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Should lawyers give financial advice?

Since the Financial Advisers Act (FAA) came into force there has been some angst over exemptions for other professions – such as lawyers and accountants.  Are financial advisers right to be concerned that lawyers and accountants can hand out financial advice? Are there any restrictions on them?

Thursday, October 19th 2017, 6:37AM 7 Comments

by Pathfinder Asset Management

Financial advice requires specialised skills.  This means to give other professions an open-ended exemption from the FAA could jeopardise the quality of financial advice and undermine consumer confidence when seeking advice.  This commentary considers the exemption for lawyers and accountants and what restrictions apply (or should apply).

Is it financial advice?

The FAA sets the ground rules for when someone is giving financial advice.  There are several carve-outs where a person is not giving financial advice (section 10(3)) which include:

  • Providing information (such as the cost or terms of a financial product)
  • A recommendation about a class of financial products
  • Making a recommendation about the procedure for acquiring or disposing of a financial product.

Here no one (including a lawyer) is giving financial advice if they make statements like “shares generally give better long term returns than bonds” or “you can buy or sell shares by phoning a broker but I think it’s easier to do this online.”  There is no financial advice here under the FAA (for lawyers or for anyone else).

When can lawyers give financial advice?

Section 13 of the FAA provides that financial advice is not given if that advice is incidental to a business (and that business is to principally a financial service).  There is no clear dividing line for what ‘incidental” means.  A lawyer whose practice principally provides legal (not financial) advice could rely on this exemption.

Section 14 provides an exemption to specific professions.  This includes teachers, lecturers, journalists, registered valuers, real estate agents, accountants and lawyers. In the case of lawyers and accountants the exemption applies if they are “providing a relevant service in the ordinary course of business of that kind”.

What is special about lawyers and accountants that allows them onto the exemption list? On the face of it their training and day to day workload are very unlikely to give them skills matching financial adviser qualifications, experience and training.

This has been described by many as an outrage – yet the exemption granted is unlikely to be very wide.  It would be a brave accountant or lawyer that freely dishes out financial advice to clients believing they are exempt.  The exemption may be very narrow indeed. 

What does the FMA say?

It is a struggle to find explicit guidance on this on the FMA website. Under the heading “Types of advice” they do give some useful pointers to consumers which appear to treat the lawyer exemption as very limited:

“Sometimes lawyers and accountants offer financial advice alongside the other services they provide. They’re allowed to do this, as long as they don’t just give you financial advice….. generally speaking, if someone is providing a recommendation or opinion on buying or selling a financial product, or providing financial planning services, they have to be an authorised or legally registered financial adviser.”

It is still pretty murky where the boundaries start and stop.  An ADLS article¹ from 2013 referred to examples provided by the FMA of when a lawyer (or accountant) is within the FAA exemption.  Here’s a couple:

  • A lawyer who is administering a deceased estate notifies the beneficiaries of their cash inheritance. The lawyer suggests they place the inheritance in a bank term deposit until they have decided how to use or invest it, and also suggests if they are going to invest it to get the help of an authorised financial adviser.
  • A lawyer who is setting up a company for a client advises the client to include an option to buy out her business partner’s shares in the event that he wishes to sell, and to agree the method for calculating the price of the shares.

The FMA also provided examples of when a lawyer (or accountant) is acting outside the exemption:

  • A lawyer who has administered a deceased estate informs the beneficiaries of their cash inheritance and advises them to use the money to pay down their mortgage, or invest in a specific KiwiSaver Scheme.
  • An accountant (or a lawyer) who has acted in the voluntary solvent liquidation of a company advises the shareholders to use the released equity to invest in shares in a specific company, which is about to list on the NZX.

The picture from the FMA’s examples is of a very narrow FAA exemption for lawyers and accountants.

What do lawyers think?

