Advice under FMA spotlight

FMA raises concerns about lack of advice for KiwiSaver members but says overall AFAs doing well.

Tuesday, November 17th 2015, 10:00AM 1 Comment

by Susan Edmunds

FMA director Liam Mason

Most authorised financial advisers are committed to taking their obligations seriously, the Financial Markets Authority says.

It has released its first monitoring report on practices in sales and advice within New Zealand’s financial services sector, which covers its investigation into KiwiSaver sales practices.

It found cause for concern in some KiwiSaver provider practices - such as sales incentives for staff and customers being sold KiwiSaver when they approached the provider for something else. It said providers were operating a sales rather than an advice model for their clients.

The report said just three in 1000 KiwiSaver sales were being made with personalised advice.

But it said monitoring of AFAs showed the vast majority were committed to doing what they were asked under the rules, and the FMA would support them.

It pointed out some areas for improvement:

- In some cases where advice was provided, the needs analysis process was informal, with no documented evidence that a defined "needs analysis" process was followed.

- AFAs did not always provide an outline of the principal benefits and risks of following their advice, and they didn’t always provide personalised relevant information.

"In some cases, the scope of service agreed with clients was either incorrectly documented or did not match the adviser services provided."

- Some AFAs did not have sufficient records on the financial services provided to clients.

- In some cases they only presented the benefits of a particular decision to a client.

"An example is the transfer of a UK defined benefits pension scheme to a New Zealand defined contribution superannuation scheme. In this situation, the risks may outweigh the benefits, depending on the customer. We would expect the customer to be told about the risk so they have a balanced view and, particularly for superannuation schemes, understand any loss of benefits."

The FMA’s director of regulation, Liam Mason said most AFAs were taking the obligations seriously and acting in their clients' interests but the FMA was seeing instances of poor documentation being kept that could show the FMA that advisers were fully meeting their obligations under their code of conduct.

He said the FMC Act brought a new approach to financial services, where the focus of regulation was on the conduct of providers of financial services and the impact that conduct had on customers and on markets.

He said the sales and advice monitoring work undertaken by the FMA indicated a high degree of willingness among firms to meet their obligations and adjust to the demands of the new legislation.

However, as previously commented upon in other areas of the new regime, the FMA believes that the full adjustment to the expectations of the regulator and of consumers would likely take a few more years in terms of sales and advice, when the FMA, the industry and consumers would see more directly the benefits of the new regulations.

“We’ll be stepping-up our efforts to accelerate the change and to ensure providers are systematically putting the interests and outcomes for consumers at the centre of their processes,” Mason said.

He said the FMA would ensure close attention to sales and advice practices, particularly in areas that posed a high risk to investors.

“The new regulatory system in New Zealand is designed to give the FMA more means to act, and to improve results. We recognise we are part way through a transition period to the new regime. We’ll continue engaging directly with firms, through supervision and guidance, so they implement the right systems themselves and effectively manage their new obligations.”

Tags: financial advisers FMA