[GRTV] FMA monitoring gives FAPs eight out of 10

Think about proportionality says the FMA in the wake of its financial advice provider monitoring report.

Friday, July 26th 2024, 6:58AM

by Andrea Malcolm

The regulator’s monitoring team visited 60 class one and class two financial advice providers (FAPs) the length of New Zealand in preparing the report, says FMA director deposit taking, insurance and advice Michael Hewes.

Regardless of size there was a consistency across both classes of FAP in adhering to code requirements and standard conditions.

The FMA monitoring approach focuses very much on what is appropriate for the size of the business, says Hewes, but from a findings perspective, there was consistency across class ones and class twos.

“Our expectation is that if you are a larger FAP you will have the resources to undertake the oversight, supervision and monitoring of financial advisers.”

Hewes rates both classes a solid 8 to 8.5 out of 10. “It’s important to recognise the amount of work that the FMA, the industry and industry associations have undertaken over a long period of time. There weren't any surprises. We have a very active market engagement strategy even outside monitoring.”

CPD and replacement

When it comes to professional development, Hewes says FAPs should broaden their horizons. “Think about your business and the learning that is appropriate to you. Rather than being focused on one line like insurance, think about other inputs specifically around insurance. That might be opportunities to learn about the broader economy and what feeds into and is driving insurance premium rates.”

Replacement business in insurance seems less of an issue than it has been. Hewes says in 2016 and 2018 FMA released a thematic report looking at some of the old qualifying financial entities in the old financial advice regime. “We certainly see replacement business as an area of increased risk and increased harm to consumers. So consumers need to understand what happens when they move from one company to another company.

“An observation from us is that where we see a move from one company to another, now the processes are a lot more robust, there’s disclosure, customers understand why they've moved and advisers are explaining that. That’s not to say that the move from one company to another might not, in fact, be a good idea, but it’s highlighting that there needs to be better disclosure. It’s not as big an issue as previously.”

On the topic of suitability of advice, Hewes discusses the recent case in which the FMA censured Auckland-FAP deVere for breaching its license obligations. In the report, the FMA said deVere failed to adequately consider the client’s investing experience and their financial product knowledge.

This has led to commentary that the case takes the suitability question further than its description in Code standard three.

“It’s about having that broader horizon and lens,” says Hewes. “While you have Code standard three, it’s appreciating that in this case there needed to be that focus on client outcomes and client harm.”

So does the adviser having to go in and question and explore the client’s knowledge around products add up to something new? Not necessarily new, says Hewes. “We are saying don’t use a templated question set or rely on a tick box exercise. It’s going one step further and finding out in more detail about their knowledge.

“One of the things we’ve always said, and you’ll hear this theme come through in a lot of the FMA communications - is about proportionality - making sure you have the processes in place that are right sized for your business. So where there’s someone using a combination of a template or tick box, what overarches and underpins it and what else is there to ensure you are delivering good outcomes?”

Does that mean proportionality is a subjective judgment of the FMA?

“Where we are visiting a class one FAP our expectation would not be a client assurance programme or framework built and designed for a large FAP class three FAP. It’s making sure what you put into your business is appropriate for your business and that has been the clear and concise message the FMA has always given.

Class three monitoring will start in the next few weeks. Some of these may have multiple types of license so the FMA will go in once and look at all licenses together.

Hewes says more than 600 advisers attended the recent roadshow on the report and many have asked when the exercise will be repeated.

“Probably not next year but certainly the year after because we’ve observed that there has been so much growth and good connection between the FMA, advisers and their customers.”