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Many advisers 'won't pass licensing hurdle'

As many as 40% of advisers may fail to receive a licence under the new regulatory regime, it has been suggested.

Tuesday, August 1st 2017, 6:00AM 5 Comments

by Susan Edmunds

Industry commentator Russell Hutchinson said the experience of financial service providers applying for licenses under the Financial Markets Act could be illustrative of how advisers would fare.

The FMA received a total of 253 license applications for FMC licenses, of which 201 resulted in a granted license. Eleven were unsuccessful and 41 withdrawn.

That means about 20% did not make it across the line.

Hutchinson said advisers should not expect their experience to be very different.

“The draft Financial Services Legislation Amendment Bill moves financial advice law into the framework of the Financial Markets Conduct Act," he said.

"The law under which those FSPs are licensed. The approach the FMA has taken to licensing is bound to be the basis for the approach that will be applied to financial advice providers and financial advisers.”

He said the 20% failure rate under the FMC was significant and did not capture those who looked at the criteria and decided not to apply at all.

What was hard for financial service providers should be expected to be difficult for financial advice businesses.

“Some [financial service providers] are small businesses, they do things like write pieces of software or get people to trade options. But they are not tiny businesses. A lot of financial advisers are tiny businesses.”

He said the FMA might make it easier for financial advisers to apply – “but why? Which standards are you going to adjust?”

Many financial advice businesses were not even running as incorporated companies, he said.

“They’ve got less resource there. The bottom 20% of financial services providers are better equipped than the bottom 20% of financial advisers.”

Hutchinson said the least productive advisers would find licensing harder. But he said the impact should nevertheless be expected to be significant and the failure rate could be 20% or 30% of the industry, or even more.

Those who did not become licensed could opt to be representatives or salespeople.

Gavin Austin, of compliance firm ABC, is in Australia meeting licence-holders there.

He said Hutchinson had raised valid points.

"Many advisers will struggle to justify the cost to be licensed individuals," he said.

"Not just the fees but the time and the added ongoing compliance. In Australia many small businesses joined licence holders who had scale ability where the licensee was responsible for compliance or similar to the FAR proposed designation of the current review.

"In Australia the FAR pays either a flat fee of $2000 per month, which includes PI, all the tools to be compliant and no hassle with the regulators. Small businesses who do become licensed will not be able to justify in-house compliance resources so will contract this to independent compliance consultants. I hope to find out what they charge."

He said it would be important for adviser businesses to start early once it became clear what was required from them. "I expect that one of the costs that will increase dramatically will be PI cover."

Tags: compliance financial advisers Financial Markets Conduct Act FMA Russell Hutchinson

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Comments from our readers

On 1 August 2017 at 9:41 am Pragmatic said:
A note of caution to the Regulator – be careful what you wish for

Let me say up front, that I’m a big fan of continually lifting the bar. Not for the industry’s sake, moreso to provided added protection and predictability for consumers. Ultimately this will benefit the financial services industry, as consumers increase their confidence in an industry that has suffered from a poor track record.

Nevertheless, all changes come at a cost. The industry currently suffers from an aging fragmented workforce of advice participants, a relatively narrow selection of investment options, low consumer investment sophistication, and a diminishing number of participants. Add this to the major industry employers (large financial institutions) who are currently questioning their involvement in wealth management, and increased compliance costs – and you’ve got the potential for a significant industry adjustment. All this at a time where consumers are nervous about their savings, euphoric about bricks and mortar (albeit that this appears to have subsided in recent months), and unaware of the industry’s collective (& individual) value proposition.

In the absence of a well-considered plan for the industry, the burden of another round of compliance costs will force the hand of many independent advisors, leaving a large segment of the community unable to access “non-aligned advice” (as distinct from being flogged a product). You don’t have to look too far offshore to see the effects of industry degeneration on consumers, and the investment decisions (and massive regulatory burdens) that result.
On 1 August 2017 at 10:32 am Barry Read said:
Russell's point is vaild but as far as comments about costs and PI increases are pure speculation and scaremongering. Until we have a bill passed and an FMA implementation plan with actual costs it is useless to speculate on the impacts of the licencing regime. MBIE have clearly stated that they intend to have a process that allows individual adviser businesses to continue to operate.
On 1 August 2017 at 2:05 pm AFA Muggins said:
Barry Read, yes of course they (MBIE) will have a process, it is simply more than likely most individual advisers will be facing even greater headwinds and it may not be a viable option.
This is about corporatisation of the profession.
There are a number of very qualified, experienced advisers out there providing fantastic service and advice to clients. You wont get bespoke service in the big end of town. You probably wont get it for much longer anywhere.
But hey - now we have Financial Advice New Zealand to fight on our behalf, don't we? Lets see how that goes.......
On 1 August 2017 at 5:09 pm Murray Weatherston said:
I also think it is too early to tell the magnitude how numbers will be affected.
But I think it crystal clear what the direction of the affect will be - down.
How do I get this conclusion?
1. Start with what you think the number of small adviser practices (say < 10 advisers) currently is. I guess over all product disciplines, the answer could be as high as 10,000.
2.Take off those who just won't proceed to a full licence application at all.
3.Take off the number who get discouraged during the license application process and withdraw their application.
4. Then take off the number of applicants who FMA turn down for a full licence.
5 Oh yes, add on the number of new entrants who will be so enthused about the opportunity that they will have their applications in early.
Re Groups 2, 3 and 4, has anyone had a look at how FMA thinks a small adviser practice run via a company should be governed?
It's clear to me that neither the people who wrote the text nor their superiors who endorsed the publication thereof has any idea how the SME secotor is governed in NZ right across the board.
I reckon that section alone (irrespective of any other regulations) will give a lot of smaller advisers good cause to wonder whether they should even embark on the full licensing process in 2019 and 2020.
Of course if the result is a material defection of advisers out of the industry, officials will simply pass it off as an "unintended consequence" and move onto the next area of policy to wreak new havoc.
On 1 August 2017 at 7:18 pm Pragmatic said:
Thanks Murray. I've re-read my initial contribution, and can probably cut to the chase (and I suspect concur with Murray's sentiment) by asking: "what is the problem that is trying to be solved?"

The "unintended consequences" of further regulatory upheaval could well outweigh the "problems"

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