable, and whose ‘advice’ is limited to products offered or supported by their financial advice provider, can put their client’s interest first? There is an intrinsic conflict of interest."

Severn said a structure in which the financial advice provider set controls and limitations left a lot of room for different views on crucial areas, such as what constituted a scenario which involved a “level of complexity or uncertainty that cannot be adequately addressed using a financial advice provider’s predetermined processes controls and limitations,” and was therefore out of the scope of financial advice representatives.

"Way too much room to move; particularly when you consider that reducing consumer confusion is one of our – the industry and regulator’s – primary concerns and objectives… And not only reducing consumer confusion, but crucially, raising the public's’ trust and confidence in advice."

Tags: Financial Markets Conduct Act PAA

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Comments from our readers

On 29 March 2017 at 8:08 am Charity said:
Under the logic of MBIE, since the Financial Advice Provider controls everything, then is the Financial Advice Provider subject to the Code of Professional Conduct?

Does this mean that the Financial Advice Representative has no responsibility under the Code?

Does this mean a Financial Advice Representative can ignore all of the obligations under the Code without any repercussions to him or her personally?
On 29 March 2017 at 9:44 am Brent Sheather said:
The FMA are probably full of good people trying to do the right thing. But as we saw with the infamous “polo shirt” comment they are constrained by having to work for a government which has absolutely no interest in doing the right thing for retail investors. The succession of Ministers in charge of the FMA, in my view, have been at best incompetent and we won’t speculate on the worst case scenario.

As Mr Severn says it is ridiculous to think that someone who can only sell high cost products good for no one can be putting their clients’ interest first. The story of the Emperor’s New Clothes comes to mind. The polo shirt comment did huge damage to the credibility of the FMA. Indeed it was such a ridiculous thing to say that the only reason, in my view, why anyone would say it is because they had to. That must be very frustrating.
On 29 March 2017 at 10:37 am NormanStacey said:
Maybe they are quite young, but curious that MBIE considers product provider's processes and controls superior to that of AFA'.
ANZ / ING DYF & RYF, Finance Company Debentures, Fisher Fledgling Fund & Marlin, Guardian Trust CashPlus & Mortgage Funds, Huljich KS, Tower MortgagePlus & market manipulations all suggest that Product Providers are not infallible. 'Advice' to buy these products did little to foster confidence in NZ's market-place.
As currently proposed, the exemption from accountability for product providers salespersons is difficult to align with the legislation's objectives.
On 29 March 2017 at 10:50 am PP said:
As AFA's we have a duty not to "mislead"... The proposed designations are definitely misleading. Financial advice representatives are typically pushing/selling product and should be labeled as such. The FMA & legislators need to stop being lobbied/bullied by the 'big end of town' and call it what it is - adviser or salesperson!
On 29 March 2017 at 11:51 am Murray Weatherston said:
Using "we" in the Royal sense, we need to articulate what the problem we have is.
It's clear there is a lot of dislike in adviserland for the term "financial advice representative"
So let's play a scenario game.
Assume Government/officials agree to change the designation to something else - the plainest vanilla term (other than salesperson which is not available for selection) that we can come up with is Provider representative. Seems accurate because what were formerly going to be called FARS are representatives of the financial adviser provider who employs them.
Great so far.
But now assume that nothing else changes.
Has our problem magically gone away.

On 29 March 2017 at 12:34 pm Ron Flood said:
Murray. The problem won't go away but it will help the consumer recognize that the person they are are talking with can only give advice on that providers product.

I won't hold my breath, but I would expect that when licenses are given to Financial Service Providers it will include a caveat that any advice given relating to any product not sold/provided by the license holder can only be provided by a Licensed Financial Adviser.

This would retain the status quo where currently this advice, within QFE's, is given by AFA's.

From what I have seen in the present offering from MBIE and the FMA in the draft we will once again, in 5 years time, be asking ourselves "how can we remove consumer confusion and give then access to good advice".
On 29 March 2017 at 1:12 pm doomben said:
I think the Nicky Hager type 'corruption in high places' line is getting tiresome.

My guess is the main reason regulation is proceeding this way is boring practicalities.

There is simply no way for the FMA to regulate 20,000+ people individually. How many staff would they need to have meaningful interactions with that number of people?

Firm licenses reduces the number of entities to be regulated down to a practical number.

There is faith that regulating the directors of firms effectively shifts the regulatory burden onto firms.

Further the Government has no incentive to end up with only 1,800 'real' financial advisers in NZ. I doubt the Government really thinks those 1,800 are actually that special. (And I would agree with them.)

Focusing on the label used is pretty meaningless. Do people really go around describing themselves to potential clients as an "Authorised Financial Adviser".

I never use that term - the client might think I sell insurance.

I say I am wealth manager, investment adviser, I manage people's money, or what takes my fancy at that time.

So I doubt the official legal name for financial adviser really matters.

What Brent and Murray need to keep doing is trying to influence what the FMA puts into firm licences.
On 30 March 2017 at 11:12 am R1 said:
Doomben, I think you are living in a fools paradise if you feel this way. The amount of investors' money that is involved with this regulation and the profits and bonuses this generates has a lot at stake for a lot of people. To think that the problems with the current regulations and the draft proposal of changes has come about from boring practicalities is, to put it mildly, stupid and naïve. This attitude is the complacency that corruption feeds upon and we need to be vigilant and hold regulators and the lobbyists' paymasters to account for their favouritism of a few at the expense of the many.

