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Advisers 'firebreaker' for clients, Botica says

Financial advisers are keen to engage with full licensing proposals – and have been able to prove their worth during the country’s response to Covid-19, the Financial Markets Authority says.

Saturday, June 20th 2020, 10:23PM 6 Comments

John Botica

John Botica, director of market engagement at the FMA, spoke to a Financial Advice NZ webinar after the regulator released its consultation document on proposed standards for full licensing.

The FMA is proposing a range of classes of full licence in the FSLAA regime, according to the size of the advice business. It is also intending to require applicants to meet eight criteria: record keeping, internal complaints process, regulatory returns, outsourcing, professional indemnity insurance, business continuity and technology systems, ongoing capability, and notification of material changes.

The consultation document was released on Wednesday. Botica said 1,058 people had downloaded the consultation document before the end of that date. He said each submission that was made would be read and assessed. “We thank you all very much for your enthusiasm.”

Consultation is open until August 7.

Botica said the professional indemnity insurance required was a hotly debated topic. Many advisers had strong arguments for requiring and many disagreed, he said. Some had said it was expensive and did not give as much protection for consumers as people might think while some firms had said they were not going to do business without it. The FMA wanted to hear feedback, he said, on how hard it would be to get cover that was proportionate to the size of the business.

Botica said advisers should think through the options available to them. “You’ve told us often how important it is to give consumers the right information at the right time to make good decisions. The same thing should apply to you as well around your future wellbeing and business.”

It would be important to thoroughly examine any FAP an adviser considered joining, he said, because any negative attention the FAP's brand received could also stick to its advisers.

Advisers should talk to the FMA, their association and product providers to help work out what the best path forward was for their businesses, he said. “Any question you have to ask is a good question. We don’t store that as intelligence against you when assessing your licence application.”

He said full licences would be categorised into classes to make the application process as streamlined as possible. It would enable the assessment process to be aligned to the type of business and recognised the diversity of structures in the industry, he said. “Each class will have tailored questions and assessment based on the complexity of the structure.”

So far, 846 transitional licences have been approved or are being assessed.

Anyone giving personalised financial advice will need a transitional licence when the new regime takes effect, probably in March next year. Two years later, they will need to have a full licence.

Botica said there were 5,855 financial advisers working for those 846 transitional licence applicants and 6,800 nominated representatives. In total, 46% of licences applied for so far were for single adviser businesses and 49% for businesses with two to 20 advisers. Only 5% of licences were for businesses with 20 or more advisers but they represented 3,150 advisers and 6,500 nominated representatives.

He said recent months had been challenging for everyone in the industry.

But he said he had heard many examples of advisers working “tirelessly” and helping clients.

“I get the sense that you’ve emotionally been right where you’ve needed to be to help clients. Advisers have been acting as an emotional firebreaker for clients through this period.”

It was a testament to the strong future for advice, he said, where it would continue to be desired and prized. The changes planned should benefit everyone he said. They would “drive the industry up the professional curve”, he said, and provide protection for adviser businesses.

“The challenging financial landscape in the future does nothing more than fuel the need for ongoing financial advice – it all leads to building long-term value.”

