RFA standards set to lift

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[UPDATED] An options paper that will guide the review of the Financial Advisers Act has been released. It seems virtually certain that RFAs can expect their regulatory obligations to increase - although a ban or restriction on commissions is not a "preferred option".

Wednesday, November 25th 2015, 8:37AM 4 Comments

by Susan Edmunds

An options paper that will guide the review of the Financial Advisers Act has been released.

Options are presented individually and as three packages of changes, the first proposing relatively minor changes, and the second more significant alterations.

It makes it clear that raising the standards currently required of registered financial advisers is a priority, as is differentiating between sales and advice.

The industry has until the end of February to offer feedback.

Commerce Minister Paul Goldmsith said: “We hope to make improvements to this regime so that all New Zealanders, including those with simple questions and without large sums to invest, have access to trusted financial advice should they want it.  

“We’ve heard, for example, that the current regime is overly complex and that this has reduced access to financial advice. Another complicating feature is that people don’t always know whether they are getting genuine advice or whether they are being sold a product, such as insurance or investments," he said.

“Current rules around the disclosure of commissions and potential conflicts of interest are inconsistent. The options paper canvasses different approaches to achieve greater consistency across the board.

“This paper outlines options, ranging from minor changes to more fundamental reform, for simplifying the regime and addressing the issues that were identified in the initial consultation phase.”

The options paper says the FAA has lifted professional standards in the industry.

But there are still problems: It is hard for consumers to know where to seek advice, certain types of advice are not being provided, consumers may be receiving advice from people without adequate knowledge, skill and competency levels, certain conflicts of interest may lead to poor outcomes for consumers, and consumers do not always understand the limitations of different types of advice.

Under the first package of possible changes, MBIE proposes retaining the current boundaries about who can provide what type of advice, but requiring all advisers to put customers' interests first and give their clients a simple, common form of disclosure.

It also would update advice terminology to make it more user-friendly, and licensed entities would be able to provide roboadvice online.

In the second option, all the improvements in package one would be adopted, the distinction between "class" and "personalised" advice would be removed, and a subset of Expert Financial Advisers would be able to advise on complex matters.

In addition, all financial adviser businesses would have to be licensed and those businesses would ensure their employees comply with competency and ethical obligations.

The third package would have all the package one improvements, as well as some from the second package such as no distinction between class and personalised advice, licensed advice businesses, and competency requirements.

It would also require salespeople who are not subject to the obligation to put their customers first to notify consumers of this.

Salespeople could only sell their own products and there could be a role for industry associations to take more of a role in regulation.

The paper says: “There is an imbalance between higher competency requirements for some advisers (AFAs) and low or non-existent competency requirements on other advisers (especially RFAs). We hear that these competency requirements are not always proportionate to the risk or complexity of the financial advice services being provided. This includes the concern that RFAs do not have to meet a competency standard, despite advising on financial products which can have a significant impact on consumers’ financial wellbeing (e.g. insurance). For an RFA to practise he or she must simply register as a financial service provider (this involves an application form, criminal record check, annual fee, and joining a dispute resolution scheme)."

It says while it is seeking feedback on which of the three packages of options are preferred, they are not set in stone.

“They are intended as a basis for discussion with stakeholders about the pros and cons of each and what may or may not work in practice.  We are also seeking feedback on whether there are other packages that could work better than the three permutations presented here."

A restriction or ban on commission is not a preferred option, the paper says. "This option could limit access to advice to those who are not willing to, or cannot afford to, pay upfront for advice."

That would seem to mean the Financial Services Council's Melville Jessup Weaver report into life insurance commissions will have little impact.

FSC chief executive Peter Neilson said the options were not a surprise and there were still questions about adviser conflicts of interest that needed to be resolved.

Download Options paper here

Tags: Financial Advisers Act

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