Code changes released
UPDATED: Soft commissions and RFAs advising on KiwiSaver are in the sights of the Code Committee for Financial Advisers as it begins consulting on proposed changes to the Code of Professional Conduct.
Friday, August 9th 2013, 2:05PM 
11 Comments
by Susan Edmunds
Download a copy of the consultation paper here.
Chairman David Ireland said it was timely to review the code, which has been in place since 2010.
One of the key changes the committee is proposing is added emphasis on code standard one – the requirement to put a client’s interests first – as the overarching code standard.
“We have had feedback from some quarters suggesting that if they comply with what is set out in the other standards, that overrides standard one… We had always intended that code standard one should be seen as paramount. But nothing other than its placement gave it that emphasis.”
He said if the committee was to move towards being less prescriptive with the other standards, the need to put clients’ interests first would become even more important. “That’s the backstop, the ultimate.”
The committee is also reviewing code standard five, which relates to conflicts of interest.
Ireland said the committee did not feel it had the jurisdiction to directly attack conflicted remuneration but it was important to have a clear conflict of interest standard. “We need to clarify what we mean when we say ‘managing conflict of interest’.”
That would partly mean emphasising client first, he said, and clarify that it meant more than just disclosing remuneration. “Soft commission is still a conflict of interest. If I sell an insurance product and get an all-expenses-paid trip to the Gold Coast, I’m getting something out of it and I need to explain that to clients.”
He said there were a lot of situations where there were other influences on an adviser’s advice, not just through direct remuneration or soft remuneration but their interest in related parties that stood to benefit.
It has already been reported that the committee was mulling the possibility of a “KiwiSaver only” adviser, and the consultation documents provide more information about that.
Advisers would be able to qualify to advise only on KiwiSaver, not other investment products. But they would be regulated as if they were a full AFA. Ireland said: “We see KiwiSaver as a relatively simple product as a concept. There’s a more specific skillset for people to advise on that.”
Advisers would only have to pass sets a, b, and c – not d, which deals with numeric formulae and other information needed to deal in bonds, shares ad other investment products.
Ireland said it was unclear how many advisers would want to take up the offer, because of the extra compliance. “Hopefully that won’t be a put-off for them because we like to think they operate in that way any way.”
There are also changes proposed to support a new qualifications framework that will increase minimum standards of competence, knowledge and skill for AFAs, and introduce more flexibility in continuing professional training as well as clarifying requirements for structured training.
Ireland said the Committee is particularly interested in feedback on how well the current suitability and basis for advice code standards are working.
“There has been a lot of industry feedback about how these may be limiting access to professional financial advice. This is not a desired outcome, so it’s very important we get some detailed feedback on these points.”
The committee plans to hold public meetings on the changes and submissions close on September 6.
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Comments from our readers
1. Trips to Asia for meeting production levels in their photographic supplies business.
2. Many clients in the hospitality industry who were taken to the Rugby World Cup in 2007 by brewers and suppliers and have ongoing incentives and rewards.
3. On several overseas trips we have travelled next to farmers who were on a 'study tour' - fully subsidised by suppliers.
Incentives and rewards are a normal part of business and I am not aware of any other industry where it is a 'naughty thing'.
In reality though - as long as you are acting in the clients best interest (or under Code Standard 1 for an AFA), why should this be an issue?
I come across far too many risk and investment salesmen (sorry advisers) who try to justify their decisions around soft dollars received. I'd really like to see the outcome of those same decisions if the trips, etc. were not offered.
If you want to compare yourself to a plumber Richard, fair enough. I personally strive for a lot higher. Horses for courses I guess. And no we don't accept soft dollars.
Your fiduciary duties are higher (in my opinion) than the Code ones.
It’s as a fiduciary that you have a duty to avoid conflicts on interest - hence the reason you as an advisor must decline soft dollar commission where your plumber doesn't have to (he/she is not a fiduciary).
I don't believe that having access to soft dollar commissions means that you aren't putting your clients interest first. When I look at the insurance advice that we are giving, we make sure that we act in the clients best interest. This entails using independent research and an in-house checking process. While we have a good diversification of providers that we place clients business with, we may well end up qualifying for one or more soft dollar incentives this year from insurance providers.
As long as I am satisfied that there is no conflict of interest and that this is the best fit for that client, why would that not be acting in my clients best interest? And as a fiduciary?
Having said that, I do personally strongly believe that any soft dollar incentives related to investments are not acceptable.
Why the difference in standards between insurance and investment?
Simply because the vast majority (if not all) of the insurance providers offer soft dollar commissions. Therefore, an adviser could be eligible for soft dollar commissions whoever they do business with. Whereas the same cannot be said (these days anyway) about investment providers.
@btw, obviously we have no idea who you are and where you are coming from, but if you take a pure pure viewpoint of conflict of interest, isn't it a conflict of interest that as an adviser who recommends investments that we receive a fee from a platform based on investment asset values? That is, unless as an adviser we are fortunate enough to be able to generate all our income from plan fees or flat ongoing fees for advice and leave the implementation of investment advice to someone else?
As long as we try to justify these perverse soft dollars and have these conflicts of interest we will continue to be seen in the same light as Estate Agents and used car salesmen.
I get paid well enough by the insurance companies to choose when, where and with whom I will go on holiday.
Like you John we accept no soft dollars...including that free lunch.
He was so enthusiastic about it
All Lipex did was make me ill with side effects
Another doctor said my cholestorel count my was not high enough to need Lipex
Pfizers make $12 billion pa. from Lipex
no doubt my first doctor liked their soft commissions, but they were bad for my health
Sorry but I am no fan of soft commissions, anywhere, anytime
For once I even agree with Brett Sheather
@btw the standards as they were are well and good but soft dollars and incentive programs have always existed, so perhaps the pragmatic approach has been taken. The previously tolerated degrees of adherance have been observed, and found to be that the law implied one thing, the industry did another, so maybe they tried to bring some common sense to it with a new definition (known as code standard 1). 'Previous standards' have not been lowered if they were never really upheld in the first place.
As for RFAs thinking they avoid scrutiny by flying below the FMA radar I remain skeptical. Sure it's cheaper, but AFA (or what an AFA would have done) is the standard they will be measured against. I am pleased to see that realization dawning in the commentary on here.
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a) The plumber was given a trip to Argentina for the All Black game last year from his supplier "Zip Plumbing"
b) The builder is off to Thailand in a couple of weeks for a free trip with Placemakers
c) The supplier of our kitchen appliances went on an off shore conference care of Fisher & Paykell.
Isn't this just Capitalism at work and its discretion of the supplier, why regulate some industries and not others?