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QFEs get licensing head-start

Dealer groups and adviser networks may opt for financial advice provider status (FAP) under the new legislation, but it is expected to be an easier transition for existing qualifying financial entities (QFEs).

Tuesday, August 15th 2017, 6:00AM 11 Comments

Under the Financial Services Legislation Amendment Bill, advice will be able to be offered by financial advisers, FAPs or FAPs' nominated representatives.

AMP, Share and Forsyth Barr are among those planning to apply for a FAP license. That would allow them to have representatives working within that license.

Scott Black, of Share, said a final decision would be made once all the detail was available.

“We are working on the things we think we will need to have in place to apply for a licence, but we actually do most of those things anyway, and they are just best practice.”

Shane Edmond, head of private client services at Forsyth Barr, said his firm had reached the same conclusion. “Given we were early in becoming a QFE and we have 120 AFAs it would be highly likely that we would be (an FAP). Organisations who have employees as opposed to contractors, like us, are likely to go down that path.”

David Ireland, of Kensington Swan, said QFEs would be the most advanced with their systems and would be best placed to get sorted to apply for FAP status. “It’s unlikely their current processes and documentation will be a perfect fit for the new regime. But whatever the licensing requirements may be they have a bit of a head start.”

He said the other big advantage for QFEs over other groups was that when the Financial Services Legislation Bill became law, only existing QFEs would be able to engage nominated representatives under their transitional licence. Others will have to wait for a full licence.

He said only QFEs would be able to give the regime confidence that they would have the systems to oversee and control the activities of their nominated representatives. “For other groups it’s a bigger step up to deliver those systems from scratch.”

He said dealer groups and aggregators might choose to become FAPs but that would mean they were taking on a lot of the responsibilities and accountability for their financial advisers. “Can they be confident they have the systems in place to control that?”

He said comments from Commerce Minister Jacqui Dean that the regime would be simpler because there would be one FAP licence instead of ten adviser business statements might not prove correct. “That’s not a great analogy because I don’t think you get the understanding of the complexity and the hoops you might need to jump through to get your licence. It’s not just a straight numbers game. Ten ABSs are not automatically more complicated than one licence it’s quite likely the other way around."

But Ireland said there was a concerted effort to make the new regime fit the stated aim of making advice more accessible. Advisers could call the regulators out if what they introduced went against that and made it harder to offer an advice business, he said.

Sue Brown, of Sue Brown Solutions, said what was required would be revealed as the FMA developed its transitional and ongoing licensing criteria.

“The FMA’s licensing criteria tend to focus on capacity, capability and resources including processes, so I’d expect entities that have been used to operating in a licensed environment - either themselves or working with a group of AFAs - will find the switch over to the new licensing regime less of a new challenge than entities that haven’t been licensed at all and who will likely need more help getting to the starting line.”

Tags: AFA AMP David Ireland financial advisers Financial Services Legislation Amendment Bill FMA Forsyth Barr Jacqui Dean QFE Share Sue Brown

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Comments from our readers

On 15 August 2017 at 6:49 am Murray Weatherston said:
Unless I completely misunderstand the proposed new regime, this story is a mish-mash of stuff some right and some confused and maybe even misleading.

To provide advice in the new regime, an entity will have to have a financial advice provider licence. No FAP licence - unlawful to give regulated advice to retail customers. Same rule applies to the littlest sole practitioner and the biggest VIO. The licensee will deliver that advice in its own right (e.g robo ) or through nominated representatives or through financial advisers linked to its licence.

AMP and ForBarr on the one hand, and SHARE on the other are different in the following respects.
AMP and ForBarr are already QFEs. They have AFAs and QFE advisers. If they want to stay in the advice business they will need a financial advice provider licence. As a former QFE during the transitional period, they will be able to have nominated representatives.

Aggregators (e.g.SHARE) and adviser networks are commonly not QFEs. The current regulation is via individual advisers, so aggregators and adviser networks currently do not provide advice. Their members do, but in the members’ own rights.

I understand a number of this latter grouping are considering whether or not in the new regime they should apply for a FAP licence. If they do and are successful, then in return for being able to have nominated representatives, they will take on all civil penalty liabilities for advice delivered through or by their linked financial advisers and their nominated representatives. That is a huge change to their business risk I would have thought – their PI insurers are likely to be more than a tad interested.

As an aside, I would think that any aggregator finally deciding to go down that path would be well advised to apply for a QFE licence now while that window is open, so that they would have the right under the transitional scheme to have nominated representatives from day 1 of the transitional regime. Otherwise they will have to wait until their full licence is processed and granted.
On 15 August 2017 at 8:29 am Scott Black said:
A good summary Murray. As an adviser-owned co-operative SHARE will only apply for a licence if we believe it is in the best interests of our advisers and their clients. We will make that call when we see the costs, responsibilities and liabilities that we have to assume on behalf of our adviser-shareholders - and as the owners of the business it will up to them to decide whether they want to pass the buck up the chain to SHARE.
At this stage with over half of our 75 advisers as AFA's, robust processes, annual compliance audits, audited financials, a governance board etc. we think we are in pretty good shape to apply for a licence, if that is the decision. And it will probably be a lot easier to apply for a single licence for SHARE rather than have all of the advisers have to do it individually.
The devil, as they say, will be in the detail!
On 15 August 2017 at 9:19 am Ron Flood said:
Can anyone clarify the situation relating to a sole trader. I understood that they would firstly have to apply for FAP status and then be licensed individually under that entity.

