Sec Comm thoughts on setting adviser competence standards

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Read the Securities Commission discussion document On Authorised Financial Adviser Competence in full here.

Tuesday, April 21st 2009, 7:02AM

STAFF PAPER ON AUTHORISED FINANCIAL ADVISER COMPETENCE

Introduction

1. The purpose of this paper is to outline current developments and possible approaches in relation to standards of competence for authorised financial advisers ("AFAs") under the Financial Advisers Act 2008 ("the Act"). It has been prepared by Securities Commission staff to inform not only the Commission itself (i.e. the Commission in its capacity as a statutory decision maker) and the Commissioner for Financial Advisers, but also the Code Committee, financial advisers and their employers, consumers, education providers and other interested parties. In turn we seek comments to help provide a more complete picture of current developments and possible approaches.
2. To the extent that views are expressed in this paper they represent the preliminary thinking of Commission staff.
3. Much of this paper is descriptive - setting the scene for a discussion. First we give an outline of how the Act relates to the competence of AFAs. Within that outline we draw attention to the various distinct roles of the Commission, the Commissioner, and the Code Committee. We then go on to outline the National Qualifications Framework and the development of unit standards of competence for financial advisers. The last section of this paper is the beginning of the substantive discussion on a competence framework for AFAs under the Act.
4. The intention is for this paper to lay the groundwork for consultation processes and decision making in relation to competence matters. In particular, we are keen to ensure that, ahead of the Code Committee's consultation process on the competence standards to be specified in the Code, there is a good level of understanding of the National Qualifications Framework in order that feedback can be provided to the Code Committee for early consideration.
5. We are keen to fully understand and assess the financial and other implications of the possible approaches set out in this paper. We ask you to comment on costs, benefits and any other impacts (for example the effects on competition or on trans-Tasman business efficiency). We are seeking both quantitative and qualitative information. We encourage you to describe any alternative approach you think would achieve the Act's objectives. We are keen to hear from you on any other issues you consider important.
6. Submissions should be sent to the Commission by 5.30pm on 29 May 2009.

Email:

faa.consultation@seccom.govt.nz

Post:

AFA Competence Discussion
Securities Commission
PO Box 1179
Wellington

Facsimile:

(04) 472 8076

7. Submissions will be shared with the Code Committee.
8. Submissions will be subject to the Official Information Act 1982. We may also make them available, for example on our website, and draw attention to them in any further report. If you would like us to withhold any commercially sensitive, confidential or proprietary information included in your submission please state this in your response. Any request to have information withheld will be considered in accordance with the Official Information Act.

Authorised financial advisers and competence

9. In this section we outline how the Act relates to the competence of AFAs and discuss the competence-related roles of the Code Committee, the Commission and the Commissioner for Financial Advisers.

Competence

10. The purpose of the Act is to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers, by:
    1. requiring disclosure by financial advisers,
    2. requiring the competence of financial advisers, and
    3. ensuring that financial advisers are held accountable for any financial advice that they give and there are incentives for financial advisers to manage appropriately conflicts of interest.
11. Competence is therefore central to the Act. However, the impact of the Act depends upon the type of financial adviser service being performed, and whether an adviser is an employee or agent of a "Qualifying Financial Entity". This paper is concerned with competence as it relates to AFAs.

Authorised Financial Advisers

12. The Act divides financial products into two categories:
    1. Category 1 (higher risk or more complex products) - securities (other than those listed as Category 2), real estate, and futures contracts.
    2. Category 2 (lower risk or less complex products) - call debt securities, bank term deposits, insurance products (other than life insurance issued after 31 December 2008), and consumer credit contracts.
13. In general, advisers who give advice on or undertake investment transactions in respect of category 1 products, and all people who provide financial planning services, will need to be authorised by the Securities Commission. The exception to that is an employee of a Qualifying Financial Entity (QFE) advising on or undertaking investment transactions in respect of category 1 products issued by the QFE will not need to be authorised.

The Commission

14. To obtain authorisation, a person must satisfy the Commission that, amongst other things, he or she meets levels of competence, knowledge and skills set out in the Code of Professional Conduct for AFAs.
15. The Commission itself is therefore a key stakeholder in the development of the Code. The competence framework established in the Code will have a direct bearing on what the Commission will need to do to determine applications for authorisation and on the efficiency of the Commission's ongoing supervision of AFAs.

