Wealthpoint questions efficiency of authorised bodies
With time running out until new regulatory reforms are introduced in late June 2020, Wealthpoint has followed with interest the industry discussions taking place about various FAP structures that may exist post June.
Thursday, January 30th 2020, 12:00AM 
16 Comments
One option that the FMA discussed at their roadshows last year involved advisers operating as authorised bodies where they come under another entity’s licence. In such a scenario, these authorised bodies will also need to operate as FAPs although they will not need to hold a separate licence.
While this arrangement may be suitable in some situations, Wealthpoint questions the efficiency of this type of structure for small advisory businesses. Simon Manning, Wealthpoint’s CEO, says that historically advisers joined dealer groups to, amongst other things, gain access to certain suppliers and for commission aggregation purposes. However, in future, advisers whilst still needing critical access to suppliers, will also want to align with groups that offer high quality business and compliance support and efficient processes that allow them to focus on their core role – servicing client needs.
Structures that require advisers to duplicate the compliance systems, controls and monitoring processes that the group FAP must also have in place seem counter-productive and inefficient. In addition, there is potential for confusion from clients around which FAP would be responsible for the advice provided – would a client think it was the FAP in which the adviser operates, or the group FAP that holds the licence? Would they understand the difference?
Simon Manning says Wealthpoint have addressed these issues directly through the structures they have put in place with their 50+ member businesses and 150+ financial advisers. Wealthpoint is an independent co-operative where the shareholding "members" are the advisory businesses however the individual advisers hold Practising Agreements directly with Wealthpoint.
These Practising Agreements set out adviser compliance obligations and importantly, it means that advisers operating under Wealthpoint’s structure do not need to set themselves up as authorised bodies/FAPs. Instead, advisers can rely directly on the compliance controls co-ordinated through Wealthpoint’s head office.
This model delivers a far more efficient and cost-effective compliance structure for advisers where the need for duplicated controls are eliminated.
Simon Manning believes their FAP group structure is unusual as most dealer groups he is aware of appear to fall into three camps currently – most will require members to be authorised bodies, some will significantly reduce member numbers if they operate without requiring authorised bodies and others still haven’t confirmed what FAP structure they will operate, if any.
For more information on Wealthpoint visit www.wealthpoint.co.nz/about-us/ or call (09) 972-0470.
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Comments from our readers
On 31 January 2020 at 4:26 pm w k said:
there seems to be a lot we foresee, but the regulators don't. gives me a feeling that there is zero value in all our suggestions and feedback.
if what we foresee happens, advisers may well have to be prepared to fork out more fees.
On 2 February 2020 at 2:51 pm Murray Weatherston said:
An interesting model.
It looks like all the financial advisers will be directly engaged by the FAP (Wealthpoint). Wealthpoint therefore must carry all the civil pecuniary liability (I wonder how much capital FMA will require a 150 FA FAP to hold?)
Wealthpoint must be going to run like a super managing agency - with all the clients belonging to Wealthpoint with some strong rules to allocate or corrall each client to a particular member business - presumably the business to which a particular FA providing the advice and relationship belongs.
This model avoids the intracacies of Interposed Persons (IPs) and Authorised Bodies (ABs). Seems wise.
On that score, some of the stuff I have seen from regulators and some commentators seems to mix up and/or confuse these concepts.
Interposed persons and authorised bodies are FAP like, but they don't necessarily need to be FAPs in their own right.
However the fine print says the FMA may require a particular Interposed Person or a particular Authorised Body to get its own FAP licence.
Sometimes some stuff seems to me to be suggesting that IPs and ABs are the same - but logic dictates they can't be because if that was the case, the legislation writers would not have given them different names.
I did make an OIA request about the policy discussions that underpinned the treatment of ABs for financial advice providers (as compared with ABs for other license holders) but the response had all the stuff that would have informed me withheld on grounds from memory it was legal advice from MBIE to itself! So I've just given up and admitted defeat,
On 4 February 2020 at 4:55 pm Davet said:
From a Wealthpoint member - best thing I ever did was to join. Regulation and compliance all looked after in one easy and cost effective model and they've taken all the worry away. And JPH I haven't lost control of my business or my clients as you seem to fear; quite the opposite actually. On 5 February 2020 at 8:07 am JPHale said:
Completely agree Murray. It is confusing.
The fundamental behind IPs and AB's is about the client and who is advising them, giving them regulated financial advice.
AB's were added in to capture the intermediated entity where the FA is giving advice to the FAP's clients via a Limited Company.
This comes back to the stuff I was banging on about last year, where the advice relationship with the client dictates the licence structure required.
