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Working group raises FSLAB worries

The working group developing a new code of conduct for financial advisers has suggested changes to the Financial Services Legislation Amendment Bill (FSLAB).

Wednesday, February 28th 2018, 6:00AM 18 Comments

by Susan Edmunds

FSLAB is being considered by select committee. Submissions on the new bill were open until the end of last week.

The code working group, tasked with devising the code that will apply to all advisers under the new rules, was one submitter.

It highlighted concerns about the exemption in FSLAB for financial advice that is provided by specified occupations, such as lawyers and accountants, in the ordinary course of business.

The group said because there was no "bright-line" test, the boundaries of what was acceptable under the exclusion were blurred.

"Writing or reviewing an investment plan for a family trust requires specialised competence, knowledge and skills. Yet it might be claimed that this activity is part of the ordinary business of a lawyer who advises on trusts and estate planning.

"Our concern is that this lack of certainty has the potential to undermine consumer protection – the consumer continues to be a 'retail client”' receiving 'financial advice' but the financial advice is not regulated to the standards of the code."

The submission said the group understood there was little monitoring of the delineation between the advice in those exempt situations and regulated financial advice.

"Consumer protection laws that are impractical or difficult to enforce are ineffective and could result in harmful outcomes for consumers. We have received feedback that some exempted persons do not have the requisite competence, knowledge and skills to provide suitable advice even where that is in the ordinary course of the relevant occupation or business.

"We recognise that in these cases the relevant occupational supervisory regime will have jurisdiction. However, that relies on a complaint first being made and will, almost always be after any harm has been done. Furthermore, the level of competence, knowledge and skill expected by each of the different occupational supervisors could be materially lower than that in the code."

Other changes the working group suggested included making it clearer that minimum standards of professional conduct could apply to entities as well as human advisers, expanding the definition of financial advice products and redefining "financial advice" to include advice in connection with things such as switching KiwiSaver funds and the design of a financial plan that was not investment.

"We note that a variation of the terms of a financial advice product is deemed to be a financial advice product. However, the exercise of an existing right under the terms of a financial advice product arguably is not a variation. Financial advice in connection with switching KiwiSaver investment funds is one of the most common and important advice situations. We think it is important that the new financial advice regime unambiguously applies to that advice."

Tags: Code Working Group Financial Services Legislation Amendment Bill

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Comments from our readers

On 28 February 2018 at 7:32 am Brent Sheather said:
That is a good point about accountants and lawyers. Most are sensible and to be honest because they are most often not conflicted they give good advice but occasionally they are conflicted – some lawyer and accounting firms own shares in a mortgage trust thus often they direct their clients funds into that mortgage trust. Very naughty I thought. In addition when reviewing plans a couple of accountants have told their clients “don’t invest in international stocks as you will pay too much tax” and, about 10 years ago, “don’t buy long dated bonds as interest rates are going to go up”. Both of these latter mistakes are obviously not limited to accountants but do demonstrate a lack of knowledge and maybe a little arrogance.

Regards
Brent Sheather
On 28 February 2018 at 9:03 am Simon Papa said:
As a lawyer I’ve never provided financial advice to clients. I think it’s worth noting that, except in limited areas of work (like court work), there are no restrictions on non-lawyers (including financial advisers) on providing legal advice, as long they don’t call themselves “lawyers” (and some other protected titles). The Law Society notes that “it is important for lawyers to not to take an overly technical approach to interpretation [of the exemption] but to consider their clients’ needs first and foremost, and their own competence to provide the [financial] advice.” I think the code committee’s scepticism about the role and skills of occupational supervisory regimes is somewhat unwarranted. Lawyers Standards Committees released 39 decisions in 2017 (which do not cover all complaints considered). In addition, the Lawyers & Conveyancers Disciplinary Tribunal released 27 decisions in 2017. Lawyers take their professional obligations seriously and the committees and the tribunal serve an important role in educating lawyers about the bounds of professional conduct and the consequences for not meeting them. As a lawyer I’ve never provided financial advice to clients. I think it’s worth noting that, except in limited areas of work (like court work), there are no restrictions on non-lawyers (including financial advisers) on providing legal advice, as long they don’t call themselves “lawyers” (and some other protected titles). The Law Society notes that “it is important for lawyers to not to take an overly technical approach to interpretation [of the exemption] but to consider their clients’ needs first and foremost, and their own competence to provide the [financial] advice.” I think the code committee’s scepticism about the role of occupational supervisory regimes is somewhat unwarranted. Lawyers Standards Committees released 39 decisions in 2017 (which do not cover all complaints considered). In addition, the Lawyers & Conveyancers Disciplinary Tribunal released 27 decisions in 2017. Lawyers take their professional obligations seriously and the committees and the tribunal serve an important role in educating lawyers about the bounds of professional conduct and the consequences for not meeting them. I note that, in contrast, the Financial Advisers Disciplinary Committee has released 9 decisions in 7 years, though it can only consider decisions on referral from the FMA and the FMA does take other actions against financial advisers.
On 28 February 2018 at 2:24 pm Murray Weatherston said:
@Simon Papa
The fact that you do not provide financial advice yourself does not disprove the allegation that some layers provide financial advice.

