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Recommending products without expert research - new Code guidance

The question of whether financial advisers can recommend new products or advise on equities when there is no available research, is addressed by a new guidance from the Financial Markets Authority (FMA).

Friday, February 10th 2023, 8:46AM 2 Comments

by Andrea Malcolm

The guidance is the first issued by the FMA on how it will apply and enforce the Code of Professional Conduct for Financial Advice Services which comes into force on March 15. It deals with Code Standard 3 which requires financial advisers to ensure that their advice is suitable for the client, with regard to its nature and scope. Suitability should include having reasonable grounds for the advice.

The FMA notes the challenge of giving financial advice about high risk, complex or novel financial products when it is difficult to access information to support reasonable grounds, for example advising on IPOs or smaller market cap stocks.

It says it does not intend to discourage advisers from giving opinions or recommendations not backed by expert research as this could result in New Zealanders having less access to possibly beneficial financial advice and could also lead to lower levels of interest, and liquidity, in some products. But the requirement for reasonable grounds must be met, although what is reasonable will depend on each case and context.

This means that if an adviser does not have time, capacity, or resources to provide financial advice on more complex or novel products, the FMA expects the adviser to make it clear to the client that the scope of their services does not cover those products.

“You will need to exercise your professional judgement and experience to determine what information and evaluation is required in the relevant circumstances. We expect your focus to be on ensuring good customer outcomes, including that your advice is suitable for the client.”

The guidance addresses an issue highlighted in an industry-led report in 2019, outlining a ten-year agenda to promote stronger capital markets in this country. The Growing New Zealand’s Capital Markets 2029 report said that under the old financial advice rules introduced in 2010, advisers were hesitant to recommend equity products where research was not readily available, although this was not the intent of the legislation.

The result was many small market cap stocks received limited focus by the broking community, leading to a concentration of retail investors in larger stocks and reduced interest and liquidity of smaller stocks.

Another consequence was greater difficulty for smaller companies to achieve IPO with advisers generally more reluctant to recommend clients to participate in IPOs if their firm is not providing research, or due to the likelihood of the lower liquidity of shares of smaller IPOs, and the fact research coverage, if any, may not be enduring. The report recommended that the FMA issue guidance on how to interpret reasonable grounds in the new code.

Angus Dale-Jones, chair of the Financial Advice Code Committee says when the new code was developed, it took this into account. “It’s about striking a balance between the quality of the advice and the availability of advice.”

The FMA provides six examples but says the guidance doesn’t constitute legal advice and it encourages advisers to seek professional advice to find out how the Code and legislation apply.

Tags: FMA

« Advisers told to make disclosure easy Tough times ahead for NZ economy: Nikko economist »

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Comments from our readers

On 16 February 2023 at 4:35 pm JPHale said:
As has often been said, the Nature & Scope of the client engagement defines what is and is not covered by the advice.

This same message translates across all financial services disciplines and not just investments.

If you don't know how XYZ product works, the prudent adviser will state this as a default point in their disclosure.

Don't do KiwiSaver because you're not qualified or licensed; say so!

Nature and Scope are just as much about what you say you don't do as it is about the stuff you do do.

And we have a legal precedent for this where an adviser was found liable for the issue because they did not explicitly state they were not advising in that area (and this pre-dates the 2010/2011 legislation)
On 16 February 2023 at 6:48 pm w k said:
@JP: there are 2 basic approaches to a problem.

1. a sniper approach - an expert who knew his exact target, requires only one shot to solve the problem. they have an easily understood, simple, and clear cut rule.

2. the machine gun approach - most of them are "cut and paste" experts. they fire as many rounds as possible. if and when they hit one, they'll wonder, is this the target? they'll have tons of written regulations. when you ask them, their response will be, we can't give you advice. you are advised to seek legal advice.

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