Review outcomes announced
13 Jul 2016
Commerce and Consumer Affairs Minister Paul Goldsmith has announced numerous changes to the legislation which covers financial advice and financial advisers including insurance brokers.
Paul Goldsmith said “I recognise that changes will have an impact on existing financial advisers. MBIE will work with advisers on possible transitional arrangements, to ensure they are reasonable in light of practicalities such as the need to meet higher competency standards.
“All providers of financial advice are now required to be more transparent about limitations on their advice and disclose information regarding conflicts of interest, such as commissions.
Changes include the removal of existing categories of financial advisers. The Authorised, registered and QFE advisers will be replaced.
The title “Financial Adviser” will be used by those licensed individuals who take personal responsibility for the advice they give. Anyone offering advice on behalf of a firm will be referred to as a “Financial Agent”. Like an individual financial adviser, these “Financial Advice Firms” will be licensed by the FMA and able to give advice.
Anyone (or any robo-advice platform) providing financial advice will need to be licensed. To ensure this does not impose undue costs on industry or Government, licensing will be required at the firm level. This approach replicates the efficiencies of the current QFE model and applies it to all. There will be flexibility, depending on the size and nature of the firm, in how prospective licensees will be expected to meet those requirements given a ‘one size fits all’ approach to licensing and reporting is unlikely to work.
While there will be no legislative difference in the services financial advisers or agents could provide, in practice, agents will only be able to provide advice services where their firm has sufficient processes and controls in place such that the FMA is satisfied it is appropriate for the firm (and not the individual) to hold accountability. It is therefore likely that, in practice, the services offered by an agent would be limited when compared to those offered by an adviser.
On banning commissions MBIE recommended focusing on the conduct of those providing financial advice, rather than imposing a ban or restriction on commissions. Banning commissions is not a ‘silver bullet’ that will improve the quality of advice, because:
• Commissions are not themselves harmful. They are a means of funding the distribution cost of the adviser channel. There is a risk that banning commissions in New Zealand would further limit access to advice.
• A ban on commissions would not directly target poor conduct, as the FMA noted in its recent review of insurance replacement business many advisers do not have high replacement business despite being paid on commission structure.
• It would not address conflicts of interest where financial products are sold through in-house distribution channels, such as bonuses or sales targets.
• The proposals represent a more prudent approach in the first instance. However, MBIE and the FMA will continue to monitor the conduct of advisers to ensure the measures are sufficient.
Unclear terminology will be removed and simplified, common disclosure requirements are to be introduced to ensure consumers can access the right information to make informed financial decisions. This disclosure will include key information, such as the commission being paid, any conflicts of interest and the limitations of the advice.
The Code Committee will establish conduct and competency requirements for all financial advisers. In particular, all financial advice is to be held to a clear requirement to put the consumers’ interests first, and be subject to a Code of Conduct that establishes appropriate client-care, competence, knowledge, and skill standards.
The Committee will be required to consult on the standards that should apply to different parts of financial services.
The requirement for advice tailored for a consumer to be provided by a natural person will be removed, along with the definitions of class, personalised advice and the categorisation of products. These changes enable the provision of robo-advice and make it easier to give consumers tailored advice.
Anyone (or any robo-advice platform) providing financial advice is to be subject to active regulatory oversight and this is to be done at the firm level so it does not impose undue costs on government or across industry.
The Government plans to raise the threshold that businesses must meet to make it on to the Financial Services Providers Register over concerns some overseas firms are abusing it.
The register is a list of people, businesses, and organisations that offer financial services. While all in the sector must be registered, this does not mean the entity in question is officially sanctioned by authorities.
The Financial Markets Authority can direct that companies be removed from the register where it is likely it provides a misleading impression about the extent to which it is regulated in New Zealand.
That FMA went on the offensive last year, booting more than 50 overseas firms off the register amid concerns some were taking advantage of the country's reputation of "being a well-regulated jurisdiction and a good place to do business".
Under proposed changes announced yesterday, the Government said entities could be on the register only if they were providing financial services to New Zealanders. They must also be providing these services from a business in New Zealand.
What happens next
The new regime will be refined further through consultation on an exposure draft of the new legislation and testing with consumers and industry this year. The aim is to introduce a Bill to the House at the end of 2016. The Government is still to make decisions on:
• Transitional arrangements
• Complementary measures which could help address misuse of the Financial Service Providers Register
• The membership and proceedings of the Code Committee
• The FMA’s enforcement, monitoring and oversight.
MBIE will report back to Cabinet in more detail on these points later in the year.