The New Zealand Law Society also published a Practice Briefing titled “Financial Advisers Legislation – implications for lawyers.”  They give a series of 7 scenarios and consider if a lawyer would be acting inside or outside the exemption.  The scenarios provide a few useful observations:

  • It’s ok for a lawyer to tell someone to put funds from a property sale on call with a bank while the lawyer finalises how the funds should be distributed to family interests.  The advice (put the cash on deposit with Westpac) is a “stop gap” measure taken by the lawyer.
  • It’s not ok for a lawyer to provide advice on a full range of financial products where the legal practice generates the majority of its fee income from providing such advice.  (Personally I would have thought the last part about “majority of fee income” isn’t needed – lawyers should not be providing advice on a full range of financial products unless they are an AFA).
  • It is ok for a lawyer who is a trustee of a trust to make decisions about how to invest the trust’s money.  That is fine because they are acting in the capacity of a trustee (not because they have any special exemption as a lawyer).

An article published by a member of the NZ Law Society’s Commercial and Business Law Committee² expressed a wider view.  This argued that Parliament excluded lawyers from the scope of the FAA regime because lawyers’ professional conduct rules provide sufficient regulation already.  The reasoning here is that lawyers can only provide financial advice when they are competent to do so – they need to comply with their duty of care to clients.  On this reasoning they can provide more than the “stop gap” deposit advice if they feel they’re competent to do so.

Anyone else have a view?

The sorted.org.nz website gives common sense advice to consumers around their finances.  Under the heading “Legal Advice” it suggests consumers should talk to a lawyer, accountant or community law service for tax matters, setting up a family trust or for legal advice.  Under the heading “Investing advice” it suggests consumers speak to financial advisers and sharebrokers for advice around shares, bonds, “sometimes property” and for finding the right mix of investments.  They don’t suggest consumers should go to their lawyer or accountant for financial advice.

Barry Read from IDS Limited provides a couple of useful examples of when lawyers get involved in financial advice and on the face of it they are acting beyond the FAA’s “incidental” exemption:

  • An AFA prepares a full plan for a client who in turn provides it to their lawyer for comment. Their lawyer says “don’t do this” to the overall plan or parts of it. Saying “don’t do this” is financial advice.
  • A lawyer sees a client’s financial accounts and queries some insurance costs by saying “you’re paying a lot for insurance, do you really need it? You should just do without it.” Again, this is financial advice.

These examples go beyond a lawyer acting in a way that is “incidental” to the business of being a lawyer. 

Final thoughts

To finish up it is worth noting that the NZ Law Society Practice Briefing seems to accept that most forms of financial advice will be outside a lawyer’s skill set:

“Lawyers should consider whether to secure an AFA status…The fact lawyers may be able to rely upon an exemption does not necessarily mean that they should. It may be the case that the client is actually better served by referral to a professional adviser who is competent to deliver the services required.” 

In the Law Society’s 2016 submission³ to MBIE on the FAA Options Paper they state that a financial adviser should not provide financial advice services “unless the financial adviser is competent to provide that service.” They also argue that lawyers being regulated under the Lawyers and Conveyancers Act 2006 must have competence for services they provide.

The FAA exemption for lawyers should be interpreted narrowly.  It should only apply where (a) the financial advice is clearly incidental to the business of being a lawyer, for example “stop gap” deposit advice and (b) the lawyer can demonstrate they have the competence to give that financial advice.  Moving beyond the simple “stop gap” examples and into more detailed financial advice, an AFA designation should be the only way to demonstrate appropriate competence.


John Berry is co-founder of Pathfinder Asset Management Limited, an independent director of Punakaiki Fund Limited and a member of the Code Working Group.

Notes:

¹ Frank Chan:  “When is a Lawyer a Financial Adviser? A timely reminder of the need for caution” http://www.adls.org.nz/for-the-profession/news-and-opinion/2013/11/29/when-is-a-lawyer-a-financial-adviser-a-timely-reminder-of-the-need-for-caution/

² Rebecca Sellers and Luke Leybourne: “Putting clients’ interests first: Financial Advice”   https://www.lawsociety.org.nz/practice-resources/commentary/legislation-and-regulations/putting-clients-interests-first-financial-advice

³ http://www.mbie.govt.nz/info-services/business/business-law/financial-advisers/review-of-financial-advisers-act-2008/options-paper/options-paper-submissions/NZ-Law-Society-Parts12.pdf

