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The Code – issues for advisers (Part One)

This commentary looks at the new Code of Conduct and the issues, opportunities and challenges for adviser businesses. It is written by John Berry, a member of the Code Working Group (CWG), in his capacity as a commentator on NZ financial markets and as CEO of Pathfinder.

Tuesday, April 17th 2018, 6:05AM 9 Comments

by John Berry

This commentary therefore contains his personal opinions. It is not written on behalf of the CWG and is not intended to reflect CWG views. 

Where we are now
Before launching into issues around the new Code, it is important to look at where we are now.  Part One of this commentary needs to begin with some background while Part Two will address what I consider are key topics to be considered by retail advisers (which will hopefully encourage further adviser submissions).

To start with, what parts of the current regulatory regime are lacking?  What needs to be fixed? Here are five key issues commonly identified by advisers:

Issue Description Can the new Code deal with this?
Prescriptive documentation Required adviser documents are too detailed and clients often don’t read them.  Is there a better way to share information with clients? Yes, the CWG can help here, although note that RFA and AFA disclosure documents are not set by the CWG.  MBIE is separately working on new disclosure rules for advisers (MBIE issued a discussion paper on adviser disclosure with comments closing on 25 May – see link at the end).
Sales vs advice There are a range of business models providing financial advice in NZ.  These include advice businesses selecting what they see as the best product in the market, businesses choosing product from a small number of providers and businesses only making their own product available.  Unfortunately the later model (where the provider manufactures and then advises on its own product) is heavily entrenched in NZ financial services.  This model may result in a service which has more in common with “sales” than “advice”.  No, this is a matter for the Bill and Select Committee.  The designation of “sales” vs “advice” is outside the ambit of the CWG.
However, one point should be noted when comparing the current Act with the proposed Bill. The current Act requires clients to “agree” scope with an adviser while the new Bill proposal requires scope and limitations be “understood” by the client.  This change implies providers will need to be very clear with clients where “advice” is minimal and is more like a “sale”.Many advisers are concerned how the “sales vs advice” issue can be best managed for consumers, and we may look at this further in part two of this commentary.
Exemptions from giving advice Various professions (such as accountants and lawyers) can give financial advice yet nothing in their training prepares them for this.  The fact these other professions fall outside the giving of regulated advice is seen by many advisers as problematic for consumers. No – although it should be noted that the CWG agrees with the advice industry and has asked the Select Committee to tighten the exemption.
Lack of guidance on “good behaviour” There appears to be uncertainty around where boundaries may sit.  A simple example is the “client first” duty – there are a variety of views on exactly what this means in practice and how it is applied across different business models. Yes – although there is always a tension between creating a prescriptive Code (as big as a telephone book but with greater certainty and exactness) vs a principles-based Code (shorter in word count but having less certainty).  The CWG has submitted to the Select Committee asking for confirmation that the Code can include guidance and examples which will provide more certainty with interpretation.
Financial advice as a profession The industry is not currently seen as a true profession by many advisers and by consumers. Yes.  This is a long-term objective widely shared by advisers and adviser associations.  The new Code can help encourage positive change.

There are several other issues we could add that are widely discussed – for example consumer confusion around AFA and RFA designations.

Regulatory change for advisers
Advisers have faced and are continuing to face a great deal of regulatory change. This is tough to deal with, particularly for smaller businesses who won’t have the scale to employ in-house legal or compliance specialists to manage the change. 
The cost of change for both small and large businesses can be considered in three ways:

  1. Dollars: money spent on external advice such as on lawyers and compliance experts.
  2. Time: additional management (and adviser) time and energy spent on compliance work such as coming to grips with on-going change. This can be invisible to the outside world but inside a business is a very real cost.
  3. Upfront or ongoing:  understanding whether the compliance expense or time spent is a one off cost at the point of transition to a regime or whether it will be ongoing into the future.

Retail advisers will be well aware that the revised Code is only one of a handful of important regulatory changes. In addition to the Code, advisers need to keep up to date with changes to:

  1. The Financial Services Legislation Amendment Bill (and the Select Committee process)
  2. MBIE’s consultation on new disclosure rules
  3. FMA licensing

It’s a lot of work - no wonder adviser businesses (particularly smaller businesses) are feeling crushed by compliance and regulatory change.  Key links to documents relating to the Code and also 1 and 2 above are at the end of this commentary.

Challenges for the Code Working Group
While advisers already have a Code of Conduct, this cannot simply be re-dated and re-issued by the CWG.  Significant changes are needed for several reasons:

Key issues Current Code (FAA requirements) New Code (new FSLAB requirements)
The adviser audience Under the FAA regime the current Code deals only with AFAs (of which there are less than 2,000). The new Code must cover AFAs, RFAs and QFE staff – which will extend the universe to over 20,000.
Robo advice The current Code is created for a world where only humans can deliver financial advice. Under the new regime advice can be delivered by humans, “robo” systems or some hybrid combination of the two.
Code type The current Code is an occupational code meaning individual standards define the activities of an adviser. Under the Bill the new code is to be a service code which focuses on service levels from a consumer’s perspective.