People doing similar things should surely be regulated similarly

We at SIFA are delighted that the CWG has publicly lifted the veil off the lawyers' and accountant' exemptions in the way they have.

Maybe officials might listen to them. here's hoping.
On 28 February 2018 at 3:56 pm Brent Sheather said:
Thanks for your comments Simon. Do you think that lawyers who direct some or all of their clients savings into a high risk mortgage trust which they have a financial interest in would meet the definition of “considering their clients’ needs first and foremost”? The situation is further complicated by the fact that often the lawyer is a trustee and thus a trusted expert. This is a clear conflict of interest in my view and might become relevant if the mortgage trust ever gets into trouble.
Regards
Brent
On 28 February 2018 at 8:42 pm Simon Papa said:
My point Murray was that the exemption doesn't affect me at all.

It's not an "allegation"- it's a simple fact that some lawyers provide financial advice & it's quite legal for them do so. There's no "veil" to be lifted- the exemption was carefully considered when the law was passed and is widely known, and MBIE asked for submissions on it as part of the law reform process.

It doesn't automatically follow in my view that people doing similar things need to be regulated similarly e.g. immigration advisers give legal advice but don't have to be lawyers to do so. It's not up to officials now but to the MPs on the select committee and ultimately Parliament.
On 2 March 2018 at 5:13 pm BGW said:
Brent, I enjoy your commentary, and support your various campaigns. However, I think you need to develop a better understanding of fiduciary obligations and obligation to act in client's best interest given how much you opine on it. This medium doesn't allow me to explain what I mean properly, but, briefly;
• First, lawyers do not have an obligation “to put client’s needs first and foremost”. Rather they have a fiduciary obligation to act in client’s best interest. An obligation to put client interest first, which I presume is to what you are referring, is a contrived, soon to be statutory, duty created by the code committee and which, thankfully, only afflicts financial advisors under the FSLAB. [Noting as an aside that many financial advisors will also have fiduciary duties imposed on them under common law, which is on top of their pending statutory duty under the FSLAB];
• Second, on any reasoned analysis, and certainly on the basis of available client remedies, the FSLAB obligation to put client interests first is not higher than the fiduciary obligation to act in client’s best interests, despite what Code Committee seem to be suggesting in the article (which, incidentally, completely contradicts previous statements from Code Committee and regulators);
• "best interest" doesn't mean "best", it means "best interest" (…..as opposed to worst interest, say);
• Potential conflicts can be properly avoided by disclosure;
• Trustees have the same fiduciary obligations as lawyers (not higher); and
• Lastly, and most relevantly to your commentary, performance (loss or profit) of an investment is not generally relevant to breach of a fiduciary duty - or to put it another way liability for breach of a fiduciary duty by a fiduciary (such as a lawyer) arises quite independently of the loss or profit of an investment. A fiduciary is never liable for direct loss of an investment by itself. They are only liable if they haven’t acted in the best interests of the client in giving that advice, and that liability arises even if the investment produces an expected profit. For example, in your case, let’s say the mortgage trust fund was the best performing mortgage trust fund in the history of the world. If the lawyer secretly profited from the advice (say via an undisclosed shareholding in the mortgage trust fund manager), the lawyer is in breach of its duty and will have to account to the client for that breach – which liability arises even though the mortgage trust fund is the best performing fund ever, and the returns to the client are unparalleled in the history of all time. However if they did disclose that shareholding then no liability, as full disclosure has been made and no conflict of interest arises. No doubt some would be asking what the lawyer will be liable for in not disclosing the shareholding if the client has made such an enormous profit and suffered no apparent loss?? Answer is - the liability would be for the profit the lawyer made, which hadn’t been disclosed to, or consented to, by the client. So the lawyer would have to pay the client the equivalent of the increased value of the shareholding (say). This is because fiduciaries are liable for any income derived by them from the transaction which is not specifically consented to by the client. This is particularly relevant for financial advisors and, topically, real estate agents (just substitute commission for shareholding).

