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New law - new rules

You may have noted that I sometimes have a penchant for controversial comments. This isn't just to be contentious around the changes we have to deal with; it's to raise awareness of changes to how we are expected to work with the new rules.

Thursday, July 13th 2023, 8:19AM

by Jon-Paul Hale

My recent comments on liability and client base sales are one of the more recent.

For a very long time, we have worked on the basis that the adviser before us has the responsibility for the advice they gave, and this is why as a retiring adviser, you need to have run off PI cover, as Tony Vidler recently covered here https://www.goodreturns.co.nz/article/976521842/new-pi-insurer-bundles-in-retroactive-cover.html

The new aspect is that we have new laws around how we are working and operating. As a result, we need to change how we view our world.

The introduction of licensing and FAPs means we now have additional entities involved in the structure and delivery of advice.

This also means that FAPs "own" the advice relationship with clients; it's defined in the legislation.

As an adviser, you may hold the right to take clients with you if you leave a FAP; however, under the law, the FAP is still responsible for the advice to your clients.

Multiple entities have always been a thing that people struggle to comprehend. There is a common confluence of a situation into one thing as a ball of wax rather than appreciating the individual components have individual issues and responsibilities.

What used to be a principal adviser and associate relationship, where the associate adviser was responsible, and the principal had to deal with it and manage it, has now morphed into a significantly more complicated structure.

Additional Authorised Bodies in the structure just increase the complexity.

What now exists is a significantly more complex environment that many don't seem to have caught up with.

The FAP at the top is listed as the ultimate responsible party for financial advice, but even that isn't so simple.

A FAP has several layers to it that we all need to be aware of.

- The limited company most will have, being the anchor point for the license.
- Under that, we have the company directors; they are responsible for the company and thus the advice provided under the license.
- Under them are the company's officers, maybe the same people as the directors; they could also be different people in a larger advice firm.
- Then you have those responsible for the advice given in the business, the structure of the advice tools and advice solutions presented.

It's possible that a FAP may not have experienced or qualified financial services people in the roles of directors and officers of the company.
- It was used in some of the FMA examples through the consultation and implementation period and was discussed directly with the digital robo-advice examples of licensing.

Under all of that, we have the Financial Advisers and Authorised Bodies with Financial Advisers. Both give advice and are responsible for the advice provided downstream.

Authorised Bodies in large operations may also have the same structural challenges that the FAP does for how it operates and provides advice.

I haven't mentioned nominated reps in detail, as the liability for them falls to the FAP or AB they operate under.

With the much smaller number of licenses now than principal agencies before, the liability issues for FAPs have also become more acute.

In the past, it was easy for a principal to pass off that the liability was with someone else, especially if the principal had no contact with the client.

Under the new rules, which likely came about because of this very issue, FAPs are held directly accountable for the advice given to their clients.

Where this is grey and still needs to be tested in court is where that liability lands where the FAP has taken over a client base. It's unclear which FAP is responsible; it states the Financial Advice Provider is the one giving the advice, and everyone else is providing advice on behalf.

Change the FAP; the contracted responsibility flows directly to the new FAP. If I read between the lines with the 12-month servicing expectation, the old FAP will be responsible for 12 months or if the new FAP has reviewed and engaged the client earlier.

This is since 16 March 2021, when FSLAA came into effect, not 16 March 2023, when transitional licensing ended and the qualifications exemption ended. Client base S&P since March 2021 has been under the new rules FAP to FAP.

Where this opens the door for liability differs from how we have previously understood this.

Under the old rules, the advice on the policy remained with the prior adviser; under the new rules, the advice liability sits with the FAP. Sure, the old adviser has a part to play in their advice, thus the need for run-off liability cover.

However, the new rules open the door to inclusive liability, much like what we saw with the changes in building code for the leaky home issues and, more recently, Health & Safety. The authority concerned rounds up everyone involved and then determines who's responsible.

That experience often resulted in people being held responsible that had little to do with the original issue and more because they exist to pay for it. In a case I saw, the plasterer working on the opposite side of the home to the issue in question got landed with the bill for the leaky home. They lost their house, mainly because everyone else was wound up or had no money to pay for the issue.

Patently unfair, at the same time, how the process worked; we now have the same rules for our liability issues too. If we aren't looking outside our industry at this elsewhere, we're looking for trouble!

This means that as soon as you, the Financial Adviser, review a client and advise that the historic contract is still fit for purpose, you're now liable for that advice and the performance of that contract into the future.

Yes, that assumes that as the adviser, you have checked the application and disclosure for accuracy, or at the very least, made statements about your advice being reliant on the client stating what was required at application time to avoid non-disclosure issues with future claims.

As I said, this is a grey area. Where the prior adviser may have responsibility for how they executed the original contract while at the same time, that execution responsibility becomes yours when you state that contract is good to go for the future. You both could be on the hook.

This becomes problematic when we have sales and purchases of clients under the new rules. Where the transfer is from one FAP to another, it gets murky.

Should the new adviser be responsible for the old product advice and execution? On the face of it, no.

However, suppose the client has been reviewed, and the adviser has said the existing cover (in any way possible to say this) is appropriate for the future. In that case, the adviser now plays a part in the performance of the old contract in making that statement. A role that should include the review of the contract to ensure that the original disclosure and terms were appropriate and remain appropriate for the future.

It might surprise you that what you think may not be the case.

For example, the old medical policy your client has, does it have an excess per condition claimed, or is it the usual we know one per 12 months or per policy year?

Or another one from Tower's medical policies from 2007/2008 is that children becoming adults transition at age 21 to their own policy at smoking rates, with a requirement to state they are non-smokers to move back to non-smokers. (nib has recently done some work around this crazy clause not to effect it with these transfers, but it's still in the Ultimate Health & UHM wordings)

I know I have plenty of detractors on this subject; I'm used to that with my commentary about the new rules, where pretty much everything I have said here from the beginning has happened as I said it.

Like I have said many times, you may not agree, but at the same time, you don't want to be the first case to test it out, either.

The choice is yours; operate prudently or not, you'll find out eventually, and if it's not, I thank you for your service in finding out for the rest of us.

Tags: Jon-Paul Hale

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AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 6.39
ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.14 6.79 6.65
ASB Bank 8.64 7.14 6.75 6.39
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
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BNZ - Classic - 7.14 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.74 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.74 7.35 6.99
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.65 7.25 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
SBS Bank 8.74 7.74 7.09 6.95
Lender Flt 1yr 2yr 3yr
SBS Bank Special - 7.14 6.49 6.35
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Lender Flt 1yr 2yr 3yr
Westpac 8.64 ▼7.49 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - ▼6.89 6.75 6.39
Median 8.64 7.14 6.82 6.65

Last updated: 11 July 2024 1:26pm

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