Is the Financial Advisers Act working?

Whether the Financial Advisers Act is really helping consumers to get advice is one of the key questions a panel of experts wants addressed when the law is reviewed next year.

Friday, October 31st 2014, 6:01AM 1 Comment

by Susan Edmunds

A panel discussion about the review was held in Auckland yesterday, hosted by Infinz, CFA Society and Massey University.

Speakers Barry Read, of IDS, Claire Matthews, of Massey, Iain Southall, manager of the corporate law team at MBIE, John Hawkins, of the Shareholders’ Association, Liam Mason, FMA’s head of legal and Kiwibank chief investment officer Simon O’Grady outlined what they thought the focus of the review should be.

They agreed on several key themes.

Matthews said the Act needed to make advice more accessible to average New Zealanders. “One of the unintended consequences of the Financial Advisers Act has been that while it may have made the advice that’s being given better, higher quality, it has made it harder for the average person to access it in the first place.”

Cost and red tape for advisers were pushing out sole practitioners, she said. “Not everyone wants to go to bank, not everyone wants to go to a fund manager or a big company. Some people want a more personal approach that they’ll get from a sole practitioner. But the evidence suggests it’s really difficult in the current environment for sole practitioners to operate.”

Adviser education standards should be lifted, she said. “At the moment to be a non-AFA adviser you don’t need any qualifications. If you want to be an AFA, you need a level five certificate… that level five certificate is equivalent to one semester – three or four months’ work – of first year university. That’s what our top AFAs have to have. Is that really adequate?”

She said level five should be the minimum for non-AFAs and AFA requirements should be higher.

Matthews said there were problems relating to the differentiation between advisers who are AFAs and those who are not. “There’s quite a gap between what is required of the two and it needs to be made a bit closer. I know category two products are simpler but they’re not riskless, people should still be getting good quality advice.”

Read said categorising advice on the basis of products was incorrect. “A better way of categorising could be that an AFA is someone who gives personalised financial advice and therefore puts clients’ best interests first, makes sure the advice is suitable and the recommendations are suitable. That should be across any product range, not just investments.”

Mason said the FMA might need to test how well consumers understood the different categorisations. “Do consumers understand, does it help to breach the information gap or is it adding to the complexity of the information?”

As well as the differentiation between classes of adviser, there were concerns about the different types of advice.

O’Grady called it an “advice continuum problem”. He said whether advice was class or personalised was an artificial construct.

Financial advice isn’t a continuum. You either give it or you don’t. If you do, you need to do so with the full set of facts. It’s causing problems – what are you, where are you, where is the line? It’s holding back the industry from giving advice.”

Whether disclosure was working was something the panellists also pondered.

Matthews said there was a lot of disclosure. “Is it practical, is it something the average New Zealander can digest, make use of, understand? It needs to be simplified.”

The review could follow lessons learned through the FMCA, Mason said. “Thinking hard about disclosure that is for users as opposed to disclosure that’s great for lawyers. “

Southall, of MBIE, said it would be important to address the regulatory structure to get the right balance when it came to the cost of compliance. He said it was an opportunity for the policy makers to take a step back and work out what the objectives for the regime should be.

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