Keep up the good work.
On 5 March 2018 at 8:53 am Brent Sheather said:
Hi BGW

Thanks for that. With due respect whether lawyers have a duty to act in a client’s best interest or put client’s needs first doesn’t make much difference if instead of recommending a balanced fixed interest portfolio as per best practise they instead say “let’s invest the money in a mortgage trust”. That’s demonstrably wrong and not consistent with either putting client’s interests first or “putting clients’ needs first”. Everything else is just “noise” and my point was lawyers might know about the law but they might not know what a properly diversified fixed interest portfolio looks like.
On 5 March 2018 at 5:10 pm Murray Weatherston said:
@BGW
Four comments and a question
1. Agreed lawyers have fiduciary duty to their clients (as do trustees to their beneficiaries). Both are "status fiduciaries"
I would however take issue with your statement "many financial advisers will also have fiduciary duties imposed upon them under the common law".....I agree some might be held to be a fiduciary at law but I would not think it would be "many". ie it will be the exception rather than the rule

2. The statutory duty under FSLAB will be (if unchanged) "Give priority to the client's interest" and not put the interests of the client first. In some people's minds they are not the same - giving priority is narrower (and more easily understood - hallelujah to that)

3. (Second bullet) The Code Working Group and the Code Committee are two different beasts and there is no earthly reason there needs to be consistency between their views and statements. Code Committee is responsible for the present Code of Professional Conduct for AFAs. CWG is writing the Code to apply in the future to all advisers caught under FMCA.

4. Key point of your last bullet point is surely that where a fiduciary is involved, mere disclosure of a conflict is not enough, the client has to actively consent to the fiduciary making a profit.

5. My question - In second bullet, why do you say "which, thankfully, only afflicts financial advisors under the FSLAB". What are the fishhooks you see?
On 6 March 2018 at 9:51 am Tash said:
oh dear! the word fiduciary duty is bandied about with abandon. For those who believe lawyers have a fiduciary duty please provide your legal authority for this comment, in New Zealand or any other jurisdiction. Trustees have fiduciary duties imposed on them by,inter alia, hundreds of years of English (and other jurisdictions) common laws, confirmed in Judgements by the highest courts. Lawyers, accountants, financial advisers, architects, builders, used car sales men do not owe fiduciary duties. Fiduciary duties are very onerous and while these people owe duties of various sorts they are not fiduciary duties in the sense the law regards a fiduciary duty.
On 6 March 2018 at 10:17 am James Sheridan said:
Interesting that Lawyers have a fiduciary duty yet accountants and other professions do not.
But do lawyers have an obligation to provide disclosure both before and after advice, in particular detailing remuneration and conflicts of interest?
Do they have an obligation to be suitably trained by a specified series of CPD?

Do they have a stated obligation to provide competency and skill?

Will they have an obligation to be on a register that shows they are accredited to provide financial advice.

Will they be going through a detailed and complex licensing arrangement that constantly requires checks on competency, financial strength, training and compliance assurance?
I think we know the answers.
On 6 March 2018 at 1:22 pm Murray Weatherston said:
@Tash
Does the following statement from NZ Law Society webpage provide sufficient authority. The third obligation is the apposite one.

Client care

The Rules of Conduct and Client Care for Lawyers came into effect on 1 August 2008. They are based to a large extent on the four fundamental obligations of lawyers set out in s4 of the LCA.