Tags: FMA John Botica licensing

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Comments from our readers

On 22 June 2020 at 11:36 am Walter Wallcarpet said:
I find it astonishing that financial advisers and risk management advisers would consider not having a robust professional indemnity plan in place. It never occurred to me that anyone in the industry would operate without the protection it offers. Can someone enlighten me as to the logic behind choosing to not have PI in place?
On 23 June 2020 at 6:44 am Murray Weatherston said:
I wonder whether this isn't a good time to open the Pandora's box on PI. I hazard the guess that regulators have incomplete knowledge on what is even possible to buy.
Most advisers at the small end of town will be members of group schemes. These will have individual claim limits (say $1 million per claim) but subject to an overriding group limit - say $5 million. What I understand that to mean is that if there have already been $5 million of claims paid out in the current policy year, then maybe the advisers individually have no cover for the balance of the policy year.
Then there are the severe limitations for investment advisers where the client's loss has been caused by "diminution of values" because of market events. I am aware a number of claims post GFC were discontinued because the advisers were not covered by PI and plaintiffs realised a court victory would be Pyrrhic because of the incapacity of the adviser to pay.
PI is normally described as a protection for professionals against claims by their clients.
Post March 2021, financial advisers have increased regulatory risk - with FAPs potentially liable for civil pecuniary penalties and all financial advisers subject to FADC discipline, in circumstances when the client has not suffered a loss (and where the client may not even now that their file is involved in a case taken by the regulator against an adviser - this seems to have been the case in a FADC case against a UK pensions adviser a couple of years ago.)
I haven't seen much press about how existing adviser PI policies will be changed, if at all, to provide cover for claims not by clients but by regulators.
In other businesses I am involved in, we have Statutory cover to protect against regulatory breaches.
Perhaps Good Returns could interview a few PI insurers and report the details on these pages. I am sure a lot of financial advisers ought to be vitally interested in the answers.
It's time for the insurance experts to step forward.
On 23 June 2020 at 1:17 pm All hat no cattle said:
any PI scheme worth a grain of salt should include liability sections for Ds and Os, stats, cyber and employers.

Good question though about who can bring/trigger a claim. In the FADC case, would your typical PI be able to respond? I would suspect that the stats section can.
On 24 June 2020 at 9:09 am Murray Weatherston said:
@All hat no cattle
You and I are talking about two different things.
I am talking about a pure PI cover, which I understand protects the insured only when there is a claim from her client.
You are talking about bundled policies (like a combined house contents and car policy). D&O is a completely separate insurance line for an insurer. Ditto cybersecurity or Statutory Protection.
If the regulations are going to require PI surely it is important that everybody understands what the meaning is? Or is this yet another area where it doesn't really matter what it means and we'll just leave it to the initial cases to sort it out?
Again can I plea that we try and engage publicly the insurance experts in this field.
Is there anyone from Marsh or Aon or Vero Liability (to name a few) reading Good Returns who might be motivated to add a comment or write a general opinion piece or agree to an interview with Phil or Susan to educate we "great unwashed."
On 24 June 2020 at 9:57 am All hat no cattle said:
You asked if PI can cover a "claim" caused by regulators instead of a client that has "suffered loss". And I said, stats might cover that.

You said "In other businesses I am involved in, we have Statutory cover to protect against regulatory breaches." So I was labouring under the impression that we were talking about the same thing.

I know the other lines are "bundled". That was my point. Still the same thing.

Ever order a big mac without the bun, cheese, lettuce and sauce?
On 3 July 2020 at 7:03 am JPHale said:
The modern adviser practice is in need of multiple covers from a PI/Liability perspective.

Yes, there is the advice indemnity aspect, but that won't necessarily protect the adviser against the actions of the regulator in the absence of the client complaining. The regulator may take action when the client has declined to, or a combination of both as we have seen.

It could also be a supervision issue, which means the Directors and officers of the operation need to be insured, especially so under a FAP. As the D&O's are responsible for the conduct of their advisers.

What about security and privacy breaches, someone gaining access to information and breaching client privacy, on the most part this is Cyber cover. And unless you have ticked that box in your renewal you don't have it.
And those that think they have internet liability may also be surprised, with one of the large PI group schemes removing it this year.

The better PI schemes out there have an aggregate of $10 or $20mil nowadays and based on present lack of PI claims is more than sufficient, though that may change in the next few years, it may not.

If you want a basic PI only policy direct and for yourself, you're talking $5k plus, if you are part of an aggregate group, you're around the $1-1,500 mark.

Frankly, an insurance adviser without PI insurance is an adviser that doesn't understand the risks, more the point is an adviser you probably don't want to be dealing with.

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