AFAs face more DIMS hurdles

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Authorised financial advisers will likely have to navigate extra hurdles to prove they are capable of offering discretionary investment management services (DIMS) when new regulations come into force.

Monday, July 22nd 2013, 7:21AM 2 Comments

The Ministry of Business, Innovation and Employment has released another discussion paper, ahead of the introduction of the Financial Markets Conduct Bill (FMCB).

The FMCB will introduce a number of changes to how financial products are created, promoted and sold.  It includes changes under the FAA to the way DIMS and custodians are regulated. The discussion paper is designed to seek stakeholder views on potential regulations relating to DIMS.

Among proposals in the discussion paper is a plan to align the obligations of AFAs who offer personalised DIMS with the obligations applied, under the FMCB, to large-scale, licensed providers providing class advice, such as investment via wrap platforms. MBIE also wants to change the way AFAs disclose information about DIMS to their clients, their client agreements and the frequency of their reporting.

But one of the most significant changes for advisers is that AFAs wanting to offer DIMS will have to pass good character and competence standards and also prove that they have systems in place to minimise undue risk to their clients.

The discussion paper proposes that they should have to prove that there is no reason to believe they will not meet their obligations under the legislation.

They will also have to offer retail clients regular reports that show the portfolio valuations of all assets managed on behalf of the client, total investment returns and fees charged, a schedule of transactions and details of the assets managed.

Chapman Tripp senior associate Emma Harding said: “At the moment you just have to tick a box basically. [The proposed new criteria] will require more due diligence on the part of the FMA but it gives investors a bit more protection.”

She said the added disclosure requirements around DIMS would also benefit clients.  The proposal is for a prescribed statement outlining what DIMS involves and what risks are associated, how custody over the assets will be provided, how the client can give instructions on corporate actions relating to financial products in their portfolios and what will happen at the termination of the DIMS.

She said: “At the moment DIMS have very little additional disclosure than someone offering advice on KiwiSaver.”

She said MBIE had indicated a willingness to go through a transition period if any changes would have a significant impact on adviser businesses.

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