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Entity licensing 'boosts risk'

Entity licensing could increase the risk of undesirable behaviour from vertically integrated product providers, one commentator says.

Wednesday, October 11th 2017, 6:00AM 4 Comments

by Susan Edmunds

David Whyte, former general manager of AIA in New Zealand, managing director of AIG Life in Australia and now a consultant and director in the industry, said the Financial Services Legislation Amendment Bill and accompanying new code of conduct for those offering advice would change many of the business models operating in the market.

Instead of individual authorisation of advisers and registration, everyone giving advice will have to be connected to a licensed entity. It has been indicated that this will reduce the compliance burden on some businesses.

But Whyte said it could end up being a more difficult process than some expected.

“Now is the time to start thinking about it. Having been through the process in Australia with licensing there, it comes up very quickly even though you think you’ve got time.”

He said organisations that had salaried employees might have less to do to meet their new compliance obligations.

“Entity licensing still has some major potential for bad behaviour. We can see it happening in Australia.”

He said “errant behaviour” seen in licensed firms in Australia, including mis-selling of financial products, could be repeated here if entity licensing led to a more hands-off approach from the regulator.

“But that’s what we’ve got. We have to live with it and keep a wary eye out on those that are not complying in a timely fashion with proper behaviour and best practice. It’s all very well the FMA saying it is getting impatient with product providers not meeting best practice but they have got to do something about it.”

Whyte said he was struggling to see the difference between a financial adviser and a nominated representative in practice.  “They are in no more a position of clarity than they were before the review took place. There’s the same confusing initials being bandied around and hey mean nothing to consumers.”

Nominated representatives will deal with less of their own compliance requirements.

The option to become a nominated representative operating under an entity license would appeal to those who wanted to be guided in their compliance requirements, Whyte said, or who wished to have their own licensed entity that adopted suitably compliant processes.

“You can have a financial adviser who decides to sell one product and a nominated representative who has an approved product list. How is the consumer meant to identify between the two? How does the consumer fare in the legislation?”

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Comments from our readers

On 11 October 2017 at 8:05 am Pragmatic said:
If you ask any Director of any financial services entity, the thing that they fear the most is being personally exposed as a result of the actions of others. To help manage this risk, the new licensing regime will further stymie the discretion of agents to provide anything other than what is prescribed by their principals (“any colour you want as long as it’s ours”).

I suspect this is a significant contributing factor behind many of the vertically-integrated financial services entities who are currently running the ruler over their wealth management divisions, and whether a continued involvement is in their best [personal???] interests going forward… and it’s not just the banks!!! Insurance companies find it easier to debate the grey-zone around insurance and payouts, than the relatively binary expectations of investments
On 11 October 2017 at 9:04 am Brent Sheather said:
The key words here are “undesirable behaviour”. What might be deemed undesirable by one regulator (think the FCA in the UK) could be deemed desirable by another. For example – not so very long ago Mr Everett, using his polo shirt analogy, said that from the FMA’s perspective that putting clients’ interests first meant different things for different entities. He specifically mentioned ASB which is a vertically integrated provider i.e. is inclined to maximise profitability by recommending its own products rather than choosing more widely. This was a line in the sand from the local regulator and it basically gave the go ahead for certain instances of “undesirable behaviour” from local players. Now the FMA might grind its teeth and argue semantics but that’s what was said back then.

Fortunately it is never too late to do the right thing, particularly when the business you work for might soon be sold to a new institution less enamoured with the banksters of this world. For me personally that was the most shocking instance of bad behaviour I have ever seen by the regulator. Yes they have done lots of good things and most of the really bad players have left town. The polo shirt comment however suggests that the FMA has little real appetite for substantively reforming the behaviour of the “good guys” which is very sad because the good guys inflict 99% of the damage on retail investor outcomes. If we do have a change of government I would urge all financial advisers to make contact with your local Labour/Green/NZ First MP urging change so that all client’s interests are put first and we have a level regulatory playing field.
On 12 October 2017 at 10:39 am Barry Read said:
I don't see the issue the same way. The distinction between a Nominated Rep and a Financial Adviser is who is responsible for any bad behaviour. The behaviour standards, care, diligence and competency requirements will be the same for all advice services or as defined by the code, the only difference is who is responsible for the bad behaviour. For a NR the entity is 100% responsible, for FA's the responsibility will be split between the FA and the FAP depending on their licence requirements. An NR will be the same as a Robo-Advice offer by an entity, the entity is 100% responsible. There are no lesser requirements between the two types of adviser.
On 12 October 2017 at 7:26 pm dcwhyte said:
Pretty much the theory about entity responsibility in Australia in 2004, Baz. Results? EUs for just about every VIO. Remains to be seen if we'll have a different experience.

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