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It starts with governance

Russell Hutchinson discusses the importance of governance in achieving a compliant FAP business.

Wednesday, August 5th 2020, 10:14AM 11 Comments

by Russell Hutchinson

Russell Hutchinson

Financial advice provider compliance, arguably, starts with governance.

Yet the focus of recent years has been mainly on education, or Code.

Education has been an easy place to look.

The regulators set a standard. It has been talked about it, written about, and is a clear, defined milestone on the way to achieving a compliant business: get the qualification.

But arguably, it is the least urgent of all mandatory requirements. After all, the new regime commences in March next year with a two-year window to achieve the required educational standard.

Code comes next – it is also a good focus, also critical to operating a compliant business.

It is the standard that must be hit in the new regime.

I am probably doing it a disservice when I say it is "only" about financial advice. Of course, as a financial advice provider this is the heart of what you do. It is also not descriptive of everything that you do.

Each quarter we track all the legal and regulatory issues that directly affect the provision of financial advice. That includes non-advice legal and regulatory requirements.

To pick a topical one, consider privacy. As new privacy law creates changed requirements for all businesses, these include financial advice providers.

They must be met. But your review must also include all non-law or regulatory requirements of your business – these are contractual commitments that you make.

For example, agency agreements with product providers include a list of commitments that you must maintain in order to retain your agency. These must also be managed.

As a business grows managing all the different requirements takes more time and effort – because your services are more complex, reach more people, and are delivered by employees rather than an owner-operator.

Hence, the importance of governance.

Good governance is a process that enables effective compliance by the business.

It is the operating system that ensures the business conforms to its plans and commitments (the rules we choose for ourselves) and the relevant laws and regulation (the rules chosen by others in our society).

If you have ever come back from a conference with a bright new idea, tried to make it happen, and then realised six months later that you haven’t been able to make that change … it is a good sign that a governance gap may exist.

In practice, most small businesses already have a goal to achieve better governance.

It is a lot like the saying about planting trees. The best time to plant one was twenty years ago. The second-best time is now. But definitely before March next year.

If you were in any doubt about whether this is a requirement – just like the Code, the standard conditions, or the educational standards, then please read the FMA’s guide to governance.

Tags: Code compliance FAP Opinion Russell Hutchinson

« Should we be warning consumers about IP prices? The clock is ticking on getting a transitional licence… »

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Comments from our readers

On 11 August 2020 at 9:55 am JPHale said:
Well said as usual Russell, you’re right governance is one of the things that has been missing from the discussion and I would think many adviser businesses don’t have this sorted yet
On 11 August 2020 at 2:02 pm Adviser1 said:
Who offers a governance solution for a one man adviser business or is adviser peer review the way to go? Cheers
On 11 August 2020 at 9:42 pm gavin austin adviser business compliance said:
Hi Adviser 1 -I don't think peer review will cut the mustard. There is more to it than someone having a look at you do and saying yeah that's ok. It's about knowing your responsibilities under various Acts eg Health & Safety plus all the other acts and regs and then documenting how you will approach all those. Unfortunately there's a bit more than that but it's not overwhelming and something you should be doing anyway eg have a Health and Safety Policy (documented etc - and you thought it was just the FA Act and FMC Act you had be sort out). Sorry but Governance and Compliance has been with us all for a long time (even me and even more so if you employ an assistant/PA etc) but now the FMA may put the spotlight on you a bit when you get to apply for your FULL FAP license to see just how you will approach "Governance" for the Acts and regulations they watch over. I may be biased but independent advice is often the best way to navigate all this. (Advertorial -There are several of us out there). Strategi, Compliance Factory, maybe some dealer groups, Rosewill Consulting to name a few, and of course me).
On 12 August 2020 at 12:13 pm Adviser1 said:
Thanks Gavin, appreciate your comments. So by engaging a compliance consultant and having the necessary policies, procedures and controls ticks off the 'Governance' required for a one adviser FAP? Unclear on that aspect if you'd like to elaborate?
On 12 August 2020 at 2:25 pm JPHale said:
@Adviser1 this is part of the discussion we need to have as an industry. It is also part of the message we have with the A,B, & C class licenses.

