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Industry rallies to make its voice heard

The financial advice industry has picked holes in the exposure draft of the new legislation set to govern the sector with a large number of submissions filed so far.

Monday, April 3rd 2017, 6:00AM 6 Comments

by Susan Edmunds

By 3.30pm on Friday, there had been 76 submissions on the Financial Services Legislation Amendment Bill.

A number of key themes emerged.

Designations

Throughout the consultation process, there has been concern at the designations applied to those giving advice.

The bill suggests AFAs, RFAs and QFEs could be replaced by financial advisers, financial advice providers and financial advice representatives.

But the IFA said the FAR term was muddied and confusing. “[It] provides no clarity on that role, and limitations, processes and controls, and will do little for the public to differentiate between a FAR and a FA and we believe this will not address the area of consumer confusion about who to approach.”

It said “financial provider representative” would be better.

But it said that would not be enough on its own.

“We also feel that the ‘true’ financial advisers need to have their title more clearly defined with a result that clearly separates who they are and more importantly what they do.

“AFAs are going but perhaps if the true financial advisers were clearly separated with ‘registered’ added to the title that alone would, in the public's eyes, have a simple resonance as they are already conditioned to Registered Master Builder, Registered Nurses, Registered Medical Practitioners etc.”

It said another option was “personal financial adviser” for those providing personalised, independent financial advice.

Pathfinder agreed it was confusing.

"A key feature of an FAR is that, unlike an FA, they do not have personal responsibility to their clients.  This is troubling as there must be accountability.  If this approach is to proceed we believe that FAR liability should follow health and safety liability - the board should be made responsible.  Liability should go beyond the financial advice provider’s corporate entity."

But Graham Duston, of FANZ, said the proposed designations would work well.

He said the financial adviser-based model would enable any licensed financial advice provider to engage a financial adviser on a non-exclusive basis. “These financial advisers would sit under the financial advice provider entity and not need to obtain their own licenses, generating compliance efficiencies. Being able to align with a number of financial advice licensees would reduce the extent to which financial advisers need their own operations licensed.”

He said a system of FARs would also give consumers more access to advice.

Sales versus advice

Earlier in the review process, it was suggested that the law could do more to make clear the difference between sales and advice.

But any plan for carve-out disappeared before the bill was released.

SIFA said it was disappointed the Government had not made a separation clear.

“We reiterate our statements in other venues that in our view, this legislation will give carte blanche to the institutions to 'sell'  their own products under the guise of 'advice'."

The IFA said it should be left to the Code Committee to identify the line.

“The sale of products such as insurance and KiwiSaver can be problematic when the focus of the interaction with the customer has been another product.

“The secondary sale often has much less care or attention or time committed to it. The firm and their staff are conflicted when their performance is measured on volume and there is not a corresponding requirement to ensure all products meet suitability requirements, or are in the best interests of the customer.”

Client first

The bill proposes to bring into law the requirement to put a client’s interest before an adviser’s own.

But there have been questions raised – the Code Committee said it was too prescriptive in something that had been intended to be a philosophical statement.

The IFA said the code should be left to clarify the meaning of a client-first duty, and how that should manifest itself.

“We would support extending the client-first duty to all providers of financial advice, not limited to those who deal only with retail clients.

“Since the Introduction of the Financial Advisers Act the FMA monitoring reports have attested to the fact that the principle based Code of Conduct has worked in relation to AFA conduct. We question why this aspect of the existing structure needs to be altered, when it could simply be extended to bind all participants.”

Duston said the standard would not be workable for a vertically-integrated structure. 

SIFA said financial advice providers should be handed a total prohibition on incentives to representatives.  “However, given that it is unlikely that you will ban all incentives, we further submit that any volume incentive should be prohibited. Volume-based incentives are in our opinion most likely to result in the bad behaviours that you are worried about most.”

Pathfinder agreed with SIFA and the Code Committee that the wording was broad.  "This should be limited to the adviser and related parties – it is difficult to construct scenarios where the interests of unrelated third parties should be considered."

Qualifications

IFA argued that AFAs deserved not to have their designation dumbed down as competence standards expanded to include all advisers.

