Where to from here?

Opinion piece by David Whyte

The licensing and attendant legal regime is now in full force for those offering regulated financial advice in NZ. But now that all measures are in place (CoFI excepted), what’s next and where do we go from here?

While the regime is far from perfect, the foundations of establishing a professional financial advice industry have been well and truly laid.

The glaring deficiency in the framework is the almost ideological obsession from the Authorities to refuse to distinguish between sales and advice. During the consultation stage, MBIE refused to include such a distinction for “fear of creating two classes of Advisers” as stated in their Regulatory Impact Statement to the Minister.

I’m sorry, but the establishment of ‘Financial Advisers’ and ‘Nominated Representatives’ did exactly that.

In the Australian Government’s review of the quality of financial advice, Michelle Levy, the lawyer appointed to head the review, has rightly opined that it is impossible for an individual who is contracted to, or retained by, a product provider to place client interests ahead of the contractual obligations owed to that product provider.

NZ is no different - first and foremost, Nom Reps have to serve the priorities of their insurance company or bank employer in order to sustain a commercial relationship; Financial Advisers have to prioritise client interests ahead of their own and from that basic premise, two entirely different pathways are pursued.

I really couldn’t care less where Nom Reps go next - their Lords and Masters will decide that and I fully anticipate the emergence of future examples of clients suffering adverse experiences as a result of being unable to distinguish between someone trying to push them a product and a Financial Adviser offering non-aligned advice free from product provider bias or influence.

So, for FAP licensees, the future challenge is to hold on to the license.
Early indications suggest that FMA is moving ahead into the supervision and oversight phase and that licensees should prepare accordingly.

In practical terms, the form completed to apply for the FAP license should be revisited and checked over to see which of the provisions declared as being met at the time of applying are actually in place, and able to be presented to the FMA in documented format as requested by the regulator.

This is not an exercise to be taken lightly as client files, notes, Statements of Advice, evidence of appropriate governance practices, etc - all the specific items contained in the application form - will be required to be produced in a very short space of time - likely 10 days. The extensive and comprehensive nature of a review is no more than any regulator would look for to confirm that a FAP licensee has their house in order, but I would strongly recommend conducting an internal review now before the FMA comes calling to see if there any gaps that would cause the regulator concerns with your practices.

Finally, and this may be a more controversial recommendation, but I would advise that if any FAP licensee is contacted by the FMA stating that a review will be conducted, send a copy of the letter to your legal adviser as soon as it arrives.
All may turn out well and no serious threat to your livelihood emerges from the review - here’s hoping that’s the outcome for all of the reviews conducted - but just in case any issues arise, it’s the safest course of action to have your legal people talking to the FMA’s legal people.

Professional advice is a necessary and invaluable service and you need to have access to legal advice to retain your capacity to continue offering your professional advice to your clients.