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Review gets it wrong

03 Mar 2017

Industry commentators are angry that attempts to clearly separate sales activity from advice appear to have been abandoned in the rewrite of financial adviser legislation.

The Financial Services Legislation Amendment Bill was released last month.

It amends sections of the Financial Markets Conduct Act to include advice-specific regulation.

During the options paper process, there had been discussion of a carve-out of sales versus advice services.

"We have also heard that the distinction between advice that puts the interest of the customer first, and what is essentially sales activity, remains blurred," then-Commerce Minister Paul Goldsmith said.

A survey by the Ministry of Business, Innovation and Employment found almost 90% of consumers said clarification would help them better understand the industry.

One of the options proposed was a "salesperson" category, in which people would not have to put the customer first - but would have to notify them of that - and could only sell their own provider's products.

But banks argued strongly against the idea in their submissions on the options paper. 

The draft bill lays out a proposal for financial advisers and financial advice representatives, working for licensed financial advice providers.

Both advisers and representatives have to make clear any limitations on their advice. But representatives will work on behalf of advice providers, and will not be individually accountable for compliance with conduct and disclosure.

It is proposed that all existing RFAs and AFAs who wish to continue providing advice services during the transitional licensing period are required to be financial advisers. Existing QFE advisers who remain engaged by a firm which was previously a QFE will be able to operate as financial advice representatives.

IFA chief executive Fred Dodds said using the word "advice" in the representative title was a "complete mistake". "Any reasonable person would assume they are advisers and will follow an advice process. In fact, they will follow a sales process."

He said, with the draft indicating that in-house training would be an option for representatives, it would consign the next generation of QFE employees to being "formally unqualified under NZQA and having no portable qualifications. It will have a devastating effect of reducing the potential number of advisers for the future.

"It seems MBIE seems really confused here – and is solely focused on competency – which is gained through experience, training and CPD.  MBIE seem to ignore knowledge – gained through learning, the standard being a ‘qualification’.  Every adviser needs both. They are not mutually exclusive. The standard has been previously set at Level 5 and now MBIE seem to want to avoid this?"

He said every sector in New Zealand had insisted on both competency and qualifications. 

"The law profession have always been very strong on up front qualifications – and now insisting on CPD and competency. Seems MBIE are being weak on what makes the financial services sector equally robust for the NZ public. Finally – we are building a massive gap in skills and qualifications with the rest of the world – in particular Australia who have set a much higher standard."

Industry commentator David Whyte said the draft was disappointing.  "From a consumer perspective, I fail to see the difference between the functions carried out by a financial adviser and a financial advice representative. From a commercial advisory entity in the distribution space, I fail to see the attraction of engaging financial advisers. From an individual adviser's perspective, I fail to see the attraction of being a financial adviser.

"I fail to see how when a bank employs a financial advice representative to sell bank products, he/she can possibly put the client's interest first. I fail to see where the title 'financial advice representative' provides adequate distinction from the term 'financial adviser'."

But Bradley Kidd, of Chapman Tripp, said there was another point of view. 

"The counter view lies in a combination of licensing the entity and assigning primary responsibility for meeting consumer protection expectations to that entity.  According to this theory, consumer protection is equally served by having the client-first duty apply to all types of advice - including sales, to the extent there is a recommendation.  And ultimate responsibility should lie with the licensed entity - as it typically would be for most types of licensed entities, not the FAR, given the entity should have processes and systems in place to comply - and should be held accountable for any defective advice, even if it is in the nature of 'sales'.

"There will no doubt be a range of views on this.  An outcome which ensures sales activity is subject to the client-first duty, even if that means entity rather than individual responsibility, is hard to fault from a consumer protection perspective – but individual advisers may take issue with the absolute nature of this requirement."

 - Good Returns

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