Regulation 'should not drive business structure'

In an ideal world, regulation would be of no consequence to financial advisers because they would already be operating at a level well beyond what it required, the chief executive of Financial Advice NZ says.

Monday, July 16th 2018, 6:00AM 15 Comments

by Susan Edmunds

The new association is now operating and taking on new members.

It had been suggested that eventually it might be able to take a regulatory role. IFA president Michael Dowling said in 2016 hat the suggestion had been put to the Financial Markets Authority, which wanted it to “walk the talk” first.

Financial Advice NZ practitioner director Bruce Cortesi has developed a proposal for a new commission structure – which some took to be a sign of the association moving to a regulatory position. Cortesi said he was not available for comment.

Financial Advice NZ chief executive Katrina Shanks said she would like to see the industry get to a place where its ethics and code and advisers’ business practices were at a level that was beyond what was required of regulation.

“We strive to service our clients and New Zealanders in such a way that you don’t need that regulation because the standard of what is provided is already so high.”

The association will operate a quality service mark for advisers, which will eventually become compulsory.

Shanks said the industry would need to assess what would provide the best scenario for clients, product providers and advisers and how that could be delivered – then comparing that to what was currently happening and tweaking if it was necessary.

“Adviser business models are what we should focus on. Regulation is the framework to work within, not telling you how to run your business.”

It was important to focus on what would build consumers’ trust, she said, so they could see advisers were behaving to a standard and had a strong model of ethics and code of conduct they could have confidence in.

Advisers were already operating in a fairly highly regulated sector, she said.

Tags: Financial Advice New Zealand regulation

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Comments from our readers

On 16 July 2018 at 6:56 am Murray Weatherston said:
I had always thought Bruce Cortesi was acting pretty much as a lone-wolf in his new commission proposal. He had not appeared to have been able to leverage his position as the head elected of PAA to get PAA to endorse it. In that context it is interesting that the timing of his going public coincides with the launch of the new merged body.
On 16 July 2018 at 8:15 am Brent Sheather said:
Looking at what the IFA and IFA members have done and said over the years I don’t think the IFA should ever have anything to do with regulation other than be the subject of regulation. In fact we used to see recommendations from IFA members based in Tauranga and Auckland back in the 90’s and the bond component was almost exclusively finance company debentures with Bridgecorp featuring prominently. Before that the same people were chasing commission recommending unlisted property trusts with Armstrong Jones the favourite. Things got so bad that in our disclosure statement we used to stress the fact that we were not members of the IFA.

Even today it is clear they have very little appreciation of what best practice looks like and if they did their members would likely mutiny as best practice would constrain their profitability. My guess is that a much greater proportion of IFA members receive commission than the broader AFA community. Continuing this theme today’s headline looks ridiculous – if you accept that vertical integration is bad for consumers then of course “regulation should drive business structure”.
On 16 July 2018 at 9:00 am John Milner said:
Brent I hardly think your note of non membership of the IFA within your disclosure document had much impact, if any. There’s nothing worse than someone throwing stones from the outside. I am aware of the individuals in Tauranga and Wellington for that matter, who were neck deep in finance companies. But there were many of us in turn that turned our backs on finance companies and were and still are fee based advisers. All within the IFA working to make it better.
On 16 July 2018 at 10:53 am Murray Weatherston said:
It seems to me a case of 'plus ca change, plus c'est la meme chose'.
Financial Advice wants to be the Regulator, just as IFA wanted to be.

Viewed through my prism, they are forgetting that one of the principal rationales for professional bodies is actually to protect its members (effectively a white collar trade union).

In its quest to show it should be the regulator, if the regulator sets the bar ("minimum standard") at X metres, FA will set its bar at X+y metres (where y is > 0).

This risks confusing the consumer because while the regulator will be saying "this is the minimum standard", FA will be saying implicitly if not explicitly "no it's not; that's too low!"