Tags: code working group financial advisers Pathfinder Asset Management

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Comments from our readers

On 19 October 2017 at 8:33 am w k said:
your answer to "should financial advisers give legal or tax advice" should give you some idea if lawyers should give financial advice.
On 19 October 2017 at 8:53 am Brent Sheather said:
Good article. I have seen lots of instances where lawyers and accountants give financial advice and whilst most of it is good some of it is very stupid. For example – about five years ago one accountant persuaded his fellow trustees of a family trust not to buy international shares because of “tax problems”. Similarly a lawyer argued about 10 years ago that a family trust should own no long dated bonds “because interest rates were going up”. Yes all those things could be a matter of opinion but neither individual had the appropriate frame of reference in that neither knew what best practice looked like. What was worse when that was explained to them neither cared. In effect they were saying my law/accounting degree and experience gives me more knowledge of investment matters than the combined knowledge and experience of the market. Good luck with that idea.
On 19 October 2017 at 9:04 am Brent Sheather said:
A further thought. In the section “What do lawyers think” I can see it is ok for a lawyer to tell someone to put their money in the bank as an interim measure. But is it ok for the lawyer to tell someone to invest in a mortgage trust when the law firm actually owns the mortgage trust? If the answer to that is no, and obviously it should be no, then maybe the FMA need to do some research…… It is the old problem with vertically integrated businesses – advice masquerading as independent when it aint.
On 20 October 2017 at 10:58 am dcwhyte said:
Good article, John - and agree with Brett. There is nothing in an LLB or CA qualification that prepares a lawyer or an account to advise on investment or life insurance any more than an architect or a dentist is prepared by their professional qualification. Smart lawyers and accountants will find alliances with professionally qualified financial advisers and do the right thing by their clients.
On 20 October 2017 at 2:10 pm Licensed Adviser said:
It would be appropriate for Lawyers and accountants active in this space to follow similar CPD to Financial Advisers. Logging 30 hours specific investment training would go some way to showing competence.
On 20 October 2017 at 2:11 pm Licensed Adviser said:
It would be appropriate for Lawyers and accountants active in this space to follow similar CPD to Financial Advisers. Logging 30 hours specific investment training would go some way to showing competence.
On 24 October 2017 at 8:52 pm SonnieBailey said:
I'm a former lawyer and current AFA. I'd reframe this a little to see where financial advisers and lawyers complement each other. Sometimes, lawyers can provide incidental advice that results in better client outcomes.

There were definitely times where, as a lawyer, I would provide incidental advice. For example, where I would be preparing wills for young couples with young children. After going through their asset situation, I would ask about their life insurance arrangements. Many times they didn't have sufficient life insurance in place, or any at all. I would explain that, no matter how well I draft the will, their testamentary intentions meant very little if their estates aren't able to finance them. I would say they really need to consider life insurance (and while they're at it, other forms of personal insurance - this was often in the context of preparing enduring powers of attorney, as well, so it was relevant). Wherever possible I would refer them on to risk advisers, explaining the benefits of seeking an adviser compared to, say, going to an insurer directly or using LifeDirect. I wouldn't provide specific product advice or advice about level of cover, but I would strongly encourage them to consider insurance.

I think this was absolutely appropriate and lawyers should be encouraged to provide advice in these limited situations where it will result in better client outcomes.

Another example that comes to mind is where clients are discussing shareholder/buy-sell agreements. Often insurance is central to this. There is certainly a point where you can overstep the mark, but if you're too rigid you'll prevent important conversations from taking place.

I can also think of scenarios where the example "An AFA prepares a full plan for a client who in turn provides it to their lawyer for comment. Their lawyer says 'don’t do this' to the overall plan or parts of it" needs to be fleshed out. For example, a lawyer may be aware that the client has made a specific gift of certain financial assets for someone in their will, and a recommendation to sell the shares would compromise this. Or the recommendation relates to trust assets, and the lawyer is aware that the recommendations are not in line with the terms of trust. Perhaps "don't do this" lacks nuance but communicating these issues with a client are relevant.

I don't think any of my comments are inconsistent with the article but thought I'd add to the conversation.

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