Code submissions revealed: Industry wanted change
Submitters on the draft code of conduct for the financial advice sector took issue with the draft proposed by the working group right from the first code standard.
Monday, April 15th 2019, 6:00AM 
3 Comments
The submissions made to the group through its consultation process have been released, ahead of sign-off of the final code.
Some were concerned about the proposed first standard “treat clients fairly and act in their interests”.
Many submitters said this was a confusing double-up with the requirement in the new law to give priority to a client’s interests.
“We think there is the potential for confusion to arise from two separate requirements relating to client interests applying in quite different situations,” AIA said.
“We suggest the references to client interests should be removed from this standard, leaving the sole focus on fairness.”
This was a view shared by ASB.
It said the standard could be simplified to remove "and act in their interests" without losing what was intended to be the overarching purpose of the standard.
Russell Hutchinson, of Chatswood Consulting, said the wording should be changed to match the law so that there was no confusion about whether the code required something different.
COMPETENCY
The code requires competency equal to level five for all financial advisers, with possible higher standards to come for investment advisers.
“We welcome the decision not to include a requirement for a tertiary or similar qualification as this may have resulted in many advisers leaving the industry, leaving a gap while other/new advisers obtained a relevant qualification. This would have been inconsistent with the objective of ensuring the availability of financial advice,” AIA said.
“It is not clear how this standard will be applied to trainee advisers who are yet to obtain level five. We believe that further clarification on this point is required, perhaps by way of an example that specifically recognises how a trainee adviser can work in conjunction with others to satisfy the competence requirement.”
Partners Life said the level five certificate alone was not enough.
"To advise a client about financial advice products effectively, the person giving financial advice must understand the benefits and risks of the product, and the key ways it is similar to and differs from other similar products.
"The level five certificate does not teach the content of financial advice products. A person who has a level five certificate only does not have sufficient knowledge to provide competently financial advice about specific financial advice products. We submit that [the code] should also require a person giving financial advice to be competent in the financial advice products about which they give financial advice."
KiwiSaver provider Generate questioned the need for KiwiSaver advisers to demonstrate competence to the level of the entire level five investment strand if KiwiSaver was the only investment advice they offered.
“It significantly reduces the availability and accessibility of KiwiSaver advice which has a negative impact on financial outcomes for consumers.
“Secondly, removing the requirement for FAs to have the investment strand to provide KiwiSaver advice will not reduce the quality of advice if they can refer consumers where required."
CLIENT UNDERSTANDING
ASB questioned code standard four, which requires advisers to take reasonable steps to ensure the client understands financial advice including "all material risks and consequences".
ASB said this was going too far. "'All material' is a high threshold, which could create the risk that it becomes more practical in some cases not to provide advice. Even if the advice is provided, there is a risk that an advice provider 'over-discloses' in order to mitigate the risk of non-compliance."
The bank said replacing "all material" with "significant" or "key" would help.
The working group was told code standard six, which requires client information to be protected, was unnecessary because it was covered by the Privacy Act.
CONFLICTS
The requirement to manage conflicts of interest, and avoid them where practicable, also raised concerns.
Westpac said the focus should instead be on identifying, assessing and appropriately managing the conflict.
"There will be conflicts of interest in many business models, and the current language could be interpreted as requiring a financial advice provider (FAP) to change its business model. We understand that this is not the CWG’s intention."
The Triple A Advisers Association also agreed that conflicts of interest would occur.
"There should be a duty to prioritise the interests of the client but it won't be pragmatic to avoid conflicts of interest all the time. So the standard should not be 'where practicable to avoid them', the standard should be all about how to manage them when they are present."
Financial Advice NZ also wanted change, but of the opposite sort.
"The proposed test for a conflict of interest - ‘where practicable’ the person must avoid the conflict - is now a lower and less objective test. Under the current CS5 – an adviser must effectively manage any conflicts of interest that may arise. The ‘effective management’ meant, that if there was a conflict where the adviser could not place the client’s interests first and above their own, then they must decline to act (one way to avoid a conflict)."
The submission said the draft conflict of interest standard seemed to be in conflict with code standard one.
"By lowering the avoidance threshold to the contingent situation where the conflict needs only to be avoided only if ‘practicable’, is likely to reduce public confidence and trust where conflicts arise, and weakens the intent of a Financial Advice Code. The bullet points should be re-ordered, placing ‘identify conflicts of interest’ first."
Submitters asked for clearer rules about what CPD was expected and said an annual total could be included in the code.
Some submitters said the code should include a requirement for the disclosure of remuneration.
Adviser Peter Leitch said clients should also be told the costs of not following advice.
The Boutique Advisers Association said professional indemnity insurance should be mandatory.
The Financial Services Council said there could be some commentary about “independence”.
“The current CS3 prevents an AFA from stating or implying that they are ‘independent’ if a reasonable person would not consider that this is the case. Our members feel this is an important inclusion and that it was an enhancement to the current disclosure regime. We recommend including the same in the new code.”
Financial Advice NZ also wanted more guidance on how to evidence advice.
“There has been an argument that such requirements would be ‘prescriptive’, but we would expect this Financial Advice Code contain the overarching requirements to provide and retain evidence of advice. Further, we would expect that disclosure regulations contain specific requirements, and that licencing requirements outline the procedures and processes.
“The current code format could allow an adviser or FAP to provide advice without retaining any record of such advice being – either in written or digital record (such as video recorded advice, audio recorded advice). This seriously leaves the client at risk, with regards to the original communication, the client comprehension of that advice, and their recourse and redress options should that advice prove to be deficient, incomplete, conflicted or risky.”
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It will be very interesting to see how the CWG has responded in its final version to the substantial number of reservations and criticisms I saw included in the submissions I have read.
If these criticisms and reservations have been taken into account and acted upon, there should be material differences in the final draft compared with the second consultation draft.