Financial services sector questioned regulation draft

New Zealand’s financial services sector raised concerns about disclosure regulations resulting in a larger volume of repetitive disclosure that could be difficult for clients to digest, submissions show.

Friday, August 28th 2020, 6:00AM 2 Comments

MBIE has made public submissions on the disclosure regulations exposure draft.

The now-finalised regulations will take effect on March 15, when the new financial advice regime comes into force.

While the industry was generally supportive of what was intended when draft regulations were circulated late last year, some concerns were raised.

The regulations have three parts: The information about a financial advice provider that needs to be on its website to ensure that consumers could choose a FAP that suits their needs, more information given when the nature and scope of advice is known, and a final tranche of disclosure when the advice is given.

In some cases, the information given at each stage is an expanded or more defined version of the information provided earlier.

SiFA said that could mean a “huge volume” of records to be collected and retained.

“In the early stages of a client engagement, there could be one document for every suspect, two documents for every prospect (who doesn’t become a client), and three disclosures for any person who is advised. The person who becomes a client could then get at least an annual disclosure for the ongoing relationship.”

AMP said there was a risk that the disclosure would end up being repetitive and not address the issue of long, impenetrable disclosures not currently being valued by consumers.

“For benefits to be delivered to New Zealand consumers it is essential for disclosures to be simple, meaningful, very brief and unobtrusive. We do not consider that these aims would be met with the regulations as drafted.”

Under the new rules, advisers are required to disclose any commissions or incentives they receive that a reasonable client might think might materially influence their advice.

AIA had argued for that materiality threshold.

“We suggest an appropriate materiality threshold would be the disclosure of conflicts that a reasonable consumer would perceive as materially influencing the financial advice.”

But Financial Advice NZ said a reasonable client would not expect to have a good grasp of identifying conflicts of interest in the sector.

“The regulation could be strengthened by having a higher standard, such as – ‘any interest of A, P, or any other person connected with the giving of the advice that has the potential to influence the advice given by A’.

“There are various references to ‘incentives’. We recommend including in the regulation a definition and reference to ‘disincentives’ as well. For example, a reduction of commission rates for low volumes could escape the disclosure regime. Disincentives is an area that is often overlooked and should be drawn attention to, so FAPs and advisers cannot avoid their disclosure obligations by saying ‘this disincentive is not technically an incentive’.”

AIA said there should be more detail on when it was considered “practicable” for advisers to include in their disclosure the amount of fees payable by a client connected to the advice recommendation.

“This is a significant issue for financial advice providers. For AIA NZ, significant system investments will be required to provide estimates. While AIA NZ anticipates making this investment, we are concerned that other providers may choose not to do so, and instead elect not to provide estimates on the basis that it is not practicable to do so. This is an undesirable outcome for consumers which we consider could be avoided by better articulating the circumstances when providers may elect not to provide estimates.”

AMP said there should be some disclosure requirements for clients considering advice on replacing products.

“Particularly in the case of life insurance products, it is common for the replacement of a product to involve many thousands of dollars of ‘new business’ upfront commission.

“Sometimes there may be minimal benefits to the client of perhaps in the order of only a hundred dollars and/or marginal product feature differences. When the risks of such replacement are not adequately explained and/or fulsome like-with-like comparisons of the key differences between the incumbent and recommended products are not provided, the asymmetry of information combined with the inherent conflict of interest in such a recommendation is stark.

“It should be clear to a client in a replacement advice scenario the difference in commission that will go to P and/or A if the recommendation is followed as well as the commission which would be received if the status quo occurred, or otherwise if an adjustment to the existing product is made, eg increasing or decreasing the incumbent cover rather than replacing it. The FMA has had particular focus on life insurance replacement business advice. It is noticeably absent from the regulations, and we suggest that this omission, if left unaddressed, will contribute to ongoing poor customer outcomes relating to replacement.”

Tags: Disclosure FSLAA FSLAB MBIE regulation

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Comments from our readers

On 28 August 2020 at 7:40 am Backstage said:
Well that was an easy read.
On 28 August 2020 at 10:35 am Amused said:
AMP with arguably the worst life products in the market makes a submission to MBIE/FMA on replacement business. I think folks that’s what you call the definition of irony.

Hopefully MBIE do their homework to understand how AMP life products actually compare to other providers.

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