When is a client really a client?
More clarity is needed on when someone counts as a client under the new financial advice regime, Financial Advice New Zealand says.
Wednesday, November 13th 2019, 10:07PM 
16 Comments
It made a submission on the proposed disclosure regulations for the new regime.
The Government is proposing staged disclosure, through which advisers make certain generic information publicly available but then move to more specific and relevant information as the client relationship progresses.
Advisers would be required to keep a record of the disclosures given.
But Katrina Shanks, chief executive of the association, said more clarification was needed on when a consumer was considered a client because this would affect what record-keeping was required and for whom.
“The regulation is currently silent on this. The current regulations could lead to unworkable requirements.”
She said a disclosure could be given in regard to the nature and scope of advice but the consumer might then not decide to become a client, nor seek financial advice.
“In such a case, the consumer would not meet the definition of a client, therefore, we recommend there be no obligation to hold these disclosure records.
“If a person does not proceed from the disclosure on scope of advice, are they considered a client? If a person does not agree to action advice given are they still considered a client? How long, if at all, would these disclosure records for these ‘clients’ have to be held? There is considerable cost and effort to hold records for persons not on a client base.
“Our recommendation is that the regulations need to clarify if these persons are defined as clients, or not, so as to determine which disclosure records need to be held. We believe when advice is implemented then the person is considered a client.”
She said disclosure requirements needed to be rewritten so it was clear there was no expectation of disclosure every 12 months – and it would only be necessary if there was a material change in the information previously disclosed, the client requested it, or if there was an advice review.
She said advisers already provided disclosures to clients as part of a six-step advice process.
“However it is ambiguous whether if these disclosures, embedded in an advice document, (dated and with the name of the client) meets this regulation requirement. Is there an expectation of separate and discrete ‘Disclosure Documents’ to be provided to the consumer/client?
“It would be much more workable for the client if disclosure was expressly allowed within advice documentation and processes rather than have prescribed separate templates."
She said clarification was also needed as to whether disclosure could be made verbally.
“We doubt whether a consumer could absorb disclosure information provided verbally in a manner which would allow them to make informed decisions in the future without receiving any written information.
“Disclosure information is technical by nature and receiving this via an automated process with no ability to ask questions we believe does not improve outcomes for consumers.”
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Comments from our readers
On 14 November 2019 at 10:16 am Tash said:
Katrina also need to ask when a client is no longer a client. she is reported as saying ..."We believe when advice is implemented then the person is considered a client.” What if the advice implementation is a one-off with no further obligation agreed or expected?
A person must surely be a client before advice implementation or payment received for services. Surely these are questions of fact dependent on agreed services still to be delivered? A person is not a client simply because they have enquired and initial disclosure has been made.
On 14 November 2019 at 11:55 am regant said:
Too late Tash, submissions have closed!
This article is reporting what was submitted. If people want to make a useful contibution the time was before the submissions closed.
Notwithstanding; this is a worthwhile discussion.
I disagree with W K. The time is when a client accepts the nature and scope, agrees that an advice engagement will proceed. The time from then to fees/commission can be lengthy, but I suspect your client considers themslves your client during that time. W K suggests the concept of 'valuable consideration' in the creation of a contract. Fair, but like with signing up for insurance - money doesn't have to change hands, just the agreement that it will is sufficient. That's why you send in a signed DD with an application, form instead of a cheque.
In the question of a limited scope, where there will be no further obligation agreed or expected: that's irrelevant. The question is around documentation and record keeping, and the trigger for that. That client has engaged, so disclosure and record keeping applies. That they don't expect it all again in the future simply means they won't be getting it all again in the future. Statute of limitations means that one-off advice still has to be recorded for 7 years. And responsibility for the advice doesnt evaporate simply because you were only required to give it once.
I agree that a consumer is not a client at the prospect, first meeting, initial disclosure stage. I also don't think it's a major problem. If they dont engage then you can't do anything wrong!
