Committee proposes FSLAB changes

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Conflict of interest, nominated representatives and what makes financial planning have come in for scrutiny by the select committee considering the Financial Services Legislation Amendment Bill. But not everyone is happy.

Tuesday, July 31st 2018, 11:46AM 6 Comments

by Susan Edmunds

The Economic Development, Science and Innovation Committee has provided its report on the bill, which recommends it be passed, with amendments.

Financial Advice New Zealand chief executive Katrina Shanks said she was disappointed to see the committee had not taken a stand to draw a line between sales and advice.

"That would help the code working group, if there was more direction in the legislation."

She said the association would push for more debate around that point.

She said the bill had also lost the Financial Advisers Act purpose of building public trust and confidence in the sector.

A significant proposed change is to the duty to give priority to clients’ interests.

The committee said the duty as it was written would stop advisers recommending a product that might advance their own interest, such as earning them a commission, over one that would better serve the client.

“However, we accept that providers should not have to consider every product on the market when making recommendations. We also accept that advisers should be able to give advice on a single product, provided the adviser says so and discloses and manages any conflicts of interest. We accept that the requirement to give priority to the client’s interests, including by taking all reasonable steps to manage conflicts of interest, could allow for an unnecessarily broad interpretation.”

To ease concerns, the committee suggested amending the wording so that the adviser was required to give priority to a client’s interests if they knew there was a conflict between those interests and their own or those of a person connected with the giving of the advice, such as the financial advice provider, or a person associated the  financial provider or an interposed person.

Shanks said it was good for public perception of the industry to have this aspect included in the bill.

Changing between funds under the umbrella of one MIS or KiwiSaver provider will also be captured by the new regime, although this was originally unclear.

Shanks said this was a good move and protected consumers.

The committee has also suggested the definitions be amended, particularly around financial planning.

“New section 431C provides that a person gives financial advice if the person designs an investment plan for another person,” its report said.

“We consider this definition may be too narrow, and consider that if a person provides planning advice about other financial products, such as insurance, it may be that they should also be considered as providing financial advice.”

But the committee said it did not want to broaden the regime to cover all forms of financial planning advice because this would impose unnecessary burdens on things such as budgeting services.

“We therefore recommend the insertion of a regulation-making power to allow the regime to be extended to other, specific financial planning services.”

The report also suggested making clearer the limited discretion of nominated representatives working for financial advice providers.

“We accept that the scope of advice that could be offered by nominated representatives should be limited. The intent of the bill is that financial advice providers should ultimately be responsible for the conduct of their nominated representatives. Therefore, the activities of nominated representatives should be tightly controlled by the processes and systems of the provider. We consider that the bill as introduced does not make clear the limits that are intended to apply to nominated representatives in exercising discretion compared with financial advisers.”

The committee also responded to dispute resolution schemes’ concerns about the proposed requirement to report to regulators.

As it stands, the bill proposes requiring the scheme to report individual material complaints to regulators such as the FMA.

At the moment they must only do so if they see a series of material complaints.

The schemes want the wording changed so they would only need to report if the complaint contributed to a series of similar complaints or reflected a systemic issue.

“We consider that regulators should be informed of significant breaches of the law, even if discovered following a single complaint. However, we see no need for every single immaterial complaint to be referred to the Registrar as this would impose an unnecessary administrative burden. We accept that the reporting requirement should only apply where there are reasonable grounds to believe that a participant has breached, or is likely to breach, the law,” the committee said.

Shanks said it was also positive that the committee had tightened the rules around exemptions for people such as lawyers and accountants, and noted that just because someone had achieved a transitional license, it should not automatically translate to full licensing.

Tags: FSLAB

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