"Before the introduction of the current FAA there was a strong and growing attraction of advisers to study. Massey University had students, the IFA was mentoring and assessing CFP and CLU candidates and membership numbers of the Institute were far higher than today.

"The introduction of the AFA status saw many existing advisers and members accept this minimalist route and use the legislated status as their 'qualification'."

It said a level playing field for all advisers would only emerge once all advisers had to attain what AFAs had had to.

"The proposals as they stand actually lower the current standards and degrade the effort and expense previously incurred and required by existing AFAs. This appears to undermine the standards of learning that AFAs had to prove. This 'level playing field for all who are providing advice' does place a huge and challenging task for the working group of the Code Committee in regards to competency and qualifications."

But questions were raised about whether submissions would be listened  to.

SIFA said: "The authors of this submission have no expectation that anything we submit about will have any effect on the final outcome. We think this consultation is merely part of a 'tick box’ process.  We raised with our membership whether we should even make a submission. While they understood our point , they were swayed by a common view expressed elsewhere that 'if you don’t submit, then you will have no right to grizzle  about the final outcome'."

 

Tags: financial advisers Financial Markets Conduct Act

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Comments from our readers

On 3 April 2017 at 6:40 am Murray Weatherston said:
Two comments about Dusty's submission for FANZ (not Financial Advice NZ but SBS).

1. Hadn't even crossed our mind that a Financial Adviser could be linked to more than one FAP.
Even if it is possible, wouldn't it have the same problem as multiple QFE rep nominations would have had - each QFE would be responsible for everything done by the rep whether it was a particular QFEs own product.
So 2 questions - 1st for MBIE - is it proposed that a FA could be linked to multiple FAs; and 2nd a general one for FAPs - would you use it?

2.Apparently, here we have an institution [VIO] saying that duty to "put client's interest first" will not be workable. I wonder if that will be a general view by VIOs.
On 3 April 2017 at 6:48 am Murray Weatherston said:
Susan, a partisan response from me as co-author of the SIFA submission.
Very disappointed that you didn't balance the "client first" section of your report with a noting that SIFA supported the broad thrust of the Client First duty as set out in the Exposure draft.
Probably the first time that we had been completely in favour of a proposal and you didn't even notice....shame.
On 4 April 2017 at 8:32 am Murray Weatherston said:
Correction to my question to MBIE in my 6.40am comment yesterday and a supplementary

Correction "Is it proposed that a FAR could represent multiple FAPs?"

Supplementary "Can I be a FA linked to one (e.g. my own) FAP, and simultaneously a FAR linked to a separate FAP?"
On 4 April 2017 at 3:44 pm Murray Weatherston said:
In the spirit of transparency , here is an answer to my private queries on this issue from an MBIE spokesperson

"The way the Bill is currently drafted it would be possible for both financial advice representatives and financial advisers to be engaged by more than one financial advice provider and for an individual to be both a [financial dvice]representative and a [financial] adviser under different provider's licences.
We [MBIE] are interested in finding out when and why this might happen in practice (as you point out, it may not be something providers would permit) and will be exploring this further as we analyse submissions. We need to make sure that this won't give rise to any problems or risks that could run counter to the objectives of the new regime."

So the current proposed legislation doesn't prevent it. But is it just a theoretical possibility, or will people use it practically? If they did, would it be a good or a bad thing?

Any views anyone?
On 5 April 2017 at 11:22 am dcwhyte said:
Just this - how confused will the consumer be by this unending complexity created by avoiding individual accountability for anyone/everyone offering guidance on financial matters?

One category of financial adviser, suitably qualified in their field(s) of advice, and accountable for their own conduct - irrespective of their employment circumstances - would see this confusing nonsense disappear overnight.
On 5 April 2017 at 2:28 pm Doddsy said:
This is now euphemistically like a dogs breakfast or probably better referred to as a classic "Jekyll and Hyde" situation.
Dr Jekyll our FA ( L5 of course) works diligently away in his 9 to 5 job but come darkness reappears as the evil Mr Hyde who is vastly different in moral character from one situation to the next!!
Perhaps Robert Louis Stevenson has the answer - somewhere.

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