Code proposals show product provider influence: Tate

Attention RFAs and Consumer Advocate organisations

I encourage every RFA and every consumer advocate to get to grips with what this discussion is all about.

Let’s start with the legislation as CWG have assumed it will be amended in select committee. The word investment s proposed to be replaced by the word financial. I have showed the 3 places by using square brackets.

431C Meaning of financial advice and regulated financial advice
(1) A person gives financial advice if the person—
(a) makes a recommendation or gives an opinion about acquiring or disposing
of (or not acquiring or disposing of) a financial advice product; or

(b) designs [a financial] plan for a person that—
(i) purports to be based on—
(A) an analysis of the person’s current and future overall financial
situation (including [financial] needs); and
(B) the identification of the person’s [financial] goals; and
(ii) includes 1 or more recommendations or opinions on how to realise 1 or more of those goals.

It’s unfortunate that terms are used in a way that is different to the way they are normally used. Financial planning in the context of what CWG is talking about is much wider (catches a lot more advisers) than what Nigel and his colleagues at IBCFP would mean by the term financial planning.

It’s easy to see where CWG got its terms product advice and financial planning in its CD. Product advice is clearly par (a) and financial planning is par (b).

It is important to recognise that (a) and (b) are not mutually exclusive categories. CWG Chair confirmed that at the Auckland consultation meeting I attended i.e. an adviser – a client interaction can be both at the same time.

My explicit assumption is that if an interaction is both product advice and financial planning, the higher standards of financial planning apply

If we start with (b) financial planning, it is clear that as soon as the advice-giver takes the clients situation, needs and goals into account, and makes a recommendation or opinion on how to realise at least one of those goals, then the advice giver has jumped the financial planning hurdle which triggers higher standard of compliance – degree and Level 6.

So the normal life insurance adviser who sits with her client and does a needs analysis and makes a recommendation based on that needs analysis prima facie crosses the line.

That’s why I think all RFAs should be vitally interested in this consultation.

So what isn’t financial planning? Execution only (where the client initiates what is bought or sold and the adviser only executes the transaction) and information only are excluded from the definition of advice. So these cant be product advice.

I can’t help coming to the conclusion that the main and perhaps the only thing that can logically fall into the “product advice” category is a pure sale. The seller doesn’t look into the client’s circumstances, doesn’t look into the customers’ needs and goals, and therefore can’t tie a recommendation or opinion into a goal.

That has to be a sale. If it looks like a duck, walks like a duck and squawks like a duck, it surely is a duck.

The VIOs and their high powered lawyers submitting on their behalf must be congratulated for convincing so far MBIE the CWG and probably in time also the Select Committee that a sale is not a sale, it is product advice.

I would have thought consumer organisations would be a tad agitated by this debate. Is it in their consumers’ interests to be legislatively encouraged to view that something that is a naked sales process is actually advice. That is surely financial illiteracy personified.

There are couple of corollaries of my analysis. Advisers might be tempted to dumb down to become product advisers (salespeople) rather than financial planners (genuine advisers); or to jump from self employment into serfdom at a VIO.

How do these outcomes meet either of the aims of increasing the availability of advice or improving the quality of advice.

MBIE have gone into a “cone of silence” because of their role as adviser to the Select Committee. So The focus of our attempts to get sense restored to this debate have to be aimed squarely at the Code Working Group.

My stance on VIOs

Lest my stance on VIOs is misunderstood or deliberately misrepresented, allow me to be crystal clear.

I am not opposed to VIOs per se. They are legitimate businesses. I am not and have never been in the school that says they should be outlawed.

VIOs should be allowed to self-distribute their own products. Like any other business making legal products they should not be prevented from selling their own output.

My explicit campaign is to prevent them from being able to misrepresent their sales activity as advice.

I am not going to die wondering whether I could have stopped such a legal travesty occurring.

good for you Murray

I salute you

if good men do nothing, then bad things often follow

you are the lone good man, it seems

The task facing the Code Working Group should not be underestimated. From the presentation at the Auckland session, it is clear that the industry needs to pitch in with constructive suggestions to help the CWG members achieve a balanced outcome that creates consensus among all stakeholders.

Of course, the term “investment plan” needs to be amended to “financial plan” which includes insurance planning.

The myth that only investment planning is complex and requires a greater level of qualification has long since been dispelled.

Also, the implications of slide 10 in the CWG Roadshow presentation need to be articulated as there is a distinct possibility that, if applied as outlined, one segment of the Financial Services Industry may regress to the 1980s.

In slide 10 under the proposed Code, Existing AFAs as defined pass through into the new world, while post-new Code approval RFAs will have a higher bar to clear to become Financial Advisers.

I have no problem with higher standards of knowledge and education being promulgated for new entrants to the Financial Advice industry – indeed to present a credible career path and to make the industry worthy of consideration, a specialist qualification at degree level should be made available.

So RFAs who look to recommend risk solutions relevant to their clients’ needs and who follow a process of discovery, needs analysis, etc., should attain AFA status.

As Murray states, AFAs should, as Financial Advisers, be able to offer “execution only”, limited advice, and full risk financial planning.

It’s the other part of the diagram on Slide 10 that makes me uneasy. The term “Product Advice” seems to open up the possibility of re-introducing the old tied agency-style product salespeople. This is tailor-made for the VIOs and like Murray, I have no issue with VIOs operating in a market economy.

However, the consumer should be able to identify immediately, clearly, and unequivocally the status of the sales people and their relationship to the VIO - the term “Product Advice” doesn’t do that.

Bear in mind that the Bankers Association submission to the Select Committee recommends that bank employees and contractors retained to sell their members’ products should be referred to as Financial Advisers as “customers will not understand why the person giving them financial advice is not a financial adviser, which, in common parlance the person obviously is.”

So VIOs should be able to have product salespeople disguised as Financial Advisers thus eliminating the consumer's ability to distinguish between the sales transaction and the financial advice process contained in the term “financial plan”.

Putting that recommendation to one side, there are likely to be RFAs who will avoid the obligations of the Financial Adviser and seek to operate in the proposed “Product Advice” space under a FAP that is prepared to accommodate them.

It is also reasonable to assume that the current adviser distribution organisations will be selective in deciding who is invited to operate under their license.

The logical step is for the product providers to offer a home to the others on a Preferred Agency status with production quotas, contractual obligations, etc., and there we are right back in the 1980s!

If this transpires, I fail to see how this flight away from needs-based risk advice improves the quality of financial advice available to consumers.

Or am I missing something?

I really hope someone smarter than myself has come up with a 'global matrix/table' of where every type of adviser sits under their respective regulator, what their minimum qualification/training requirements are for new and existing advisers. I'm not sure we'll find many countries require their existing experienced insurance advisers to hold bachelors degrees?