The Code Committee and the Code of Professional Conduct

16. Responsibility for preparing the Code falls to the Code Committee. Amongst other things, the Code must provide for minimum standards of competence, knowledge and skills for AFAs. The Code must also provide for continuing professional training for AFAs, including specification of minimum requirements that an AFA must meet for the purpose of continuing professional training.
17. The Act expressly requires the Code Committee to consult with interested parties in preparing the draft Code. A key objective of this paper is to lay the groundwork for that consultation.
18. Members of the Code Committee are appointed by the Commissioner for Financial Advisers. The Code Committee must have at least 7 members and not more than 11. One of those members must have consumer affairs knowledge and experience, and the remaining members must have industry knowledge and experience. The Commissioner is not a member of the Code Committee.
19. The Code must be approved firstly by the Commissioner for Financial Advisers and then by the Minister of Commerce.

Summary of roles and tasks

20. The following is a summary of the roles and the sequence of tasks involved in putting in place the Code to the point where financial advisers can be authorised under the Act:
    1. The Minister of Commerce appoints a Commissioner for Financial Advisers.
    2. The Commissioner for Financial Advisers appoints members of the Code Committee.
    3. The Code Committee prepares a draft Code in consultation with industry and others.
    4. The Commissioner for Financial Advisers approves the draft Code (or declines to approve it and refers it back to the Code Committee).
    5. The Minister of Commerce approves the draft Code (or declines to approve it and refers it back to the Code Committee).
    6. The Code comes into force on the date notified by the Commissioner in the Gazette.
    7. The Commission processes (or completes the processing of) applications for authorisation.

Competence framework

21. Establishing a competence framework is perhaps the most complex aspect of preparing the draft Code. That complexity derives from a number of factors including that the competence framework needs to be -
    1. effective in establishing minimum levels of competence in practice,
    2. meaningful and credible in order to underpin consumer confidence,
    3. flexible and adaptable in order to accommodate the diversity of financial advisers, financial adviser services, and the range of potentially relevant qualifications and experience,
    4. cognisant and accommodating of international mutual recognition issues, and
    5. workable and in proportion to the issues at hand to ensure that the right balance is achieved between the regulatory impact and the objectives of the Act.

The Development of Competence Standards for Financial Advisers

The National Qualifications Framework

22. The National Qualifications Framework ("NQF"), administered by the New Zealand Qualifications Authority ("NZQA"), is designed to provide nationally recognised standards and qualifications, and recognition and credit for a wide range of knowledge and skills. Unit standards of competence, and national certificates and diplomas, are registered on the NQF.
23. Tertiary education organisations such as universities, polytechnics, and private training establishments are able to seek accreditation with NZQA for the delivery of courses and programmes of training and assessment against the standards and qualifications registered on the NQF.
24. Unit standards of competence describe what a person needs to know or what they must be able to perform. They provide the basis for assessment, but they do not specify the delivery of learning or training programmes. In essence, they are definitions of outcome - the standards of performance that a person must reach in order to be objectively assessed as competent - rather than course content.
25. As the established national framework for defining qualifications and standards of competence, the NQF offers an opportunity to standardise definitions of competence for all financial advisers. The financial adviser profession covers a large and varied group of people, with vastly differing backgrounds in learning and practical experience. The NQF enables objective articulation of measurable competence standards for the entire profession.
26. Standardised articulation of competence provides a fair and transparent way of assessing people's abilities, enhances certainty (for advisers, employers, educators and regulators), and facilitates qualification portability across the profession. It allows any education provider accredited to deliver the standards to compete to provide training and assessment services. It also allows assessment to occur in the workplace by registered workplace assessors. It enables industry and the regulator to place reliance on the already well-developed systems established in the education system for assessing competence and arranging the delivery of learning. It provides demonstrable evidence to help support the international recognition of New Zealand advisers. Objective, industry-agreed standards will increase certainty regarding acceptable levels of professional skills and competence, contributing to the reduction of compliance costs - and simplification of regulatory monitoring - for all categories of advisers.
27. In addition to adviser regulation, the NQF is also available for defining standards for personal financial education. Personal financial education - such as financial literacy initiatives in schools - is generally set at lower competence levels aimed at "consumers", while this paper is concerned with competence for the "suppliers" of financial services. However, there are valuable system-wide advantages to using the NQF not only for advisers' professional competence but also for personal financial education. Not least of these is the creation of an environment where education organisations are able to deliver a spectrum of finance related disciplines, to the benefit of the entire community. Learning pathways in finance and related skills can be developed from high-school literacy levels all the way through to the competence levels required for professional financial advisers.