For the next few years, FA is going to have at least 4 classes of members
(1) members with the regulator's minimum
(2) members with the "pinnacle" CFP/CLU
(3) members with the internal QSM
(4) members with QSM and CFP/CLU.
How are they going to justify to the other members giving more promotion to any one or more of those classes?

Financial Advice have done a commendable job onboarding existing IFA/PAA/NZFAA members; I suggest that CFP/CLU rights, and PI group schemes were a significant motivator.

But those things aren't necessarily so attractive to the thousands of non-members of the 3 merged entities.
On 16 July 2018 at 12:11 pm Brent Sheather said:
Hi John

Unfortunately we were anything but on the "outside". Because all financial advisors were tarred by the same brush as those IFA members and the other perpetrators of the finance company debenture debacle we all suffered and are continuing to suffer from the resultant regulatory backlash. For the IFA to now present itself as an institution that could assist with regulation is particularly ironic and ridiculous.
On 16 July 2018 at 12:31 pm dcwhyte said:
Whether industry should or should not drive structures is moot given developments in Australia where regulations have and will continue to determine structure. There will be spillover implications for NZ also.

So far in NZ, the as yet unknown costs of meeting FMCA obligations will inevitably influence structures - and strategies for that matter.

Also, maybe I'm reading this wrongly, but there seems to be an emerging view that self-regulation is an ideal outcome and aspirational objective.

I disagree.

Having been through the attempt to reconcile the competing interests of providers, advisers, and clients in the UK, self-regulation of the industry is a Utopian concept. There are just too many competing commercial interests for self-regulation to survive.

Consider the Adviser Associations' track records as Brent and Murray mention, and consider the providers apparent lack of appetite to address the 'churn' issue.

A healthy financial services industry needs a healthy external regulatory framework within which to operate so that consumers are not constantly suspicious of self-interest concealing bad behaviour.

The Lawyers' representative body rejected financial services regulation as their self-governing structure comprehensively minimises poor conduct on the part of its members - yeah, righto!

Accepting the presence of a Government-appointed regulatory body offers a level of objective credibility that a professional body cannot match.

That's not to say that FA should flag its advocacy role as the various regulatory/legislative proposals are far from ideal as yet.

However, reality and experience suggest that this will be a constant challenge ahead of FA to protect the interests of its adviser members and strive for better regulation as the markets, products, technology, and clients' interests, evolve.
On 17 July 2018 at 12:40 pm Barry Read said:
Hi Murray

I don't think there are four classes of members. CLU and CFP are professional marks, but they are no guarantee that the ongoing advice services are in line with agreed practice standards or minimum regulation requirements.

Those practicing members who meet minimum regulatory requirements also need to meet the associations standards, and how do you demonstrate that with out it being tested or checked?

The QSM is the associations way of ensuring members, including CLU and CFP, are meeting the minimum regulatory requirements and association standards.

There was no assurance by any of the previous associations that members where actually meeting these, other than an annual declaration, like a Scout Promise, or random spot checks for some designations. That made promoting members to the public a lottery when it comes to advice services.

As far as the association replacing the regulator, that will never happen, but they should be part of replacing the Code Committee in setting the industry standards for the regulator, and I am sure that is a future goal, but there is work to be done.

On 17 July 2018 at 1:19 pm gavin austin adviser business compliance said:
Well put Barry can't agree. A bit like some advisers who think they are compliant but don't know if they are. There are reasonable number of advisers, based on my compliance experience - 10 years that haven't even read the code last alone understand it.
On 17 July 2018 at 1:31 pm TripleA said:
A number of comments I concur with. The regulators have been quite clear twice now - self regulation will never happen to any great extent. Given the extent and scope of current regulation and that the direction is an ever increasing quantum I think the proposed FANZ QSM may be a useful marketing theme but it remains to be seen whether the average client will put much credence in it or whether its just another thing that will add confusion into the marketplace. Possibly one area where self regulation might be feasible is setting our industry's own training standards and that is someone I'm sure the professional bodies could jointly advocate for on behalf of independent advisers.
On 17 July 2018 at 4:30 pm Murray Weatherston said:
@Barry - are you seriously suggesting that CFPs (most of whom will be AFAs) might not be compliant with the current law? Where's your proof?
I think you are just showing your compliance policeman's colours and white-anting advisers in general.

