Review a starting point for FAA discussion
A baseline review of the New Zealand financial services sector forms a good starting point for discussion as the Financial Advisers Act comes under official scrutiny, commentators say.
Thursday, November 6th 2014, 6:00AM 
2 Comments
by Susan Edmunds
The document, Baseline Review of Financial Advisers, was released in November 2012, but seemed to slip under the radar, unnoticed by many parts of the industry.
The document outlines the state of the financial advice sector before the introduction of the FAA, and the objectives of regulation as well as early responses to the implementation of the Act.
It said that pre-FAA, advisers had limited incentives to fully disclose information about financial products and their relationships with an issuer.
Some consumers were poorly informed about the level of expertise of their financial adviser and so could not judge the quality of the advice they received.
It said that could lead to good financial advisers being driven out of the market if consumers did not trust their advice and so decided they would not pay for it or seek it in the first place.
The FAA was designed to increase disclosure, competency and accountability of advisers, the review said.
Before the FAA was implemented, there were 11300 financial services providers. More than 80% were male and almost half had been in the industry more than 20 years.
In a survey of customers in 2011, 27% said financial advisers acted fairly and with integrity, 18% said their fees were reasonable and 24% said you could have confidence in financial advisers. Fifty-seven per cent of those who were currently using an adviser said they acted with integrity.
FMA head of legal Liam Mason said the looming review of the FMA was an opportunity to determine how well the FAA had performed in improving consumer trust in financial advisers since that review was published.
“Are we on track to develop a strong confident adviser community? There’s an opportunity here to say ‘is the regime working to support the lift in confidence?”
PAA board member Angus Dale-Jones said the document was a useful starting point for the review of parts of the FSP and Financial Advisers Act. “What I really like is that it seems nothing is set in stone. There’s a collection of thoughts and where it might go but it’s not settled in any way.”
He said he was surprised at how few participants in the industry seemed aware of its existence. “I wonder if they ever intended it to get any sort of attention.”
The document can be viewed here.
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It gives an interesting insight into the way that the MBIE people think. It also shows that our industry is complicated and quite difficult to understand from outside.
In particular, throughout the report there appears to be a lack of distinction between insurance and mortgage commission and investment commission. The report continually refers to financial advisers giving investment advice, getting risk profiles correct, diversifying through asset allocation. Then it goes on to say that commissions received distort the investment advice provided.
Somehow, as an industry we need to explain to the government officials that insurance commission is rarely (these days) associated with any investment recommendations. Somehow in the FAA review, I suggest that clear differentiations be made between insurance and mortgage advice and the remuneration models for that advice, versus investment advice and current remuneration models.
For any adviser that advises on KiwiSaver, they have to declare that they receive commission on investments, but this should be separated out in any research. I haven't done an extensive study, but my gut feel is that apart from KiwiSaver there are only a couple of handfuls of retail investment products that pay commission these days.
There are several other statements in the report that all advisers should be aware of, that reflect the thinking in 2011 in MBIE when the report was written. Somehow, as an industry we need to ensure that this thinking is clearer when the review happens. Examples:
1. Page 10 - in defining what a financial adviser does, 'a financial adviser seeks to understand a client's financial goals and risk tolerance and recommend appropriate investments on these.' No mention of insurance or mortgages.
2. Page 16 'Most financial advisers receive commissions and other incentives from providers that give rise to serious conflicts of interest....... It was also a significant contributor to investor losses from finance company losses.' There is no reference to where this information came from, maybe from the media?
3. Page 40 (and several other places) ''Commissions are mostly designed to suit the business models of financial advisers rather than serve the needs of the client and products with higher commissions are likely to be favoured by financial advisers.' This statement gives us an idea of the thinking within MBIE and does show a lack of understanding of the industry. We do need to have some communication/education around this with the decision makers. More importantly, we need to ensure that there is a clear understanding of the difference between insurance/mortgage and investment commission (and separate out KiwiSaver).
I encourage you to read the report, and start thinking about the issues that we have to deal with in this FAA review. The report notes that the review be undertaken by a Steering Group that involves stakeholders from government and FMA. Therefore, I suggest we need to somehow start educating clearly on how the different areas of the industry work and are remunerated.
Any suggestions on how we go about this? Hopefully there is a clearer understanding by now (3 years on), but I don't think we can assume.