While I don't particularly like Hager(or even the big German), they serve a useful purpose by shedding light on topics of major importance the NZ public. Murray and Brent are providing a similar service with other points of view and very often the supporting facts to support that point of view; good on both of them for doing that. Most of us just remain complacent and whinge when things don't go our way.
On 30 March 2017 at 4:37 pm gavin austin adviser business compliance said:
doomben - you may reconsider your confidence in the BEOT after you ahve digested the following:

"Entity licencing – this makes the FMA’s monitoring program work with less people. The problem is that the “Big End of Town” don’t do the monitoring themselves. Look at http://www.goodreturns.co.nz/article/976502701/amp-adviser-training-by-numbers.html

So, what does this say about the effectiveness of AMP’s self-monitoring? The stats tell us that (in my analysis based on info I was privy to in 2010) this would represent less than 10% of the total SOA’s produced for clients. The number of Proff Development Clinics was about 1.6 per adviser (wow)." So I am naturally very sceptical regarding the BIG end of town Compliance Monitoring.
On 31 March 2017 at 7:52 am Charity said:
It will be interesting to see what happens with the Code of Professional Conduct. By the logic employed by MBIE, Financial Advice Providers control processses, controls, limitations and outcomes for clients (assuming the Financial Advice Representatives follow them). Does this mean that Financial Advice Representatives are not going to be subject to the Code and not subject to the Disciplinary Committee? Does this mean that Financial Advice Providers are going to be subject to the Code and the Disciplinary Committee? Or maybe MBIE will just give them a pass because the banks aren't going to like that.
On 31 March 2017 at 12:44 pm doomben said:
R1 - utterly disagree with the idea that NZ civil servants are writing financial adviser regulations to somehow benefit themselves. Ridiculous.

Gavin - I come back to my point. We will have some form of self regulation. The numbers are too big to regulate individually and the rest of the financial industry has already moved this way.

In the absence of a credible adviser grouping (like the Law Society) that will be entity self regulation.

I doubt entity self regulation will be effective. But neither is the current regime. How often does the FMA visit each AFA/RFAs now? Hardly ever I suspect. Why do you think AFAs/RFAs are behaving but the BEOT is not? What % of AFAs/RFAs are doing meaningful professional development (I am with Brent - about 0%) and how would the FMA know?

The title of this post was "where is the accountability". The answer is we are moving from saying Bob the Adviser is accountable to Sir Phillip the Director is accountable.

I don't want to come across as supporting regulation. 99% of regulations that have been introduced are a waste of time.

But we will have entity regulation. So we should worry about how that will work rather than fighting it. What do you want entity regulation to look like for you business?
On 3 April 2017 at 5:35 am Murray Weatherston said:
@doomben
To my way of thinking, you have an unusual way of characterising the proposed regulatory system for financial advice.
You have invented a new term "entity self regulation" - which as I would understand the term is not at all what MBIE has proposed.
We still have 100% government regulation - but it is different from the FAA regulation we have had since 2011 in one important respect. Hitherto, the cornerstone has been authorisation of the individual AFA.
From 2019, Government regulation will be delivered via entity licensing.
I have no doubt that one of the reasons for going for entity regulation is to limit the number of licensees that FMA has to deal with.
But I don't see that the entity is self regulating...FMA will still come knocking at the door of the entity and say "show us how you are complying with our/State regulation".
On 3 April 2017 at 10:27 am doomben said:
Murray - What I mean by self regulation it is that principal oversight for most "advisors" will be their firm's internal compliance rather than an external regulator.

A bank teller "advisor" may go their entire career and never have anything to do with the FMA. But the expectation is they will have a LOT to do with their bank's Compliance Department.

Effectively regulation is internal to the firm. Like an Alex cartoon - the enemy is the Compliance Department not the FMA.

But certainly this relies on the firm being sufficiently concerned that the FMA will find problems that they will invest in sufficient internal compliance.

And that means the FMA issuing few enough licences that they can creditably do monitoring.
On 3 April 2017 at 11:32 am Murray Weatherston said:
Thanks for the clarification doomben.
I would call the concept you have described as "entity self regulation" as simply Compliance.
IMO Compliance is required by an entity, but it isn't self regulation in the technical sense. The Rules that have to be obeyed are set outside of the entity
On 5 April 2017 at 10:30 am R1 said:
Hi Doomben. Clearly you are not aware of the widespread "regulatory capture" that exists in many developed economies. I suggest you have a quick read of the following as an entrée to opening your eyes to the realities of the environment we are currently working in: https://en.wikipedia.org/wiki/Regulatory_capture
On 4 May 2017 at 12:42 pm AFA Muggins said:
Doomben, I’m unsure which planet you think you are on. To quote Ronald Regan - The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'

R1 I agree 100% regarding Regulatory Capture. I have a suspicion this will be even more blatant once we see the line-up of the Beauty Pageant finalists….. er, I mean the Code Committee working group members, given that some of the most experienced and articulate representatives of the advisory profession who expressed interest in being on it, have already been shafted.

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