Every lawyer who provides regulated services must, in the course of his or her practice, comply with the following fundamental obligations:

to uphold the rule of law and to facilitate the administration of justice in New Zealand

to be independent in providing regulated services to his or her clients

to act in accordance with all fiduciary duties and duties of care owed by lawyers to their clients

to protect, subject to his or her overriding duties as an officer of the High Court and to his or her duties under any enactment, the interest of his or her clients.
On 6 March 2018 at 1:33 pm BGW said:
Oh dear Tash. I try not to get drawn into debate, but your comment is so obviously wrong I can't let it lie. For anyone that doesn't otherwise have access to a Google machine please see s. 4(c) of the Lawyers and Conveyancers Act 2006 which notes, inter alia, that “Every lawyer who provides regulated services must, in the course of his or her practice, comply with the following fundamental obligations: … (c) the obligation to act in accordance with all fiduciary duties and duties of care owed by lawyers to their clients:…”. Of course, that is just one immediate and readily available authority. There are many more.

James – yes to all those questions.

Murray – all good comments. You’re quite right – not all advisors are fiduciaries. However, “expert advice” is definitely a service that can attract fiduciary obligations in the right circumstances (e.g. where reliance and trust exists). Also agents generally owe fiduciary obligations to their principals, and I consider many financial advisors act as agents in one capacity or another. I particularly agree with your point about consent being so critical to discharging the no-profit duty. A much higher threshold than is commonly understood. In response to your question, my hostility to the FSLAB duty of client first is fundamental. We have a perfectly adequate existing duty (fiduciary) which should be applied. Instead we have created a contrived and completely new duty which has no precedent value anywhere in the world, and will take a small library to properly document. The legislators are going round in circles trying to justify it, and to demonstrate differences to the existing otherwise applicable common law duties (negligence and fiduciary). Crazy in itself – but also genuinely harmful as inevitably the statutory changes will erode the client protections that currently exist under common law.

On 9 March 2018 at 10:18 am Tash said:
Thanks Murray and BGW. However, the laws and rules you quote apply in cases where lawyers take on fiduciary duties, if they accept appointment as a trustee for example. The rule does not impose a general fiduciary duty on lawyers in all dealings with clients.
On 9 March 2018 at 4:18 pm Murray Weatherston said:
@Tash
There is no kind way to say this but you are plain wrong. You have clearly done not even basic research on the topic.

Have you ever heard the terms status fiduciaries and fact based fiduciaries?

As BGW and I both told you above, the lawyer-client relationship is a status fiduciary. BGW told you where to find the lawyers' law. I quoted the NZ Law Society

If you want some distinguished judicial authority, try Tipping J in the NZ Supreme Court in Fay v Chirnside [2006] NZSC 68 at pars 73 and 75

[73] Many cases, textbooks and articles in learned journals have considered when and against what criteria the courts will find that a relationship gives rise to fiduciary
duties. In essence, there are two situations in which that will be so. In the first, the relationship is of a kind which, by its very nature, is recognised as being inherently
fiduciary. Most cases involving a breach of fiduciary duty are of this kind. They fall into one of the recognised categories of relationships which are inherently fiduciary. These include the relationships of solicitor and client, trustee and beneficiary,
principal and agent, and doctor and patient.

[74] ...{not quoted here because it is extraneous to the main point...]

[75] The second situation in which a relationship will be classed as fiduciary depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so lassified. No single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories is such that the parties owe each other obligations of a fiduciary kind. The literature in this field is voluminous. No useful purpose would be served by an attempt at a general survey.
On 13 March 2018 at 11:03 am Tash said:
Murray - yes sorry, brain fade. I was referring to a trustee's fiduciary duties - not the same as a lawyers'
On 13 March 2018 at 8:09 pm Murray Weatherston said:
Hi Tash
Tipping J's judgment that I quoted above says that both lawyers and trustees have the same fiduciary duty to their client and beneficiary respectively.
Both lawyers and trustees are automatically status fiduciaries.
On 14 March 2018 at 10:42 am Tash said:
Hi Murray. I don't read it that way, but are you telling me lawyers have an over-arching duty to look after their clients interests and take steps to protect them even if this is outside their mandate?
On 14 March 2018 at 2:29 pm Murray Weatherston said:
What I am saying is that a lawyer has a general fiduciary duty to their client in whatever they do for the client.
Google - lawyer fiduciary - and you will get hundreds of hits that will tell you that.
Similarly a trustee has a general fiduciary duty towards their beneficiary

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