If it is an A license and as a sole adviser it is acceptable to the industry and regulator that peer review is ok, then that sets a lower bar than is potentially ideal. This will likely create a gap between the peer review and the regulatory review of a problem.

As an industry peer review, no matter how experienced, needs to be more robust than that.

As a sole adviser, I like the peer review idea, at the same time it is likely to fail the requirements required for review and it has the optics of cronisim which we need to get away from.

Operating from 15 March 2015 is going to come at an increased cost and it is technically quite different to how many operate today.

One thing that hasn't sunk in yet is from March 15 2021, all advisers, regardless of license class, have to be compliant with the new rules.

Yes, they have the exemption for education, but the rest applies.

Which is a different understanding to what is being expressed by a number of advisers.

The new rules start 2021 not 2023. So if you are not already at the stage required by full licensing, you need to get you butt in gear!
On 13 August 2020 at 8:16 am gavin austin adviser business compliance said:
Hi JP, good analogy of what would be a sensible way to approach the new landscape for March 2021.
Governance does not have to be a big 10-page document. AFA’s will have a little bit of a head start as their ABS will contain some aspects of a Governance approach which can be transferred and tweaked into the new requirements. Governance and Compliance are two separate subjects that are often confused. How do you govern your business? Governance can be simply defined asr the way people, or a person do things within that Business. Governance is also how decision-making affects people in that business and how that flows through to consumers. Good governance has 8 major characteristics. It is participatory, consensus oriented, accountable, transparent, responsive, effective, and efficient, equitable and inclusive, and follows the rule of law. (definition from 3rd party via web -Governancepro.com and amended by me to be applicable to small business). In a Governance policy there will be a number of references to a Compliance Program which includes a number of different compliance requirements for different Acts that regulate how a business operates not just as a Financial Adviser but also as a business with compliance requirements for Health and Safety, Employment Relation, Tax, etc. JP is right that there will be additional costs going forward. The price of the ticket to the game has gone up. To Quote a very respected Business guru Peter Drucker “Do what you do best – Outsource the Rest”. I hope this is of some value to advisers out there wandering what this “Governance” thing is all about.

On 13 August 2020 at 12:58 pm Adviser1 said:
Thanks JP, if we know what the rules are we can follow them, if we know what the solutions are we can implement them.
On 14 August 2020 at 9:55 am Tash said:
adviser1 - go talk to Partners Life. they have a great tool to help with this sort of stuff.
On 14 August 2020 at 11:53 am dcwhyte said:
Good words Gavin - might also mention the FMA publication - https://www.fma.govt.nz/compliance/guidance-library/corporate-governance-in-new-zealand-principles-and-guidelines/ - not too hard to read and outlines the regulators expectations. Also confirms your view that there's no need to be overly concerned around the "Governance issue". In addition to your good self, there are other organisations offering guidance, IoD, Governance NZ, Strategi but the FMA handbook will provide advisers with a pretty good idea of 'what' needs to be done - the 'how' may need some external guidance.
On 14 August 2020 at 12:41 pm gavin austin adviser business compliance said:
Hi David and thanks for your words also. I did read the FMA stuff before the post and also in my first response mention off the top of my head) a few other sources of advice including Strategi. Let's hope that Advisers will get moving and prepare for 2021.
On 17 August 2020 at 8:36 am Adviser1 said:
Thanks for your comments everyone. I've completed the Partners Life support modules, engaged a compliance consultant, had a review/audit done, read the FMA updates on Governance - and still scratching my head as to how a one man adviser business is meant to successfully deal with Governance! Sorry if I'm not 'complying' making that statement.

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