Sales versus advice distinction 'lost'
Industry commentators are angry that attempts to clearly separate sales activity from advice appear to have been abandoned in the rewrite of financial adviser legislation.
Thursday, February 23rd 2017, 6:00AM 
18 Comments
by Susan Edmunds
The Financial Services Legislation Amendment Bill was released last week.
It amends sections of the Financial Markets Conduct Act to include advice-specific regulation.
During the options paper process, there had been discussion of a carve-out of sales versus advice services.
"We have also heard that the distinction between advice that puts the interest of the customer first, and what is essentially sales activity, remains blurred," then-Commerce Minister Paul Goldsmith said.
A survey by the Ministry of Business, Innovation and Employment found almost 90% of consumers said clarification would help them better understand the industry.
One of the options proposed was a "salesperson" category, in which people would not have to put the customer first - but would have to notify them of that - and could only sell their own provider's products.
But banks argued strongly against the idea in their submissions on the options paper.
The draft bill lays out a proposal for financial advisers and financial advice representatives, working for licensed financial advice providers.
Both advisers and representatives have to make clear any limitations on their advice. But representatives will work on behalf of advice providers, and will not be individually accountable for compliance with conduct and disclosure.
It is proposed that all existing RFAs and AFAs who wish to continue providing advice services during the transitional licensing period are required to be financial advisers. Existing QFE advisers who remain engaged by a firm which was previously a QFE will be able to operate as financial advice representatives.
IFA chief executive Fred Dodds said using the word "advice" in the representative title was a "complete mistake". "Any reasonable person would assume they are advisers and will follow an advice process. In fact, they will follow a sales process."
He said, with the draft indicating that in-house training would be an option for representatives, it would consign the next generation of QFE employees to being "formally unqualified under NZQA and having no portable qualifications. It will have a devastating effect of reducing the potential number of advisers for the future.
"It seems MBIE seems really confused here – and is solely focused on competency – which is gained through experience, training and CPD. MBIE seem to ignore knowledge – gained through learning, the standard being a ‘qualification’. Every adviser needs both. They are not mutually exclusive. The standard has been previously set at Level 5 and now MBIE seem to want to avoid this?"
He said every sector in New Zealand had insisted on both competency and qualifications.
"The law profession have always been very strong on up front qualifications – and now insisting on CPD and competency. Seems MBIE are being weak on what makes the financial services sector equally robust for the NZ public. Finally – we are building a massive gap in skills and qualifications with the rest of the world – in particular Australia who have set a much higher standard."
Industry commentator David Whyte said the draft was disappointing. "From a consumer perspective, I fail to see the difference between the functions carried out by a financial adviser and a financial advice representative. From a commercial advisory entity in the distribution space, I fail to see the attraction of engaging financial advisers. From an individual adviser's perspective, I fail to see the attraction of being a financial adviser.
"I fail to see how when a bank employs a financial advice representative to sell bank products, he/she can possibly put the client's interest first. I fail to see where the title 'financial advice representative' provides adequate distinction from the term 'financial adviser'."
But Bradley Kidd, of Chapman Tripp, said there was another point of view.
"The counter view lies in a combination of licensing the entity and assigning primary responsibility for meeting consumer protection expectations to that entity. According to this theory, consumer protection is equally served by having the client-first duty apply to all types of advice - including sales, to the extent there is a recommendation. And ultimate responsibility should lie with the licensed entity - as it typically would be for most types of licensed entities, not the FAR, given the entity should have processes and systems in place to comply - and should be held accountable for any defective advice, even if it is in the nature of 'sales'.
"There will no doubt be a range of views on this. An outcome which ensures sales activity is subject to the client-first duty, even if that means entity rather than individual responsibility, is hard to fault from a consumer protection perspective – but individual advisers may take issue with the absolute nature of this requirement."
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If ultimate responsibility should lie with the licensed entity, why shouldn't that be the case for all licensed entities i.e. the SEOT be treated the same as the BEOT.
But the Bill is dichotomic; it has 2 systems - the QFE-FAPs are treated his way, but the non-QFE-FAPS are treated a different way.
If the licensee has the ultimate responsibility, then there is no need to have a distinction between QFEs and non-QFEs; nor any need to have FAs and FARs- every adviser whether working for a QFE-FAP or not should be called the same.
And don't give me the excuse that the smaller firms might not be as well resourced as the QFEs to carry out the task.
I reckon applying his view of consumer protection, law firms should be licensed too. Perhaps MBIE can look there next once they have sorted out financial advice.
Therefore as was the case in Australia you can have an adviser reek havoc with one entity and move on to another entity and there is absolutely no recourse.
You can't take the adviser to dispute resolution services as they are not a member, FMA can't touch him/her without a conviction and one entity can't tell another entity of the bad adviser for privacy reasons.
This is what happened across the ditch.
One of the best things with our legislation was individual adviser registration and DRS membership.
That's now all lost.
Tell me how that builds confidence in our financial markets?
an "agent" or "tied-agent" represents the company. hence, sells only product from the company he/she represents.
a "broker" represents his/her clients. hence, advice and sells product from the companies he/she has a contractual relationship.
is that too difficult to understand? i think some smart alec must have make big bucks convincing authorities that "agents" and "brokers" are irrelevant and out-dated, and should be replaced with "financial advisers".
you guys at the top of mbie and fma: do you think anyone has ever bought a financial product without needing some sort of advice? THINK.
i believe most advisers will agree, if you don't know the product, you can't sell it, period. to me, that FAR thingy sounds pretty much like trying to convince someone that there is such a thing as "half pregnant".
just my thoughts.