The regulatory changes mean development of the Code is a tough challenge for the CWG. Add to this that the CWG must regard both the availability and quality of financial advice (which can at times seem like a balancing act) and you will appreciate it is not an easy task.  Wide consultation by the CWG is critical.

An initial question for preparing the Code is also how prescriptive it should be.  It can be long, detailed and have a “check the box” approach. This would give advisers some certainty but would also be complex and open opportunities to arbitrage the rules.  The converse is to be shorter and principles based, which throws a lot back to adviser businesses to decide if their approach is compliant. 

Principles based is less black and white but can deliver a common-sense approach with more flexibility for adviser businesses.  The CWG has signalled its preference for a principles-based Code – be sure to submit if you think this is fundamentally the wrong path.

Developing the new Code
The CWG is on a relatively tight time frame with a draft Code to be submitted for Ministerial approval later in 2018.  The process requires wide consultation with key stakeholders (advisers, consumers and the regulator) and an impact report considering key decisions the CWG makes.

There has been criticism of the make up of the CWG particularly around the lack of representation from small retail adviser businesses not associated with large corporates. The disquiet was evident from early on when the CWG was appointed by the National Government’s Commerce and Consumer Affairs Minister (Jacqui Dean) in June 2017. It is important for advisers to understand that these concerns are not a matter that the CGW itself can deal with – other than by consulting widely, openly and as often as possible with all parts of the adviser community.

Impact on advisers and looking towards “part two”
Current regulatory changes are important for both consumers and adviser businesses. Within the adviser community any change has potential to impact the careers and incomes of individual advisers.  This importance is reflected in the depth of adviser feelings on issues around the Code and CWG, but also means as an adviser you must dedicate some time to reading and thinking about proposals. Start with the links below and also note that this initial round of CWG consultation closes on 30 April.

Apologies for leaving you hanging, but it is the next instalment of this commentary that will deal with the critical issues impacting advisers and consumers.  These include good advice “outcomes”, ethics, competence, CPD, training and client care.  A final reminder – this commentary expresses the personal views of John Berry and Pathfinder (it does not represent official views of the Code Working Group).

John Berry is co-founder and CEO of Pathfinder Asset Management, a boutique responsible investment fund manager.  He is also a member of the Code Working Group.

Useful links:
The Code Working Group’s consultation paper (start with the executive summary on page 8)

Slides from the Code Working Group’s public presentations in March

Financial Services Legislation Amendment Bill (it can be hard work reading legislation - may be start by looking through the headings to clause 27).

MBIE’s discussion document on financial advice disclosure

Tags: Financial Services Legislation Amendment Bill FSLAB

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Comments from our readers

On 17 April 2018 at 1:59 pm Mrs AFA said:
Thank you, John, for the time and effort you put into this work. I appreciate it very much. Looking forward to the next installment!
On 17 April 2018 at 2:04 pm Murray Weatherston said:
Dear John

I hadn't realised you were applying for the job as CEO of Financial Advice NZ - Part One reads like a summary of what a candidate for the job would have told the Interview panel what advisers should be looking out for in the current regulatory review.

I have to say I haven't seen a lot sent out to members by organisations that have a high %age RFA membership.

And your review is not a bad review either.

But it's Part Two that will be the guts for those of us already knew what was in Part One and have already passed it on to our members.

I am going to be fascinated to see the magic of how you perform the act of giving a personal view of the Code when you are at the same time a member of the CWG.

If the CWG is already unanimous, then any member's view is the Groups view.

But if the Group isn't already unanimous on any particular issue, are you going to come clean and disclose whether you are currently in the majority or minority with your personal view.

To find that magic answer iswhy I am looking forward to Part Two. When is publication day - tomorrow perchance?
On 17 April 2018 at 4:33 pm Murray Weatherston said:
A specific question if I may.

You say in the last row of the second table under Code type
“The current Code is an occupational code meaning individual standards define the activities of an adviser.
Under the Bill the new code is to be a service code which focuses on service levels from a consumer’s perspective”

You seem to have discounted in advance a key SIFA submission which challenges the CWG interpretation of a part of the Bill – to be precise Schedule 2 that introduces new Schedule 5 to FMCA, clause 32(1)

CWG seems to reach its conclusion about a “service code” from the wording “The code must provide for minimum standards of professional conduct that must be demonstrated when regulated financial advice is given”

We have submitted to Select Committee that the wording be changed to “”…conduct that must be demonstrated by all persons who provide regulated financial advice..” That makes the following submission we have made to CWG easily possible.

We have submitted to CWG that you actually write the Code in two parts (or two Codes), one for humans who give the advice that could be written as an occupational Code [and thus get around a lot of the difficulties you (CWG) are currently struggling with] and the other for entities who give the advice (e.g. robo sales advice). There can be no boundary problem because the adviser is either human or they are not; the advice is provided on behalf of the FAP by a human or by the FAP itself.

