by Susan Edmunds
The recommendations for the new-look FAA, revealed today fall into three main categories.
The first removes distinctions between advisers and types of advice. Under the new FAA, definitions of class, personalised advice and product categories will be removed. So will the RFA, AFA and QFE designations.
Commerce Minister Paul Goldsmith said the revamped FAA was an attempt to get conversations about New Zealanders' finances flowing, instead of advisers being hindered by restrictions on the type of product they could discuss.
All advisers, whether they are human or roboadvice, will be required to place the interests of the consumer first and provide advice only where they are competent to do so.
All will be subject to a code of conduct, although the standards of that will vary according to the different types of advice provided. The code will also set the competency requirements expected of advisers. A blanket introduction of a level five qualification requirement is not being promoted at this stage.
All advisers will be expected to put the interests of their clients first.
Goldsmith said the changes would mean a higher bar for people who are currently RFAs as they were drawn into the regulatory net. "It is a step up for them. But if you look around the world, this is broadly the direction that everyone is going and is what consumers expect."
He said it would be interesting to see whether the number of advisers in the market changed. The Financial Markets Authority would be charged with monitoring whether clients were being put first and breaches could be penalised. Reporting requirements could be introduced that include things such as data on replacement and new business and details of commission, including soft commissions.
The second major change allows for roboadvice. The new FAA will remove the requirement for advice tailored to a consumer to be provided by a natural person.
"Roboadvice will need to meet the same standards as a person providing advice; however the means of meeting these standards will differ. For example, while a financial adviser may be required to demonstrate competence through having passed a qualification, a roboadvice platform may have to demonstrate equivalent quality through algorithm and scenario testing," the Ministry for Business, Innovation and Employment (MBIE) said.
The third covers entity licensing. All advisers will be required to be licensed by the FMA but they can also opt to be agents of a firm that is licensed. Those who continue as advisers will be individually accountable for complying with the legislative and code obligations on them. Firms will be responsible for their agents.
"This approach replicates the efficiencies of the current QFE model and applies it to all," MBIE said. "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. their agents."
MBIE said advisers would be better off under the new rules because the absence of a class and personalised delineation would mean they would not be restricted from providing consumers with the advice they wanted, if they were competent to provide it.
New simplified disclosure requirements and streamlining licensing and reporting requirements would help ease the regulatory burden for AFAs in particular.
There had been discussion during the options paper process of a carve-out of sales versus advice services. Goldsmith said requiring all advisers and agents to make clear the limitations of their services, and tell clients if they could only offer advice on one type of product, would deal with that issue.
MBIE said: "All advisers and agents have limitations on the services they can provide. For example, some only provide advice on one or two providers’ products. In putting the interests of the consumer first they would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis. In all cases, advisers and agents must put the consumers’ interests ahead of their own regardless of the differing financial incentives offered by providers."
MBIE said it had considered banning commissions but that was not an appropriate response.
"MBIE recommended focusing on the conduct of those providing financial advice, rather than imposing a ban or restriction on commissions."
It said commissions were no tin themselves harmful and a ban would not directly target poor conduct.
Goldsmith said he hoped to have the legislation into the house before the end of the year. But he said it was important not to rush it. "This is an area where there are so many opportunities for unintended consequences."
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Well done Minister Goldsmith for having the fortitude and courage to enable these changes and provide an industry which will better serve the NZ public.