By the way predictably unhelpful comment from Chapman Tripp, obviously reflecting commercial realities like we saw with their similarly biased comment the other day on the IPO market.
It is disappointing to see apparent intellectual negligence prevail especially considering the high standards expected of advisers.
The consultation paper fails to adequetly solve either.
Firstly, a consumer would expect that a Financial Advice Representative is a person who would discuss their needs, analyize their situation and then provide a solution that would be in their best interests.
They would not expect this same person to be an employee of an institution on salary who has KPI's that include 'flogging' $x of a 'one size fits all' product without being personally liable for giving bad advice.
I would suggest that we keep one of the same acronyms currently in place, RFA. This time, however, it would stand for Restricted Financial Adviser. This would then alert consumers that they are in some way restricted and most likely have them ask the adviser what their restrictions are.
They would then have to explain that they were restricted to only selling certain products and that they are not held personally accountable for any bad advice.
So there it is. A simple change by removing 'representative' at the end and replacing it with 'restricted' at the beginning. This shouldn't tax the brains of the employees who drafted this daft bill and a bit of twink on the appropriate parts of the Bill and an insertion is all that would be required.
This will remove any confusion consumers currently have and will continue to have if the draft Bill is passed without change.
The buck stops at the cabinet ministers
the banks will pay lots of election contributions to the National party
and the ministers keep looking sideways at the good job Simon Power got at a bank
But these ministers have an Achilles heel
National has a paper thin majority
and it’s election year
So we have to convince them we will ALL vote for someone else
Winston, love him or hate him, has no time for the Ozzie banks, and he will have the balance of power
so tell the cabinet ministers clearly that you will be voting for Winston
or someone else
but we ALL have to do it, or it will have no effect
nb I don’t see Gareth doing us any good
It is also worth saying that the recent review of Insurance Churn excluded QFE advisers and only focused on RFA’s and AFA’s. We mostly agree that QFE Advisers (Salespeople) are not well trained, commonly fail to highlight the deficiencies of their product compared to the wider market, have sales targets to meet and are incentivised (via fear of keeping their job)to meet or exceed those targets with higher monetary rewards ie hit your target consistently and you keep your job, exceed your target regularly by super high volumes and earn thousands in bonuses and other rewards. So maybe Chapman Tripp need to get their collective heads out of the sand and wake up to what reality is already there and stop being naive thinking that QFEs will change. But than again they represent the BIG end of town don't they so we shouldn't expect much more should we.
1 " ..to all types of advice - including sales, to the extent there is a recommendation."
[MDW comment I always thought if there was a recommendation, it was advice]
2. "...and should be held accountable for any defective advice, even if it is in the nature of 'sales'."
3."An outcome which ensures sales activity..."
I am willing to bet dollars to donuts that CT gets more fees from the BEOT for legal advice than it does from SOET. So he should know what the BEOT does in practice.
In the world of vehicle licencing, we understand what "restricted" means. You may be a great driver, but if you're on a "restricted" licence, you are not fully qualified and you're only on the road under certain conditions. Most people get their full licence as soon as they can.
The RFA designation as it stands is seen as a badge of honour among some advisers - who regard AFAs as mugs. Once the "R" stands for "Restricted", we should see more of those Advisers get themselves qualified.
advisers had been spending many years - unpaid hours of writing submissions and attending feedback sessions, yet not a single suggestion was taken seriously. do you honestly think they will listen this time round?
wonder what would happen if advisers stop sending submissions and attending any of those time consuming unproductive feedback sessions? i really mean zero submission and attendance. my take - it will not make a wee bit of difference to the eventual outcome.
But Mr Kidd, we do understand and we do see what is happening. The fault lies not with lawyers, because this is what they do for a living, but with the political masters of the MBIE and the regulation writers. What is needed is some simple principle based legislation and then let the Courts sort out the detail.
The FAA review is a political issue that only a change at the top has a hope of changing. Bloomberg this week had this to say about Australian bank regulators, “The perception from foreigners is … that the corporate regulator is a little soft”. NZ is no better – perhaps worse than soft.
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I must have missed completely the debate within FAAR on the alternative ways to protect the consumer. I don't think i saw the view expressed by Bradley Kidd submitted anywhere in the Review (and I at least skimmed most of the published submissions).
Doesn't his view give legal ownership of the chicken yard to the foxes?
Has anyone noticed how much money how many BEOTers in Australia have been made to pay for compensation to their customers for defective advice/sales in the last few years. And I frankly doubt that the whole iceberg has been revealed.
Under the Bill, the FAPs will be responsible for disciplining their own FARS for breaches of the regulations. But they don't seem to have to report these transgressors to anyone - so what stops a disciplined FAR at FAP1 from jumping ship and going to FAP2?
And where a FAP sanctions one of its FARs, is the FAP obliged to self report themselves to FMA in case the FAP itself is liable to civil penalties under the Act? (insert Tui's ad here0.