I did not think it possible to be individually licensed without belonging to an FAP.
On 15 August 2017 at 9:28 am Barry Read said:
Under current legislation any group/buisness registered on the FSPR that employs or contracts advisers (AFA or RFA) to offer advice services on their behalf are jointly liable for the advice services. So there will be no major change in liability for these types of groups. Also the current bill states that licence holders must not give or offer Nominated Representatives any kind of payment or other incentive that is intended to encourage, or
is likely to have the effect of encouraging, a nominated representative to engage in conduct that contravenes any duty under the act. So I would imagine offering commission for product sales might not be allowed. This is a major change from current QFE terms and would mean most adviser groups wouldn't offer this option unless they were employing salaried advisers with no product sales incentives.

I totally agree with Scott that it is way to soon to be making any decisions about what advisers and groups will do. In fact I think we are 12 months away from that point as we need to know the code and competency requirements and the licencing requirements, process and costs. In the meantime there is the opportunity to start planning what sort of advice business advisers want to have in the future, types of clients, products and services. Because if you have this clear in 12 months time, then assessing the options and requirements for licencing will be easier.
On 15 August 2017 at 10:45 am Dirty Harry said:
@ Barry
quote: " licence holders must not give or offer Nominated Representatives any kind of payment or other incentive that is intended to encourage, or
is likely to have the effect of encouraging, a nominated representative to engage in conduct that contravenes any duty under the act."

You mean like the VIOs currently shout about their "salaried staff" not having "any conflicts of interest"?

But behind the scenes those who fail to meet their KPIs (targets) are put into "performance review"?
So they dont get commission for selling, but if they dont they face extraordinary pressure and the threat of losing their jobs.

But they, hand on polo short, claim they aren't creating payments or incentives that contravenes any duty....
On 15 August 2017 at 11:40 am Murray Weatherston said:
@ron

Let me try to answer...if I get it wrong, hopefully officialdom will contact GR and fix the misinformation.

Please note: Individuals generally will not be licensed in the new regime.
It will only be entities that are licensed as FAPs.
Individuals will self-assert that they are competent to be a "financial adviser" and then have to convince a FAP to allow the individual to link with the licensed FAP. [Or get hired as a nominated representative by a FAP that is allowed to have nom reps.

Sole traders (people who trade in their personal capacity without any corporate form) will have to be a special case.
It's hard to understand why they would want to remain trading in personal capacity, but I guess that is their choice.
They don't have an entity in the normal sense. There will be a legal fiction that a sole trader will be deemed to be an entity, and that deemed entity will need a licence - guess it will be a restricted licence which does not allow for nominated representatives, and which allows only one financial adviser (the person themself) to be linked to it.
So the sole tradership will be licensed, and the adviser will link themself to that licence as a financial adviser.
Simple really.

On 15 August 2017 at 12:00 pm gavin austin adviser business compliance said:
Ron
An individual or entity who applies for a license and is granted one will by default become an FAP. FAR licensing will be similar QFE and DIMs licensing. FMA will not reinvent the wheel but will obviously consider how the legislation will apply to the licensing requirements.

Based on my time at FMA, where I was involved in the QFE licensing process(about 50 of various size and complexity) and that DIMS was very similar then it's not a great leap to come to the conclusion that FAP will have many commonalities. Murray your comment re PI is very valid.

In Australia when similar legislation was put in place the cost of PI did increase but not as much as Directors and Officers or Statutory Liability. I have had discussions with AIG and they concur but can't be specific until they can assess the increased risk. The licensing costs for larger businesses will be the same as a one man band (based on DIMS) but the big costs will be having the compliance and governance systems in place internally (or contracted out where possible) to prove capacity to comply.

My fact finding trip in Aussie showed that to manage all the ASIC and Austrack (AML) requirements for 100 NRs was significant.

A compliance team of 4. Three of which traveled extensively to do on site audits. A significant portion of these costs were passed down to advisers. Costs passed down to advisers here are unlikely to be as high but then many individual AFAs or RFAs don't have any current compliance costs other than their time ie no internal dedicated staff and no external compliance audits.

Murray current aggregators will continue to operators as they are during the transitional period and during that period they will do all the licensing to become an FAR so applying to be a QFE now will be to no advantage and only double up on costs. Existing QFEs will need to apply for licence as an FAR and pay the appropriate fees. As most commentators have said in a numbers of ways the devil will be in the detail but I would suggest that the process begin early as there could well be a large number for FMA to License and who knows what capacity and resource FMA has to cope with it all.
On 15 August 2017 at 1:39 pm Murray Weatherston said:
@Gavin
In your last paragraph, you miss the subtlety of my strategy.
If an entity has a QFE licence on 30 April 2019, it will automatically get both a transitional FAP licence and, as a QFE, the ability to employ nominated reps from 1 May 2019.
And it will then have 2 years to get its full licence.
If an aggregator does not have a QFE licence on 30 April 2019, it will have to apply thereafter for a full licence when the application window opens, and have to argue the case for being allowed to use nom reps - how long will that take - and won't be able to operate in that way until that full licence is granted.
It's hard to see why FMA would have completely different procedures for a QFE licence before say 31 December 2018, and a full licence after 1 May 2019 - so not much extra effort required.
Ever heard of "first mover advantage"?
On 15 August 2017 at 1:42 pm Murray Weatherston said:
@Gavin
PS I think you were mixed up about FAPs and FARs in your comment.
PPS your Aussie comments were illuminating.
On 15 August 2017 at 2:05 pm gavin austin adviser business compliance said:
Thanks Murray
I have to admit that I haven't read the bill as fully as you have so my comments were off the mark, so thanks for the clarity. The Aussie situation is considerably more complex so I hope we don't end up with a similar approach.
On 15 August 2017 at 2:55 pm Barry Read said:
Harry - VIOs will hopefully be asked some hard questions about the conflicts of interest between product sales and advice services when they go through the licencing process. The proposed act has moved conduct obligations such as conflicts and prioritising clients interests from the AFA code of conduct into the act itself so will apply to all licence holders.

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