Better boundaries sought on the draft Code
Jenha White attended the Code Committee's Auckland consultation meeting and reports on some of the changes advisers would like to see made to the draft Code.
Thursday, July 15th 2010, 7:25AM 
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by Jenha White
At yesterday's draft Code consultation session Code Committee chairman Ross Butler said the Investment Savings and Insurance Association (ISI) had given a cracker of an idea around the requirement for effective communication.
The ISI said authorised financial advisers (AFA's) might feel they had effectively communicated with a client on day one but if an investment was to fall over in two years time, it may turn out the communication wasn't effective in explaining risks.
The ISI said there is a risk that advisers may be judged by the benefit of hindsight and the association asked whether a safe harbor or a minimum standard approach could be taken within the code standard.
Code Committee member and Kensington Swan partner David Ireland said the Code Committee has observed from this, that advisers may end up scared of their own shadows with refusal to commit themselves to anything because of a concern they could be spanked for being caught short of effective communication.
"So we're trying to look at some sort of safe harbor guideline type test to provide some comfort for advisers."
He said one of the flipsides of trying to avoid being too prescriptive with the code is that you end up with a bit of uncertainty with what advisers specifically need to do in particular situations.
Chapman Tripp partner Tim Williams also brought up a concern around boundaries of Code Standard one where an AFA must place the interests of the client first and must act with integrity.
Williams says if you take that code standard to the enth degree, that particular rule could require never ending investigation of a particular matter for a client or it could involve not charging anything because it would be in the best interests of the client not to charge a fee.
"There's obviously got to be metres and bounds here. In Australia they recognise this by having in their regulation: take all reasonable steps to act in the best interests of your client," said Williams.
"I was wondering if the Code Committee considered that Australian standard and recognised that in actual fact code standard one doesn't have any limits or reasonableness to it."
He said the definition of putting a client's interests first would be too broad if an adviser was taken through the disputes reolution process.
Ireland replied saying the Code Committee had proposed an alternative on the client first standard, but there was strong pushback from consumer groups who did not want the client first approach watered down.
He said a balanced approach is needed and the Code Committee is happy to take specific feedback on how to restrain the standard, while also thinking about consumer groups.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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Comments from our readers
Whether you agree or disagree with AFA's being subject to fiduciary obligations, it is also wrong to suggest it is an easy solution. Fiduciary obligations are burdensome, and should not be lightly assumed or imposed, and there are many ramifications in doing so.
That said, I think it's a glaring omission for the Code not to recognise the imposition of fiduciary duties on AFA's. Whether they like it or not, AFA's are subject to such duties at common law, and the Code should address that – otherwise the industry is going to remain blissfully ignorant of them.
For those commentators endorsing the Australian regime please note Australia’s statutory fiduciary standards were only introduced two months ago, and don’t take effect for another two years. Our “Australian Experienced Advisor” has some more study to do! Prior to that the standards existed at common law (just as in NZ), but the regulated regime didn’t recognise or understand them. Hence the need for statutory reform in Australia. Main point being – blindly following Australia is not the solution (we have quite different licensing regimes as well, particularly around the distinction between class advice and personalised advice).
Incidentally, bear in mind, and IO will undoubtedly have a comment on this… embracing Australia’s statutory fiduciary obligations will almost inevitably require a blanket ban on AFA’s receiving 3rd party commissions (both these rules were adopted hand in hand in Australia). Can’t have cake etc…
My previous response deliberately avoided the suggestion of blindly adopting the Australian regulatory framework, as Australia hasn’t managed to get all the bits right yet (which Angus is no doubt aware of). However there are numerous jurisdictions (including Australia) that have successfully implemented Regulatory change over recent years, which NZ can observe and select from.
Specifically; it appears that the Code Committee has overlooked a critical opportunity in drafting the rules – that being the area of Fiduciary Responsibility. Yes – this requires a response from Parliament prior to heading down this path. However until the industry amends its ways and puts the ‘client first’, we’ll never achieve much more that producing a thesis of extraneous dribble. All other professions use the concept of fiduciary duty as their foundation.
On your final point: There is little connectivity between statutory financial obligations and Australia’s knee-jerk reaction to banning 3rd party commissions. As I have preached before, the commissions v fees debate is a billing argument, with the recent decision achieving little more than preventing the villains from continuing to fleece consumers.
Unfortunately for the financial services industry, the ban on commissions is a relatively easy and popular political response to appease misguided media and hard-done-by consumers.
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Tim Williams' recommendation to adopt the Australian language is not only reasonable, but provides an immediate solution to an otherwise time-wasting debate