There are plenty of areas of the law where the assumption is that you are compliant (innocent) until you are shown to have transgressed (found guilty) - e.g. Road Code, Crimes Act. Why do you think all advisers should have to prove they are innocent every year? Spot checks - yes; 100% audit each year - god (small g) help us.

@Gavin since the Code currently only applies to AFAs, are you serious that "reasonable numbers" of AFAs don't understand the Code, and that many of them have not even read it? Proof please?

If both you guys are right, then I think the old IFA (as the monitor of CFPs) and the FMA (as the regulator of AFAs) certainly have a lot of explaining to do!

@TripleA if by training standards, you mean CPD, then we already have a very liberal scheme - we all self assess what does and doesn't count as CPD - (1) it has to fit with our plan (2) it has to be delivered by a subject matter expert (we decide that question); and (3) you need to have external verification you attended - actually you can get the person sitting next to you at the seminar to verify! Why does that need anyone else's input?
On 17 July 2018 at 5:07 pm Simon H said:
Even moreso Murray: in NZ you have to be an IFA member, and an AFA and (unlike most parts of the world) a practicing financial adviser to get or keep using the CFP certification mark.

I can't agree with Brent. In my experience, while bad eggs can be found anywhere, the average CFP investment adviser / financial planner gives better than average advice and is less likely to accept conflicted remuneration than others.
On 17 July 2018 at 6:50 pm gavin austin adviser business compliance said:
Hi Murray
In my role at FMA and in my current business I have interacted with many AFAs (in the hundreds) and I guess you'll just have to accept my comment based on "my" experience - what's yours. Like other people AFA's don't know what they don't know.

You may know a lot but just how do you know you're compliant.

If you've been audited by FMA and they say you are then you are, otherwise it's just your opinion. No one is right ALL the time Murray. Happy to do a complimentary audit just so you do know.
On 18 July 2018 at 11:59 am Barry Read said:
Murray, The proof is not public so I am unable to share it with you. but I can assure you there are advisers of all denominations that may not be compliant all of the time and may not give the best advice.

I can tell you that on basic compliance checks of FSPR/DRS/Disclosure that we completed as IDS we had a 27% fail rate across 2,200+ advisers including AFAs/RFAs/CFPs/CLUs. Yet this is compliance 101.

The IFA and FMA have no explaining to do on this subject, the AFA monitoring program does find issues and depending on the issue takes appropriate action. The IFA meets the CFP requirements for monitoring, but that doesn't mean all CFPs get it right all the time, but I agree with Simon, the likelihood of better advice and outcomes exists.

On 18 July 2018 at 12:30 pm Ron Flood said:
I wonder if I am included in the 27% fail rate as I did not have a Secondary Disclosure Statement. That is, until I pointed out that as a Registered, but not Authorised Financial Adviser, I could only have a prescribed Disclosure Statement and that I am forbidden to have any other Disclosure Statement.
On 18 July 2018 at 1:20 pm Brent Sheather said:
The discussion about compliance is interesting but my view of what complying with the law looks like is to benchmark your investment recommendations against best practice both locally and globally, where best practice is what pension funds do. I think that financial advisors who do this will have very brief disclosure statements and as a general rule for retail investors I tell them “the more extensive the disclosure statement the more wary you should be of the advice”. Let’s be honest the main part of any disclosure statement is disclosing how you are conflicted and the extent to which your advice will be suboptimal. An advisor who adheres to best practice, as previously defined, will by definition have a short disclosure statement. But having said all that I am sure that if the FMA audit me I may well have commas and full stops in the wrong place but I am confident that I am doing the right thing by clients.

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