On 14 November 2019 at 12:59 pm LNF said:
This is becoming ridiculous
Up until the time they buy, they are not a client, they are a prospect. Any documentation that moves them from prospect to client is important. If they remain simply a prospect, nothing else is relevant
Client - a person or organization using the services of a professional person
Prospect - they begin as leads, you qualify them into prospects. They are not "clients"
Why are we making a bureaucratic shambles of this
On 14 November 2019 at 4:52 pm w k said:
thanks regant, generally agree with you. not your fault that i didn't make myself clear enough. On 14 November 2019 at 6:12 pm Murray Weatherston said:
I think anyone who thinks someone becomes their client only after that person has accepted an advice recommendation from them is going to be in for a rude awakening when the Regulator pokes his stick into their business.
Readers would be well advised to RTFM about what is advice. My guess is as soon as you cross the line into advice, then the person is your client.
That will at least be when you are discussing stuff and engaging in fact finding as a prelude to being able to agree a nature and scope of service.
Arguably you will have a new "client" when said person requests an initial disclosure from you [not sure about that when suspect looks at your website].
Being able to send an invoice that the recipient must pay I reckon will have nothing to do with when a person becomes a client under the new regime.
Maybe an investigating committee should be set up to answer this question. That's SOP for the current government.
On 15 November 2019 at 8:13 am JPHale said:
Agree Murray. Financial consideration has nothing to do with the new laws.
Might I suggest that the government and the regulator are looking to capture all activity around regulated advice, including the interactions that start but go no where.
As Murray said, RTFM, and I have spent monthS talking about the extent of these issues into the adviser businesses in my column.
The regulator will want to see the extent of the whole process, engaged or not, and that means record keeping from initial contact onwards.
As Murray has also pointed out, does that include website contact? probably not, as there isn’t sufficient information able to be legally gathered at that point to identify someone.
Enter into an advice process, robo or in person, then that triggers the documentation need.
Which is also to say if you don’t have a digital system to manage this you’re going to find it very hard to comply...
On 15 November 2019 at 11:47 am Tash said:
Regent - I didn't say limited scope clients don't require disclosure or adequate record keeping. The point is at some stage a client stops being a client. If you think ongoing diclosure to people who were once clients but are no longer clients is a requirement, please provide legal authority. We can't just make this stuff up.
Murray - As far as a client becoming a client simply when they request an initial disclosure goes, why??? The point of disclosure, at least initially, is to allow the client to make an informed decision about the adviser and whether or not they want to access their services. Such a person cannot be a client until they have engaged the adviser, either verbally or in writing, but engagement must surely happen. Insurance advisers may give out disclosure documents to many who choose to take it no further (and the details of whom the advisers do not have), surely the following discussion at a barbeque is ridiculous...
Hi Pete, nice to meet you, yes I am an insurance adviser, thanks for asking, I'll let you have my disclosure document and you can decide whether or not I can help you, but you must give me your personal details and address so I can keep sending you my disclosure document for the next seven years even if I never hear from you again"
On 15 November 2019 at 6:19 pm w k said:
wow ..... looks like advisers have to watch out for booby traps.
do clients need to have any responsibilities? who do advisers complain to if clients did something, not wrong, but unethical that affected them financially? just saying.
On 16 November 2019 at 6:49 pm JPHale said:
@tash, as insane as it sounds, yes.
The mishmash of rules around this basically say you both need to keep records of who you give disclosure to and only for those that are clients.
The chat with ReganT on this in the background came to the basic conclusion it needs to be done, until the regulator figures out what the expected standard is we will be measured too. The old law and what’s worth pursuing issue...
Also a case of best practice meets minimum standards. Personally any first appointment discussion is going to contain enough content, valid or not, for the client to think they have had a level of advice. And that becomes the rub and test on the disclosure requirements.
I have a blog article on my website about advice that looks like advice but isn’t, under the current regime, these principals will still apply.
When it boils down to the basics, the new rules are based on prospects moving through the advice process to become clients, there has been little consideration on prospects dropping out along the way.
Or, it has been thought of and the law as read suggests that the data on this aspect needs gathering and we’re the donkeys that need to gather it.
