Commission disclosure: What's material?

Advisers' requirements to disclose what they're paid under the new financial advice regime will centre on what clients might consider a material influence.

Monday, July 6th 2020, 6:00AM 6 Comments

Sharon Corbett

The Ministry of Business, Innovation and Employment’s Sharon Corbett and Rose Wang fronted a Financial Advice NZ webinar to discuss the new disclosure regulations, which will take effect on March 15.

The regulations have three parts: The information about a financial advice provider that needs to be on its website to ensure that consumers could choose a FAP that suits their needs, more information given when the nature and scope of advice is known, and a final tranche of disclosure when the advice is given.

As part of that, advisers are required to disclose any commissions or incentives they receive that a reasonable client might think might materially influence their advice.

If the adviser was paid a salary but their FAP received commission that would need to be disclosed if a client might think it would be a factor.

“We’re not saying commissions are always bad but they can create a conflict of interest – disclosing commissions that have the potential to materially influence advice and what advisers would do to manage that is important,” Wang said.

If there were other fees that could apply as a result of following the advice, such as management fees for an investment, the fact of their existence disclosed so that the client did not think the adviser’s fees were the extent of what would be paid.

Corbett said the focus was on moving away from a tick-box exercise where clients were given information they might not understand or have time to process, to one in which information was given in a clear and useful way at the right time to help clients make good decisions. She said disclosure too early was often forgotten or disregarded and disclosure given too late could risk leaving the client feeling locked in with an adviser.

“We hope the new regime, with consistent conduct and client care standards, will help build on your efforts to improve access to financial advice.”

If information is given at the same time as scope is determined, those two disclosure requirements could be combined into one.

“It is a brave new world in terms of not having this prescriptive thing anymore – I encourage you all to get your heads around what this all means.”

Disclosure can be given verbally but clients need to be told a written option is also available to them. The FMA is also imposing a record-keeping condition on licencees.

Tags: Disclosure licensing MoBIE new regime

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Comments from our readers

On 6 July 2020 at 5:37 pm LNF said:

"“We’re not saying commissions are always bad but"
Says it all really
when are the industry organisations going to represent their members and not just roll over

On 8 July 2020 at 3:56 pm All hat no cattle said:

They aren't saying it. But some in there are thinking it, and it has been a long and gradual process to get to the fairly acceptable outcome so far.

They may not ragetype keyboard smashing comments on GR, but if you think organizations like FANZ "just roll over" on the advocacy front, you better think again.

BTW, just because someone who does not represent industry participants says something a participant does not like, that is not a reflection on those who represent us. Your issue is with the person who said it!

BBTW: Do you contribute where it counts, or just ragetype on GR? let's see a copy of your detailed submission then.

On 8 July 2020 at 5:08 pm Murray Weatherston said:

One thing I have yet to hear the regulators opine about is this.
When a Bank "adviser" recommends her client buys the bank's own life insurance/car insurance/ kiwisaver/mortgage, how far up the vertical integration should the adviser's COI disclosure extend? Does it include the bank's margin over its cost of funds/the commission the underlying underwriter might pay the bank/the investment management fees the bank receives from its kiwsaver etc etc.

On 8 July 2020 at 5:13 pm LNF said:

To Murray. Exactly - got it in one

On 9 July 2020 at 9:49 am Paul Flood said:

There should be no place for a subjective materiality test in the disclosure regulations, especially where is is the party being remunerated that decides whether the materiality threshold has been reached. I stand by my submission on the 2018 discussion document on the proposed disclosure regulations, where I wrote:

"The regulations should not include a materiality test in any form. It is my view that consumers will benefit from full disclosure of any and all financial rewards and other incentives that a financial adviser or nominated representative will receive if the consumer follows their advice. It should be up to consumers to decide whether or not they think a particular reward or incentive is material to the advice provided."

On 9 July 2020 at 12:39 pm Good Hamish said:

The consumer should know that there is at times large amounts of comission involved but it has to be balanced with not confusing the consumer. When the end cost is the same to the consumer there can be confusion if one channel is made to harp on about costs when the other isnt. My submission here https://www.mbie.govt.nz/dmsdocument/10708-mortgages-online-conduct-of-financial-institutions-review-options-paper-submission-pdf

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