Industry training

28. The Tertiary Education Commission ("TEC") is the crown agency responsible for leading the government's relationship with, and investment in, the tertiary education sector. It promotes a tertiary education system that is responsive to government and stakeholder priorities.
29. The TEC, together with industry, invest in Industry Training Organisations ("ITOs"). Each ITO has a legislated role to play in developing the industry training system for the industries under its coverage. ITOs are established pursuant to the Industry Training Act as the mechanism for setting industry skill standards, providing skill and training needs leadership, and developing arrangements to deliver industry training.
30. ETITO (www.etito.co.nz) is the ITO for the financial services industry. As such it is responsible for developing unit standards for the financial services industry generally and, more specifically, for financial advisers. ETITO has worked with the financial services industry since 2002. Its coverage of the industry as the ITO for financial services was gazetted by the Minister of Education in 2007.
31. In conjunction with the financial services industry, and in parallel to the development of the Act, ETITO has been developing competence standards for financial advisers using the National Qualifications Framework.
32. Securities Commission staff have been engaging with ETITO to ensure that the Commission is included as a stakeholder in the development of a framework for financial adviser competence standards, competence assessment and training, and to ensure that Commission staff are well placed to inform the Commission itself (i.e. the Commission in its capacity as a statutory decision maker), the Commissioner for Financial Advisers, the Code Committee, financial advisers and their employers, consumers, education providers and other interested parties.

National qualifications - and their component competence standards - for financial advisers

33. To date, ETITO has finalised two National Certificate qualifications: the National Certificate in Financial Services (Level 4) and the National Certificate in Financial Services (Financial Advice) (Level 5).
34. These qualifications, developed by ETITO and its finance industry consultative committee, have focused on "baseline" competence: the skills that a financial adviser should have as a minimum. Competence standards for specialised classes of financial advice activities have not yet been written.
35. Most relevantly for AFA competence, in March 2009, the National Certificate in Financial Services (Financial Advice) (Level 5) was registered by NZQA on the NQF, following extensive development coordinated by ETITO. It can be found at www.nzqa.govt.nz. The Level 5 National Certificate would be the equivalent of a "driving test": it would provide an indication that a person meets the theoretical and practical competence standards appropriate for operating on the financial advice "road network" but not necessarily confirmation that they have the skills and knowledge for certain higher-level specialised advice activities.
36. The Level 5 National Certificate is intended for advisers - operating without direct supervision and outside a rigid "template" work process - who:
    1. "Give personalised and specific advice based on needs analysis of a wide range of data,
    2. Determine appropriate methods, make recommendations and lead the client, based on this analysis,
    3. Have full responsibility for the nature, quantity and quality of outcomes,
    4. Possess a broad knowledge base with substantial depth in some areas,
    5. Work for the client,
    6. May specialise in investment advice, insurance advice or do both." (Source ETITO website www.etito.co.nz)
37. The Level 5 National Certificate is set at a level that we anticipate would assist in obtaining international and trans-Tasman mutual recognition of financial adviser training.
38. Now that the Level 5 National Certificate has been registered, any accredited training provider is able to develop programmes of training and assessment for - or that incorporate - the Level 5 Financial Advice unit standards.
39. Ideally ETITO, industry and educators will collaborate to progressively develop additional standards - at, below and above Level 5 - providing a common currency for articulating a wide range of financial advice competence requirements. In July 2008 ETITO registered the (lower) Level 4 National Certificate, which we expect industry may find of use in helping to articulate requirements for some categories of employees and agents of QFEs.

