Getting ready for the new disclosure regime
Tuesday, March 8th 2011, 6:20AM
by FMA
Last week I was fortunate to meet advisers in Nelson, Wellington, Palmerston North and Napier. I found that AFA disclosure requirements are becoming increasingly topical as advisers complete their licensing steps and think about readying for the new disclosure regime. So some thoughts on that.
In terms of what kicks in and when, until they are repealed on 1 July, the disclosure requirements in the Securities Markets Act (SMA) remain in force. After that the Financial Advisers Act requirements, including the AFA disclosure regulations take over.
Some advisers have asked whether they can transition to the new disclosure requirements early. The answer is yes, you can, provided you remain compliant with existing disclosure requirements (under the SMA) until 1 July. If you are an AFA then the Code and the Standard Terms & Conditions apply from when you received your licence.
We are also fielding more detailed questions about the content, timing and updating of disclosure statements under various client interaction scenarios.
By way of background the financial advisers regulatory regime is principles based, as opposed to one where everything is prescribed down to the smallest detail. At face value prescription may be easier to comply with - just follow the requirements to the letter and tick them off as complied with. However such a one-size-fits-all regulatory approach can place a layer of unnecessary and costly compliance on industry. Its rigidity also means it can't easily evolve with rising standards that typify an industry on a journey of professionalism.
In contrast a principles-based approach has the advantage of recognising that all advice businesses are different. We have been able to reflect that with Adviser Business Statements - giving AFAs and QFEs the flexibility to develop a living document that fits their advice practice and acts as a useful toolkit for the business - as opposed to a hefty tome produced exclusively for the regulator and consigned to the bottom drawer.
The same principle applies to the provision of information to clients. Yes, there are regulations that prescribe what you must disclose, but prescription stops short of addressing every client scenario that might arise. In this environment, a professional will make these judgment calls in the context of their clients' interests - helping clients make informed choices and receive adequate protection.
Code Standard 7 is a helpful benchmark for all advisers. It obliges the AFA to ensure the client has sufficient information to make informed decisions and provides guidance on the sorts of information that might be provided. In some cases this could be in addition to what is prescribed in regulations.
During our post-licensing monitoring, if we spot some practices that need a nudge in a different direction then we’ll do that. If it looks widespread we’re likely to provide guidance on our expectations to industry as a group.
Professional bodies will play an important role going forward and this is a good example of how - by providing guidance and educational tools to assist members on many aspects of regulatory compliance and setting expectations and standards for professionalism. I understand the IFA will be issuing guidance on disclosure for their members and other professional bodies may also be planning to do so.
Mel Hewitson
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