[Carey Church] Time to widen debate on FAA Options paper

In this guest Blog Hamilton-based adviser Carey Church says MBIE have put up many good ideas in its Options Paper on the review of the Financial Advisers Act, but much of the debate about the options has been on just one topic.

Wednesday, January 27th 2016, 12:46PM

At the risk of being the lone voice in the wilderness, I want to congratulate MBIE/FMA for the three package options that they have come up with.

In my opinion, the baseline that has been proposed is a huge improvement for consumers and the industry. My interpretation is that the baseline of Packages One and Two are that everyone will have to 'always put their consumers interest first', and everyone will have to have the same simple disclosure.

Personally I don't agree with the proposal in Package Three to split out sales and to have no rules around 'putting the consumers interests first' for consumers - to me, that is returning to the bad old days, and I will make a submission around that.

But looking at packages one and two, a few things stand out for me:

AFAs can basically stay the same and would more or less be regulated the same (therefore not penalising us for all the work we have done) -but it will be clearer to the public that we are 'experts' in financial advice (assuming that it doesn't just apply to options, derivatives, forex trading, and does in fact apply to AFA's who give complex advice.)
All other advisers then have the same basic standard of ethical obligations and the same disclosure, but if they are transaction based, or not dealing with complex investments (and the paper appears to be open to having a level of KiwiSaver advice falling in this area - I don't know - up to a certain value - it is very open) - then they don't have to do all the additional compliance that now has to be done for advising on investments. My interpretation is that this would include those sharebrokers who don’t do full investment advice, but assist people with transactions and making purchase and sale decisions.
Yes, it is proposed that everyone have a base level of competency. But again, my interpretation is that this doesn’t mean that everyone will automatically have to go and do Level 5 just to be in the industry. This is principles based competency – which means that experience and good practice could cross the line.
The proposed disclosure in package one could be a one pager with lots of white space, with simple statements – that could be prescribed like the current AFA Primary disclosure, but with words that are more helpful to the consumer. Any more than one page, and with too many words and the consumer is unlikely to read or understand it. But it we can come up with something clear and concise (like the MBIE papers summary pages on pages 43, 44, 46,47 and 49,50, then it will actually add value and mean something.
With regard to the ‘licencing of businesses’ I don’t agree with the comments made on Good Returns so far. I think it is a brilliant idea. In our business, we all have the same processes, we work off one ABS template base, one disclosure template base, we comply with AML as a business. Yes, for AFA’s we will probably still have to complete CPD requirements and do our AFA return, but we are used to doing these. What additional compliance is our business likely to have to comply with the proposed new environment? Overall it appears to me that it would be a net neutral – less disclosure, maybe one ABS for the business instead of everyone/or a business plan instead? For one person businesses, if you are already an AFA, you may have to change your compliance structure (less disclosure, but business compliance as an example), but does it really mean more compliance?
Unlike the scaremongering from some sectors, the principles based competency proposal for non AFA’s seems quite sensible to me – it recognizes skills, but also enables the industry bodies to assist with training on best practice, without putting a huge education load on non AFA’s. It may be that if the business is going to be regulated that people come together in a loose-ish arrangement to enable that to happen.
An interesting question that I have (which I will raise in my submission) is: if we are licenced as a business, where does the legal liability lie? At present, my understanding is that it lies with us personally. If the business is going to be licenced, does this change the liability to be that of the business?
Finally, I think it is great that there is a proposal to enable robo-advice. If only 3% of clients are prepared to pay for advice and only $57 for advice, I am more than happy for all the other clients to go to a computer to get their ‘advice’, and I will work with the people the recognize the value that I add and are very happy to pay for it.

In summary, I think that there are many many good things that have been filtered out of the submissions and I am concerned that there has been a focus on the ‘licencing of the business.’

Let's start getting some discussions going on the good proposals in packages one and two – good for me as an AFA, good for the consumer (by adding an ethical obligation for everyone who is in the industry, simplifying and standardizing disclosure and adding a principles based competency.)

The 57 page paper is hard going – and I recommend that if you are finding the background information a little tedious – just start with these pages 43, 44, 46,47 and 49,50. These give you an overview of what is being proposed and you can then dig back into the rest of the paper for more definition.

Let's widen the discussion, and look at the good impact if packages one and two are implemented. Oh, and definitely form your opinions on Package Three, and make submissions on all or some of the questions. I won’t be answering all the questions in the consultation paper.

Tags: Financial Advisers Act