Discussion of possible approaches

Existing qualifications that can be substantiated

40. We envisage that the Code Committee, in providing for standards of competence, will take into account existing qualifications in the financial advice sector.
41. Where an existing qualification has a well-evidenced record of combining structured theoretical learning and assessment, together with robust and transparent assessment of practical competence in the workplace, and has been followed by a substantiated programme of continuing profession training ("CPT"), the Code Committee will need to consider whether to recognise that in the Code as the requisite standard for a particular class of adviser.

Universal use of NQF

43. We suggest using the NQF to define standards of adviser competence in a generic and measurable form, in light of the factors set out in paragraph 21. If the Code Committee agrees and adopts the NQF to define standards of adviser competence, we propose to liaise with ETITO, industry and educators to work towards defining existing qualifications using NQF standards. It would mean that over time any accredited education provider could compete to deliver the requisite training. It would facilitate the fair and objective recognition of a large range of New Zealand and overseas qualifications.
44. We acknowledge that NQF standardisation of all financial advice qualifications would be likely to take several years to complete. Accordingly, we would recommend a transitional approach, where some existing qualifications (that meet the criteria above - theoretical, practical, CPT) are listed in the Code as being the interim standards of competence for certain specialised classes of financial advice activities.

Two-step approach for existing advisers without substantiated qualifications

46. If the NQF is adopted to define standards of adviser competence, we envisage there will need to be a two-step approach for existing advisers wishing to become AFAs, if they either do not possess formal qualifications or have some qualifications but do not meet the criteria above (theoretical, practical, CPT).

Step 1

47. First, we anticipate that in carrying out its obligation to ensure an AFA applicant meets the levels of competence, knowledge and skills specified in the Code, the Commission would require some evidence of the applicant's current competence.
48. In the absence of other independent evidence of current competence, an assessment of "baseline" competence would be a valid alternative. We envisage that this could be achieved using an assessment system or process that, focuses on assessing the core competence that every adviser should have. It would not extend to cover specialist subject areas for which some AFAs would have no need.
49. We envisage that such an assessment system could be administered under ETITO's supervision. Assessment methods necessarily must be appropriate for the competence being assessed, so the assessment system would probably comprise a test or examination to assess theoretical competence plus, for example, a requirement for applicants to submit a portfolio of evidence to demonstrate practical competence in the workplace.

Step 2

51. Second, we anticipate that for AFA applicants wishing to undertake specialised classes of financial advice activities, some confirmation of theoretical and practical competence (relevant to those activities) may be required in addition to the generic baseline assessment.
52. The effect of this two-step approach is that a universal, generic baseline assessment will be applied, plus "top-up" theoretical and/or practical requirements depending on the class of work the adviser will be doing. As the baseline assessment provides evidence of current competence, substantiation of the "top-up" can be proportionately relaxed.

Bridging periods for existing advisers

53. The Act anticipates that to be authorised, all existing advisers will need to satisfy the Commission that they currently meet the level of competence specified in the Code. Consequently there is no "deemed" or automatic authorisation of existing advisers.
54. However, we are interested in your submissions regarding short bridging periods for applicants who do not initially meet the standard for authorisation as an AFA, to enable them to continue practicing in their current field of work while they further develop their skills up to the requisite level.

Other financial advisers

57. Codified competence standards will be mandated only for AFAs, not for other advisers.
58. QFEs are required to satisfy the Commission that they have the capacity to ensure their adviser staff and agents exercise reasonable care, diligence and skill. We plan to explore with potential QFEs how they may voluntarily use NQF standards (with assistance from ETITO) to map the training and competence arrangements currently used in their businesses. Our objectives are to standardise skill levels, make training provision more competitive and accessible, promote portability of qualifications, reduce compliance costs and simplify regulation. We anticipate that this mapping exercise could be undertaken by QFEs incrementally over the next two to three years.
59. Similarly, we will encourage professional associations representing Category 2 advisers to collaborate with ETITO in the progressive development of NQF standards suitable for their members.

Culture of professionalism

61. Our regulatory approach to adviser skills and competence envisages a framework more expansive than mandated requirements, where core obligations are supplemented by a culture of professionalism. Rules alone are not enough: incentives that encourage professional responsibility are essential if the financial adviser industry is to earn public confidence in its members' competence and integrity.

63. We look forward to receiving submissions on the discussion points above and on any other matters you wish to raise in relation to AFA competence.

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