Financial advisers pose lesser distribution risk says FMA

The Financial Markets Authority has put out its final guidance to financial institutions on how to comply with new CoFI rules around product and services distribution through intermediary channels.

Tuesday, June 27th 2023, 3:16PM

by Andrea Malcolm

The Financial Markets Conduct (Conduct of Institutions) Amendment Act (CoFI) will impose a new conduct-licensing regime on banks, insurers and other non-bank financial institutions from the end of March 2025 with transitional provisions starting in July.

The FMA says intermediaries which provide financial advice are already subject to their own set of conduct duties under the CoFI regime under Part 6 of the FMC Act and the Code of Professional Conduct.

“Ultimately our view is that the CoFI and financial advice regimes are complementary, with broadly consistent overarching policy objectives. The policy intention is that the dual regimes create a shared responsibility between financial institutions and FAP-licensed intermediaries for fair treatment and outcomes for consumers.”

The FMA says institutions should take into account in determining what policies, processes, systems and controls are effective for the purposes of their fair conduct programmes. Both CoFI and the financial advice regime require consumer interests to be considered in relation to the distribution of products and services.

“A FAP licence holder will generally pose a lesser risk that the institution’s distribution method will not meet the fair conduct principle but the firm should conduct its own risk assessment.”

The guidance also outlines what it doesn’t expect including institutions to supervise FAPs’ legal compliance with the financial advice regime.

“FAPs are responsible for their own licensing process and ensuring advisers and bodies operating under the licence comply with the financial advice regime.”

The guidance, which is informed by feedback from institutions and intermediaries, focuses on CoFI requirements around distribution methods applicable through advisers and all other channels such as car dealers. These provide for distribution to follow the fair conduct principle to treat consumers fairly.

Topics include determining likely customers for products and services, selecting appropriate distribution methods, roles and responsibilities of financial institutions and intermediaries, communicating to customers, how distribution will be managed and product training, managing compliance costs and remedying deficiencies. Examples are provided plus prompt questions for financial institutions to consider under each topic.

Institutions are warned to avoid ‘set and forget’ and must regularly review how distribution methods are operating.

FMA executive director of regulatory delivery Clare Bolingford says, the guidance provides practical examples and the intention is for institutions to take ownership of how they drive fair treatment of consumers.

New incentive rules not covered

The guidance does not cover incentive arrangements or related CoFI provisions (see section 446J(1)(i) and sections 446K-M).

New CoFI regulations which were passed this month will prohibit some volume-based incentives but make exceptions for financial advice providers and wholesale client-related services.

The new rules state an incentive is prohibited if it is determined or calculated by a direct reference to a target or other threshold relating to volume or value of the services or products.

However they do allow incentives based on flat commission rates (regarded as linear) as well as from wholesale clients.

COFI licensing applications will open from July 25 this year.

Tags: CoFI