Banks keen to hold on to QFE model
Banks have argued in favour of being allowed to retain their existing QFE model and rejected attempts to better delineate between advice and sales, in their submissions on the Financial Advisers Act review.
Tuesday, April 26th 2016, 6:00AM 
12 Comments
by Susan Edmunds
The Ministry of Business, Innovation and Employment has made public the submissions it received on its Financial Advisers Act review options paper.
One of the packages of options proposed included new rules that would separate financial advice from sales.
That had widespread support from much of the industry, but not banks.
All of the big four banks argued against such a change.
BNZ said finding a suitable definition to distinguish sales from advice would be a challenge.
ASB said it was not necessary because any salesperson should be satisfied they were selling a product that met a customer's needs. It said any new category of sales would corrupt the definition of advice. The key was to make sure consumers understood the scope of advice they were being offered, it said.
ANZ said the delineation would make things more complicated for consumers, not easier.
"The proposal that salespeople provide a prescribed notice to the effect that they are not required to act in the consumer's best interest would make the sales regime very unattractive. The proposed warning will also be confusing for consumers in the context of the proposal that the salesperson must nonetheless ensure that the product is suitable. The use of the warning may drive financial services providers towards an information-only model," Westpac said.
Banks are currently operating as qualifying financial entities (QFEs), which means they take responsibility for their own advisers.
The banks were also supportive of being allowed to continue with that, instead of moving to a model that puts the same requirements on all advisers, as has been supported by others in the industry.
ANZ argued QFEs should be given more powers - it wants its staff to be able to provide financial advice across any product and without having to worry about whether the advice is personalised or class.
BNZ said it would not be right for QFE staff to be given a requirement to put a client's interests first. "Such a duty would be analogous to a person going to a specific brand of car dealership and being required to be offered details on cars produced by other manufacturers to determine the absolutely best-matched car for the consumer."
Many submissions said the options paper had not acknowledged that a hurdle to consumers getting advice was that many did not understand why they needed it.
“ASB KiwiSaver Scheme customers can obtain free three personalised advice in connection with the scheme from an AFA, but less than 1% of these customers actually access this resource,” ASB wrote.
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hypothetical example, all things being equal, you are presented with two quotes:
1. A insurer premium is $100 ($30 product cost + $70 commission).
2. B insurer premium is $95 ($20 product cost + $75 commission).
regardless of whether the adviser discloses his/her commission, which insurer will you go for?
client has a particular minor ailment and wants it covered. adviser came back with 3 quotes:
Insurer A: minor ailment excluded / premium $100 per mth / commission $500
Insurer B: minor ailment excluded / premium $110 per mth / commission $450
Insurer C: ailment covered / permium $105 per mth / commission $600
question:
- which insurer will the client likely to choose?
- why?
- do you think the adviser's commission was relevant to client's decision?
People know stuff about cars. They know why they need one, they know where to find out about them, and there is lots of info out there for them to check out. There are even programmes all about cars.
There is no TV show called Top Policy.
Going to the BNZ insurance dealership the client cannot test drive multiple policies. They wont be told that the BNZ insurance has a really small fuel tank, and a poorly built engine. They wont tell the unsuspecting buyer that the service department is located elsewhere - the dealership only sells the new policies, but you must take it to another city for servicing. And if you crash, your BNZ policy may or may not have similar safety features to other models, so hopefully you have the right kind of crash, so that the policy actually saves you.
Insurance sales vs advice is not really analogous to visiting a car dealership, unless you expect the industry thinks and behaves like car salesmen.
BNZ might behave like this (sales), but I don't (advice).
Writing a definition might not be that hard. The key elements are, comparing multiple providers, and having a 'wide range' (already defined in FAA) of options to match to the client's needs - as discovered by a detailed needs analysis. The banks cannot possibly meet these elements with their existing sales processes, so obviously they have very strong incentive to argue against the idea.
For a product provider to promote sales under the guise of advice by claiming its "advisers" are free to offer any products is disingenuous in the extreme.
Yes, the licensed motor vehicle dealer may well be entitled to offer any car but you're not going to get recommended a Toyota from your Honda dealer.
As for a suitable definition between sales and advice - simple. Just ask.
The traditional argument is that disclosure at least makes an adviser justify their advice in light of the disclosure, and discourages really egregious commission arrangements that would obviously skew the advice (the sunlight is the best disinfectant argument). However, behavioural economics actually indicates that customers may take the disclosure as a sign that they can trust the adviser, and then consider the advice less critically.
So, I guess I'm not arguing that disclosure really works, just that remuneration that creates a conflict is problematic and needs to be addressed in some way. As Pragmatic says, it comes down to whether the adviser has a fiduciary duty, which is what I think the advice vs sales distinction is trying to get out. The ineffectiveness of disclosure is what is sending regulators down the road of banning commissions (which admittedly has its own set of issues)
personally, i think disclosure of remuneration is a waste of time. it would be more useful to provide consumers product information - what's in there / what's not in there / exclusions, etc. if more than one product is presented, then the comparison between the them - the pros and cons of each, etc. finally, as long as advisers don't mislead their clients.
if a product is of not use to the consumer, so what if the adviser gets zero commission and do it for free? how would that benefit the consumer??? is that not why experts charge more than the average chap? because they can solve the problem / provide a solution which the average chap can't, isn't it? then we all can argue until the cow comes home - why?
i have said before this before and i am repeating - whatever good ideas advisers have contributed, it will be pointless - we've wasted our time. the regulators have long decided the track to take. asking for "feedback", "consultation", "what you think?", etc, etc, etc, is purely going through the motion. been through this many times before and i don't it will be any different this time. look at the past, when was the last time regulators implemented an idea from advisers? tell me, maybe my memory has failed me.
Bank=no advice, sales of bank product only, limited to one solution even if not appropriate, driven by sales targets, not acting in the client's best interests
Advisers=discover client needs, research, give personalised advice, sale of appropriate product, put clients first (legislated)
Quite simple really.
Get rid of the definition "QFE Advisor". Replace with "QFE Salesperson".
Get rid of the definition "Registered Financial Advisor". Replace with Registered Financial Intermediary.
Reserve the word "Advisor" for people who actually give advice. Further, any implicit or explicit obligation to use certain products would invalidate you as an AFA. Add that to the FMA flowchart.
Being a true advisor is a beautiful thing. Your client is trusting you to act in their best interests. By clear implication that means an advisor can have no pre-conceived solutions until he/she understands the clients needs and wants.
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If a trusted adviser such as a financial adviser or lawyer is receiving remuneration that creates a conflict of interest, they should at minimum disclose that to the customer. That at least makes it somewhat transparent that the adviser would gain a pecuniary advantage from advising a particular course of action. I would argue that disclosure is actually insufficient in a number of instances.
This is not an argument for disclosing all remuneration, as not all remuneration creates a conflict of interest. In your conveyancing example, the staff salaries do not create a conflict of interest.
Alternatively, you could argue that bank tellers and some insurance advisers are not "trusted advisers" in the way that lawyers are, and that it is clear that they are acting on behalf of the product producer. If they are given a label that makes the nature of this relationship clear, such as financial salesperson, then that largely addresses the issue in my view.