And don’t expect it to be clarified by the FMA, MBIE, or Government, as they are there to measure us against the written rules, not tell us how to interpret them... Nor have they helped unpack the finer details when asked directly either.
On 17 November 2019 at 1:10 pm regant said:
Tash are you being deliberately obtuse? I didnt say you have to keep sending/giving disclosure every year, I said you have to keep a record of that time you did, for seven years.
I'm not making stuff up. I've spent more time looking over this legislation and discussing it with the committee and others, making notes, and helping with submissions, than I care to admit.
Yes, at first glance there is a piece in the legislation that says something about every 12 months, or when something changes etc. Which is bonkers. We have advocated for that to be different - if you're not actually with the client doing stuff, why send them a new copy of the same disclosure stuff just because a year has passed, as though it's a goddam newsletter? It's crazy. No, I didnt say you have to keep sending it for seven years.
I also didn't say a client becomes a client when they request an initial disclosure (- they never do that!). Part 5 triggers that disclosure "must be provided" when the "nature and scope" is "known".
The nature and scope is known, because it has been agreed to. It has been agreed to because you have been asked to provide advice. If you have been asked to provide advice, you have agreed to a scope, they are a client.
On 17 November 2019 at 1:22 pm regant said:
In a previous reply I responded to the concept of payment as a trigger.
I actually agree it’s not. While we don’t often work for free, the trigger is actually the point where advice is going to be given.
But I also don’t agree that everyone we meet has to be given a disclosure and recorded for 7 years. That’s the clever part of this regime – by making a lot of what we have to disclose publicly available prospects are not deprived the opportunity to view it. For example 229C, 5, (b), (i) and (ii) require the information be "prominently displayed” on our website home page. I’d extend that to the Facebook page as well.
In S229D:
Initial information must be given when nature and scope of advice known
(1) This regulation applies if—
(a) a person who gives advice (A) knows or ought reasonably to know the
general nature and scope of the advice that a client is seeking; and
(b) there are reasonable grounds for concluding that advice may be given to
the client.
Ok. Also, there is a lot of reference to S21A, so let’s dive into that pool and swim around for a bit;
21A Part 2 Information that must be available or be given
4 Information that must be publicly available
this section lists everything from licence status and conditions, through to types of advice, products, providers, limitations, restrictions, fees, commissions, conflicts, complaints and DRS.
All publicly available, at all times.
THEN we have:
5 Initial information to be given when nature and scope of advice known
(1) A person who gives advice (A) must give the following information to a client of a financial advice provider (P) in accordance with regulation 229D (which provides that initial information must be given to a client at the time A knows or ought reasonably to know the general nature and scope of the advice the client
is seeking):
this section says that, when A knows, or ought reasonably to know the general nature and scope of the advice the client is seeking, that A must give the client everything from licence status and conditions, through to types of advice, products, providers, limitations, restrictions, fees, commissions, conflicts, complaints and DRS.
See what happened there? Are we giving it all again?
Maybe not. To comply with 4 you’ve made it all publicly available, but that does not mean it has been received (also doesn’t mean it hasn’t). But there is a space here where a new prospect is meeting with us and the ‘nature and scope of advice’ is not yet “known”. That’s kind of the point of a first meeting.
Showing up to a first meeting is not “entering into an advice process”. Neither is a chat beside a BBQ, in the street, or in the aisle at the supermarket – so long as you manage to keep it that way. Does a lawyer give legal advice under such circumstance? Does a Dr write a prescription in these places? If you currently try to sell/advise/help people at these times and places then maybe that’s what must change, not the rules.
On 18 November 2019 at 8:18 am JPHale said:
@ReganT interesting that the two life advisers involved with the code working group discussion are the ones being argued with, when they’re the ones who have had the opportunity to discuss this directly with the rule makers...
Your last comment raises a couple of other issues that need consideration.
For everyone reading...
(A) knows or ought reasonably to know the
general nature and scope of the advice that a client is seeking; and
(b) there are reasonable grounds for concluding that advice may be given to
the client.