But absent any change to the relevant part of the Bill, do you have a personal view as to whether the words currently in the Bill would prevent you from writing a two part code (or two codes) as we have suggested? Have you ever considered such a possibility? If so, what is your answer and why do you hold that view?

Many thanks in advance.
On 17 April 2018 at 6:11 pm NormanStacey said:

A valiant defence of an awkward position.
Fascinating that you suggest need will expand from under 2000 to over 20,000.
Reminds one of the 30,000 plus advisers that the FAA - largely authored by the current CWG Chair largely authored - warned Standard Set B providers to prepare for. Missed by an order of magnitude.
The resulting effect [& possibly intent] was to gut Independent advisors as a market segment, & deliver the industry to the BEOT.
Submissions to the CEG from Independent Advisors are unlikely, largely pointless and serve mostly to add to the pretence of consultation.
The FAA 2008 failed & was Angus Dale-Jones' baby.
Sadly, the re-write is an opportunity missed.
The Peter Principle is wrong; Some persons get promoted several levels beyond their level of incompetence.
On 17 April 2018 at 10:42 pm henry Filth said:
As a simple mug punter, I am encouraged by the number of contributors to the discussion, the range of opinions, and the gradual drift away from a compliance-oriented box-ticking approach.

Principles are wonderful things, and make it much easier to develop a trust-based, long-term relationship between adviser and client.

A fascinating debate, when viewed from the outside, and one which I think is headed in the right direction.

Go team, go!
On 18 April 2018 at 8:09 am Brent Sheather said:
Well I should have known - the National Government picked the CWG. Isn’t that a surprise, not. John writes that concerns about a lack of representation from small retail businesses is “not a matter that the CWG can deal with”. On the contrary it is very easy to deal with – members who think it is an issue should resign and go public. To be honest I am surprised that the individuals on the CWG who don’t represent vertically integrated providers would want to be publicly associated with that group given the inevitable unsatisfactory outcome.

Great comments Norman. The 2008 regulations were the start of the stupidity, bias and regulatory capture in NZ. Despite having a Commerce degree and having completed a certificate in Investment Analysis with the University of Canterbury as part of entry to the NZ Society of Investment Analysts I had to waste a year of my time doing stupid courses which were demonstrably wrong and factually incorrect. In many of the multiple choice questions I had to guess which wrong answer the examiners thought were correct. I disputed a number of these and the examinations were changed. What a complete joke and disaster.

Good of Norman to remind readers who was involved back then and the fact they are still involved. Thank god the National Government are no longer in power. Labour has a chance to make things right in NZ but so far Mr Faafoi has missed the boat. The first thing he should do is a performance appraisal of the MBIE and once that confirms that things have been done badly to the detriment of investor outcomes he should refresh that team. Responsibility for much of the regulatory capture in NZ rests with the MBIE and the previous government. The government has changed and the MBIE need to be changed.

Brent Sheather
On 18 April 2018 at 8:47 am John Berry said:
Thanks Murray. I await the result of SIFA's submission to the Select Committee with interest. If your proposal (that the Code should be an occupational code) is accepted by the Select Committee, then that will mean a change of approach.

You ask (in your second comment) if I think the Code can have provisions that only apply in some cases (ie robo) and provisions that only apply in other cases (ie human). Personal view is I don't think that is precluded under the Bill and I keep an open mind on it.

To answer the question in your first comment - I hope to have Part Two available early next week.

On 18 April 2018 at 10:22 am Murray Weatherston said:
Hi John
I had another light-bulb moment overnight that now makes it obvious s32 (1) in the legislation wouldn't even need to be changed to foster a dual Code such as SIFA have been advocating for a while now.

Like all common sense, the answer has been plain to see - but we mere amateurs were blind.

Proposed FMCA Schedule 5 Section 32 (3) says

(3) The code—
(a) must identify different types of financial advice, financial advice products, or other circumstances for the purposes of subclause (1)(b); and

(b) may specify different standards under subclause (1), or other matters under subclause (4), in respect of different types of financial advice, financial advice products, or other circumstances.

Now it is obvious that advice provided by humans and advice provided by machines/entities must fit four-square within the definition of "different types of financial advice." If it doesn't, then what would?

Once you decide under (a) that is the case, under (b) you may then specify different standards for the different types of advice.

From what you say in your response, I presume the CWG has not considered this point before.

So why don't you sponsor such a discussion within CWG and I will even cede to you ownership rights for the idea.

On 18 April 2018 at 11:54 am MPT Heretic said:
Sorry John but I think suggesting there was no way for the CWG to address the concerns of the under-represented independent/small advisers is a cop-out. The CWG could (and should) easily have established a formal working group which including all interested parties. They chose not to.

And now to suggest we must charge on regardless because of tight timeframes is again just a cop-out. Clearly there are major issues here not being addressed because the CWG is to far down the rabbit hole

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