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FMA focus on financial advice

Financial advice is a key area of focus for the Financial Markets Authority, its chief executive Rob Everett told the Infinz conference.

Thursday, November 16th 2017, 6:00AM 5 Comments

He said, after the global financial crisis, regulators' focus was more tightly on behaviour, with more of an emphasis on earlier risk management, financial stability and governance.

He said good regulation should support and protect customers' and investors' interests, encourage efficient operation of financial markets and economic growth as it lowered the cost of capital for New Zealand companies.

By contrast, bad regulation would impose costs, limit commercial freedom, stifle innovation and create barriers to participation, as well as other unintended consequences.

Good regulators would be, among other things, evidence-informed, risk-based, responsive and proportionate to the risks and harms presented.

He said the regulatory system should be an asset that should deliver benefits and positive outcomes that exceeded the cost of running it.

Financial advice was one of the FMA's key focus areas, he said, as it looked at how the industry balanced access to advice against quality and trust.

He pointed to the "advice gap" that was potentially leaving many consumers without information they needed.

Everett said the FMA was looking at the impact of remuneration models and sales incentives, as well as indirect sales, especially within vertically integrated firms.

Everett said while the law reforms were aimed at clarifying who was giving advice and on what basis, there was,  in reality, little truly independent financial advice in the market and most was aimed at high-net-worth individuals.

"[That] leaves the occasional or small-time investor unaided, a population that needs help and is vulnerable to loss."

But he said people did not like paying for financial advice.

Fintech was changing the market and challenging the dominance of the big players, which had been "baked in" since the GFC by some of the responses to the crisis, such as increased capital requirements.

"It is an expectation that regulators be agile and pragmatic enough to evolve as the markets evolve.   That’s never been more necessary than today. At the FMA we’re doing everything we can to approach these challenges with the right mindset."

Tags: financial advisers fintech FMA regulation risk management Rob Everett

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Comments from our readers

On 16 November 2017 at 7:59 am Brent Sheather said:
Very good stuff from Mr Everett. Particularly like his comment that “there was, in reality little truly independent financial advice in the market”. Also when Mr Everett says that “good regulators would be evidence – informed” he should perhaps note that retail investors also need to be “evidence – informed”. Therefore perhaps the FMA should in the future, when conflicted market players make false statements without evidence, publicly call them out. Evidence is anathema to the pushers of fake news. This would stop most of the bad behaviour but personally I favour a more hands on approach - putting the perpetrators in stocks in front of the FMA building for an eight hour period and inviting the public to throw rotten fruit at them.

On 16 November 2017 at 8:29 am Charity said:
That is rich! FMA and MBIE have been the single largest contributors to the large banks and big institutions' success with the vertically integrated model. Rather than interpreting Code Standard 1 with the plain language that an AFA has to put the client's interest first, they (and Rob Everett specifically) interpret it to mean one thing for the small adviser and another thing for the adviser wearing the ASB Polo. Code Standard 1 says you put the client's interest first. It doesn't say, because the bank runs an vertically integrated model, they can decide to sell only their own products and even if they are expensive and terrible that is considered putting the interests of the clients first. There is nothing that limits large banks from accessing all products in the marketplace other than their own greed. As to fintech becoming the saviour to battle the big institutions, it is clear that the large institutions will be the first out of the gate being licenced for Roboadvice. Guess what their Roboadvice will recommend as the investment solution. Their own funds. FMA doesn't have anyone in their employ who understands what good advice is so they aren't capable of regulating it well. Mostly they employ lawyers who haven't a clue about what is involved in providing financial advice. Everett is quoted as saying "bad regualtion would impose costs, limit commercial freedom, stifle innovation, and create barriers to participation, as well as other unintended consequences." That quote specifically describes the course of regulation since 2010 in New Zealand. We are on our third version of the Code and heading for a fourth. The statutory regulations continue to change again and again. Licencing for advisers is getting ready to change again. We have already been through the DIMS licencing debacle. The cost of providing financial advice continues to escalate and it's difficult to see how the consumer has benefitted from any of this.
On 16 November 2017 at 9:31 am Pragmatic said:
Whilst this is ‘standard regulatory rhetoric’, my ears pricked up with the following statements:
1. “Everett said the FMA was looking at the impact of remuneration models and sales incentives, as well as indirect sales, especially within vertically integrated firms”: Simple solution here is for all dispensers of financial solutions to put the client’s interests first… the alternative is for those entities that are aligned or unable to provide ‘advice’ to remove that language from their proposition (ie: call themselves sales folk)

2. “By contrast, bad regulation would impose costs, limit commercial freedom, stifle innovation and create barriers to participation, as well as other unintended consequences.”: I would strongly encourage the Regulator to understand the ratio of industry time spent completing relevant / irrelevant compliance requirements, and the costs that these provide for new / existing clients.

3. “Financial advice was one of the FMA's key focus areas, he said, as it looked at how the industry balanced access to advice against quality and trust.”: I would encourage the Regulator to provide a level playing field for all dispensers of financial advice, and abolish the current loophole that Accountants and Lawyers enjoy in providing investment solutions to consumers – without the same duty of care or appraisal required.

Whilst the lure of fintech is appealing (distracting????), many consumers continue to require a relationship with a human to appraise their financial matters… which is why we all participate in the ‘trust’ industry. I suspect that the short to medium term diagnoses for fintech is that it will make the onboarding and maintenance of consumers more efficient as opposed to providing an alternative conduit for consumers.
That’s a bit of a long-winded way of encouraging the Regulator to support the existing advice industry, rather than stifling the small businesses that many of them are. The alternative will force many consumers (especially those who are unable to cover the rising costs of obtaining advice) to go direct – a much more difficult & fragmented community to police.
On 16 November 2017 at 2:53 pm Brent Sheather said:
Have to agree with Charity and Pragmatic but does anyone think there may have been a subtle change in the FMA’s rhetoric post the election? All financial advisors who agree with Charity’s comment that doing the right thing should mean the same thing whether you work for a vertically integrated provider or not should contact their local MP and tell them exactly what goes on in our industry. I am sure Mr Faafoi, if he is a reasonable man, will agree that doing the right thing should be the same for everybody. With a Labour government we have the best chance we have had in years to get some proper regulation in NZ.

On 17 November 2017 at 10:13 am R1 said:
Just an idea but how about Mr Faafoi consider a behaviour standard for the FMA that they must put the investor's long term interests first. Then we might get a regulator that consults with investors and not just the industry.

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