The IP aspect comes into play when the client is being given advice outside the FAP structure, or the FA is giving advice on something that their primary FAP doesn't give advice on. (Though my opinion here is; if this is the case, then they aren't part of that FAP but should be a FAP of their own)
The IP isn't so much a registration thing, or even a licence thing, it is something that gets triggered when the advice given to the client meets that criteria. And once triggered as an IP, then that entity needs to be a FAP.
For example; if a mortgage broker in giving advice to their client recommends insurance and investment reviews, but they don't do either of these things. Then these get 'referred' out to say me and you. As the initial advice relationship is with the first FAP, and we are 'sub-contracted' to give the respective insurance and investment advice, then our own entities are responsible for the advice we give as IP's
Which means that we have to have the systems and processes in our own business (not our upstream FAPs) to meet the requirements of the law and the code, and that also means our entities have the be FAPs in their own right.
Which then brings into question the FAP within a FAP discussion, as a double layer of the same stuff that is unnecessarily onerous.
I feel the whole discussion last year on the advice relationship was completely missed by most, it is a significant part of this issue too.
Compounded with the requirement not to be misleading, this is a bloody mess; as the advisers don't understand it, how do you expect the public to?
Frankly, the public have the expectation the person in front of them is giving the advice, not some remote organisation they have never heard of. Yet it is that remote organisation that is giving the advice...
On 5 February 2020 at 3:12 pm w k said:
........ hence, a even bigger budget is required by ........ to hire more staff to ....... let's do this, start all over again. On 5 February 2020 at 3:53 pm Walter Wallcarpet said:
@JPHale - >>Frankly, the public have the expectation the person in front of them is giving the advice, not some remote organisation they have never heard of. Yet it is that remote organisation that is giving the advice...<<
Isn't that comment just a tad mischevious? You might strech it to say that the 'adviser' is giving the advice on behalf of the organisation but it is still the individual advising and I can't see any client taking issue with that.
@wk - >>........ hence, a even bigger budget is required by ........ to hire more staff to ....... <<
only if they don't know how to run a succesful business and seek the economies of scale.
On 5 February 2020 at 6:26 pm JPHale said:
@Walter Wallcarpet, crystal clear on the structures involved here. My point isn't aimed specifically at Wealthpoint, they don't fit the bill on what I said.
What I am referring to is John Smith Adviser, trading under John Smith and Associates Ltd operating as an AB under say NZFSG’s FAP.
In this situation the client is rightly allowed to be confused by the statement required; I'm John Smith from John Smith and Associates Limited, and I’m your adviser giving you advice on XYZ on behalf of NZFSG...
That's more my point, and you can call it what you will, I don't really care. As it will be the FMA and the FADC that will be adjudicating on the misleading aspect if it exists in the client's mind.
That's my point, how does this look for the consumer? As that is who all of this change is for.
On 6 February 2020 at 10:40 am gavin austin adviser business compliance said:
JPHale - I'd suggest that given we haven't gotr the "final" disclosure regulations with associated Guidence/Explanations it's premature to be making any comments about confusing or misleading disclosure. The FMA/FADC won't and can't adjudicate if you follow what the regulations require. As to confusion for the client then "what's new"? Based on my own experiance (50 years) the majority of the public are confused about most of the legalities around compliance in most industries not just ours. On 7 February 2020 at 3:07 pm JPHale said:
@Gavin, I don't disagree with the statement consumers are confused across many things. That's sort of my point, and the new regs are designed to address that.
Final disclosure rules aside, we already have several pieces of legislation that rule in this space, from the Fair Trading Act, to the FSLAA, and the Code. Disclosure is going to attempt to wrap all of this up in a bow. We’ll see if that helps in due course. Not holding my breath on that.
My point is any complaint is going to be measured from the perspective of the client, sure there are tick box rules along the way, as too there are significant portions of the legislation that are principles-based and yet to be clearly defined what that means in practice.
We have seen in the past that having the right paperwork is just part of the picture. What that paperwork says, how and when it was delivered, and what was the intent behind the whole process that ensued all add to the picture.
So it was written in fine print at the back of a document, cool, that says very little about what happened when and whether the client understood it. And your tenure in the industry will tell you that too.
The structures of who gives the advice on behalf of whom is going to confuse the hell out of clients. Single branded like Weathpoint, not so much of an issue. In the scenario I outlined it could be quite interesting when the client finds that the FA involved is ultimately not responsible, especially if they have hung up their pen and left the industry.
Even under the current RFA rules, people disappearing causes all sorts of angst for clients, especially when things haven't gone well, this is likely to have interesting ramifications most haven't considered, especially as a FAP.
