AFA requirements should be stricter: Hughes
The Financial Markets Authority wants the entrance criteria for would-be financial advisers to become a lot stricter.
Tuesday, May 14th 2013, 6:00AM 
2 Comments
by Susan Edmunds
Chief executive Sean Hughes said there was little his organisation could do to turn down would-be applicants. But he said improvements to the regulatory regime would significantly reduce the likelihood of any future failings in the style of Ross Asset Management.
His opinion was sought from Commerce Minister Craig Foss at the end of last year.
Hughes told the minister the FMA could only turn down a would-be authorised financial adviser on the grounds of good character requirements or criminal convictions.
He suggested that applicants should be asked to satisfy a “fit and proper” assessment, or that the FMA be given some ability to exercise discretion in determining who could become and AFA. He also suggested that applicants could be required to submit detailed business records and client files.
But he said introducing such a requirement would significantly increase the time it took to licence an AFA.
Hughes suggested that if all 2000 AFAs renew in 2016, it would cost the FMA up to $1 million to check them all. He said the FMA was considering posting AFA applications on its website. “This could allow members of the public to tell us if they have valid objections or information which could be useful in considering authorisation and good character assessments.'
Hughes said the FMA had so far asked for adviser business statements from 157 AFAs, including those dealing with concentrations of “vulnerable” investors.
He said, should the Government want the FMA to recalibrate its priorities to give equal priority to wholesale clients and crime prevention while not reducing its focus on building competence in the adviser community, it would require an extra $2 million to $3 million per year.
Foss told Good Returns the FMA would not be getting any more money. “Currently, the Government has no intention to increase FMA’s budget.”
Hughes also suggested removing AFAs’ ability to provide DIMS, increasing monitoring of DIMS providers, reviewing the wholesale client definition and licensing custodial service providers.
Foss said the key suggestions had been added into the tabled Financial Markets Conduct Bill but tighter licensing rules for advisers were not being considered at this stage. He said it was something that could be reviewed in future.
The FMC Bill introduces a $750,000 threshold for someone to be counted as a wholesale investor, not needing advice from an authorised adviser. It also allows only AFAs to provide DIMS to retail clients, not QFE advisers.
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Comments from our readers
If Hughes wants more money, perhaps he should ask for a few more dollars to spend on a survey to find out if the measures he has introduced have in fact increased investors’ confidence in the industry. My only plea in this regard is, please, don’t contract this out to the Consumers Institute.
I suppose adding AFA applications to the FMA website has merit. Why not include mandatory newspaper notices as well. It would assist to bring AFAs in line with booze outlet license holders, security guards and used car salespersons.
Hughes suggestion of removing AFAs ability to provide DIMS is short sighted. It will just drive up fees and force AFAs into the hands of vested interest platform owners and expensive custodial service providers. In my experience not all clients want or are suitable for a DIMS service. Just because you get one or two rogues’ rorting the DIMS doesn’t mean the whole industry is doing it or for that matter has ever consider doing it.
I personally feel the FMA has got the good character tests for AFAs about right. Some with criminal convictions have been granted AFA approval. Some without criminal convictions have had their AFA applications turned down due to non-criminal unprofessional behaviour. Police tests, client testaments, industry testaments and examination criteria should weed out most bad apples, but not all with a bit of unseen rot in the core. I would go out on a limb and say we have a better record than Solicitors and Accountants in this regard.
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I also agree that industry participants need to determine whether they are dispensers of advice or are money managers. The latter community (inclusive of those with DIMS) should adhere to a more stringent set of rules reflecting their increased responsibilities.