Pretty much says every interaction is going to trigger disclosure. As why would someone Ben seeking the advice of an adviser...
And
Information that must be publicly available
this section lists everything from licence status and conditions, through to types of advice, products, providers, limitations, restrictions, fees, commissions, conflicts, complaints and DRS.
All publicly available, at all times.
Which suggests that every adviser needs either a website or a webpage with this information available, to meet the at all times requirement.
This is very nuanced and detailed, advisers that are arguing the toss could be considered going kicking and screaming. As pointed out earlier the time for consultation and input has passed. So check your comments, and bias before pushing the go button.
These are the rules as written, ignore them at your peril, but don't expect those in the know to repeat themselves. It's becoming a bit like talking to anti-vaxers. But.... There is no but, these are the rules we now have to work by.
On 18 November 2019 at 1:18 pm JPHale said:
Just released additional standards from the FMA.
Record keeping potentially until 7 years after the death of the life assured, or their successors on a joint policy. Which is a long time.
Standard condition:
You must create in a timely manner and maintain adequate records in relation to your financial advice service.
Your records:
must be kept in a form (which may be electronic) and manner that ensures the integrity of the information and enables it to be conveniently inspected and reviewed by us;
may be in any language providing you create and keep an accurate summary of the record in English and, if required by us, provide a full translation of the record into English by a translator approved by us;
must be available for inspection by us at all reasonable times; and
must be kept for a period of at least 7 years from the later of:
the date the record is made; and
the date the financial advice to which the record relates is given; and
the date any later record is made that refers to or relies upon information in the record.
On 18 November 2019 at 1:26 pm JPHale said:
And this subtle upgrade to the understanding of a complaint.
Which changes the ISO definition from an expression of dissatisfaction with expectation to resolve the problem to one of dissatisfaction alone.
Which means every murmur of noise about premiums and terms needs to hit the complaints register too... Not sure this has been thought through as well as it could have been...
And before commenting, take note of the use of ’or’ in the following. Good luck with this if you are a dealer group FAP or a VIO like a bank...
2. Internal complaints process
Standard condition:
You must have an internal process for resolving client complaints relating to your financial advice service that provides for:
complaints to be dealt with in a fair, timely and transparent manner; and
records to be kept of all complaints and any action taken in relation to them including the dates on which each complaint was received and any action was taken in relation to that complaint.
Explanatory note: In this condition ‘you’ means the person who holds the licence and each of the licence holder’s authorised bodies. A complaint relating to your financial advice service is an expression of dissatisfaction made to you or to a person engaged by you, relating to your financial advice service (including any regulated financial advice given to a retail client by you or on your behalf), or the complaints handling process itself, where a response or resolution is explicitly or implicitly expected. A complaint includes a complaint about a failure to provide a service or give advice. Any disclosure requirements relating to your internal complaints process are set out in the Financial Markets Conduct Regulations 2014.
On 22 November 2019 at 3:25 pm Tony Vidler said:
while many interesting points are made, I feel that Murray's earlier comment is closest to the mark. However I believe it is even more simple than Murray suggested, as the entire argument about "a client" is utterly irrelevant.
An adviser is liable (and ergo "responsible") when they provide regulated financial advice to a consumer.
In the real world this means that the consumer (or "prospect" if you prefer) who
*sends an enquiry & makes an appointment,
* and then sits with you for your complementary hour and
* asks you whether they should use the recent inheritance from Aunty martha to pay down the mortgage and
* the Advisers says "do nothing yet"
then regulated financial advice has just been delivered to a consumer. It is irrelevant I believe as to whether terms of service were agreed to, and it is entirely possible that the consumer decides they don't want to work with you and never talks to you again. Advice was provided and potential culpability arises.
The "client status" discussion is frankly a deviation from the real issue. The real issue is did you or did you not give regulated financial advice to a consumer? If you did, you are on the hook, regardless of what they did or didn't pay or did or didn't sign.
End of story.
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someone becomes my client is when i've received my fees or commission. that's basic law of contract, there must be offer and acceptance. otherwise, try working for no pay.