On 8 February 2020 at 9:26 am Pragmatic said:
My token 'weigh in here' is that the Regulator is looking to compress the advice industry into a smaller more manageable universe through the introduction of this legislation. I'd speculate that their aim is to have a lesser number of entities to police, and by virtue of this - a lesser number of potentially liable targets.
I suspect that the first 'rouge adviser' will soon change the dynamics of how FAPs operate. By rogue - I mean an adviser who decides to stray from the 'recommended list' to satisfy the client / their own ambitions. Oh - and in case you missed it: these 'recommended lists' will need to be tighter than tight to help limit the liability of the Directors of the FAP. My read on this is that the FAP will be liable for the actions of their agents (aka licence holders, aka advisers etc).
Having witnessed this principle / agency relationship (aka dealergroup) elsewhere, it won't be too many years before individual advisers re-establish their own FAPs, whilst choosing to utilise (or not) the collective services of a centralised provider.
On 9 February 2020 at 10:22 pm regant said:
what pragmatic describes (last para) is what many of us will have from the outset. Pragmatic may be reasonably accurate about the regulator's aims, but it appears moot because we're a cottage industry and will pretty much continue to be.
For those attracted to the idea of a super-FAP, consider: if you have a mega locomotive hauling 150 wagons, what happens if (when) one wagon de-rails?
The whole train has to stop!
On 10 February 2020 at 10:38 am gavin austin adviser business compliance said:
Great comments pragmatic and regant. You may recall bac k when QFE's came on the scene a lot of advisers thought that this would be a great place to opperate. They soon found the restrictions imposed by the QFE were so cotrary to thier ways they left in thier droves. So if you value independance and don't want your advice compromised by some pencil heads view of the world then the Mega FAPs won't work for you. On 10 February 2020 at 11:39 am Walter Wallcarpet said:
@regant - not the best analogy, however following your theme, if the engine conks out then there may be a problem but if one of the passengers becomes disruptive then he gets off at the next stop On 10 February 2020 at 8:45 pm All hat no cattle said:
Walter, what makes you think that serious misconduct wont cause a licence to be suspended while an investigation into the licence holder and the supervision etc is checked?
The FMA people have already pointed out this very risk (to others in a FAP). It's not a matter of kicking someone off at the next stop, not by a long shot. The train won't be allowed to depart the station again until the conductor is satisfied that the driver has all the right checks, and balances and supervision and audits in place - the assumption being they must not have been, evidenced by the behaviour of that one passenger!
Have a good read of section 431
431QPersons engaging others to give advice must ensure compliance with duties
(1)
A financial advice provider that engages another person (A) to give regulated financial advice must take all reasonable steps to ensure that A complies with sections 431I to 431P.
(2)
If A is engaged by the provider indirectly through 1 or more interposed persons (as described in section 431E(b)), each of those interposed persons must also take all reasonable steps to ensure that A complies with sections 431I to 431P.
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S431 U (b) the financial advice provider on whose behalf the financial adviser was acting is civilly liable for the contravention of a duty provision (as described in section 431H(4)(d)(i)); and
(c) the financial advice provider took all reasonable steps to ensure that the financial adviser did not contravene the duty provision.
On 11 February 2020 at 8:22 am Walter Wallcarpet said:
@ahnc - thank you for your educational comments. I don’t believe I have ever maintained that serious misconduct may not result in license suspension. For the record I am well aware of the regulation and historically fully understand the implementation and outcomes of enforced undertakings and the like by regulators. I think the 'miss' in this communication is around our view on what matters of misconduct we are referring to in our posts
For me the simple key is to either create or belong to a FAP that does indeed have all of those checks and balances in place, a strict onboarding procedure for new prospective members and solid compliance support, both in supply of tools and supporting material and audit process from the top.
My experience tells me that if you are careful which passengers get on the train in the first place, then ensure they behave themselves both through support and opportunity then you are far less likely to encounter problems. If problems start to appear, then with the right structure for the FAP these will be picked up quickly and dealt to through an incident management process.
If you get your culture right for the FAP and have good support for the members then it should be plain sailing. As I often say to my wife, it is all about quality rather than quantity so I want to belong to a FAP that is fairly careful who else joins.
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If you have to operate as an AB then you might as well operate as a FAP. Also too, if you are providing advice on clients of another business that is in a different speciality, you're an Interposed Body. That throws out the AB and requires you to be a FAP
To be a FA under a 'dealer group' FAP, without your own AB or FAP as this has outlined, means you are a salesperson in someone else's business, you don't have a business, you have a job.
This is what Tied Agency 2.0 looks like. Like it or not, this is what is likely to result. And the rights and assets that an adviser builds presently will be undermined in ways people today will be horrified at.
Tread carefully people.