New Zealand: Financial adviser reforms underway

BRIEF COUNSEL

The Financial Services Legislation Amendment Bill (the Bill) is now before Parliament.

Expectations are that the Bill will be passed by mid-2018 and in force by May 2019. No date has yet been set for submissions.

Key changes from the Exposure Draft

The Ministry of Business, Innovation and Employment (MBIE) has made a number of improvements to the Bill as part of the consultation process, including as a result of submissions made by us and other interested parties. We list the key changes below:1

  • key terms have changed – the term 'financial advice representative' is replaced with 'nominated representative' (NR), and the term 'broking service' is replaced with 'client money or property service'
  • the duty to give priority to clients' interests is less expansive – the duty requires providers to ensure that advice is not materially influenced by their own interests, or the interests of 'associated persons' (as opposed to the 'interests of any other person'), and the expansive requirement to give priority to the client's interests "in doing anything in relation to the giving of advice" has been removed
  • the duty to agree the nature and scope of advice is narrower – the duty now requires advisers to take reasonable steps to ensure that clients understand the nature, scope and limitations of the advice sought (rather than to seek their prior agreement)
  • the wholesale client definition is more limited – the wholesale definition has been aligned with the narrower FMCA definition of 'wholesale investor' (essentially by deleting the $1 million net asset threshold), so that it applies to fewer clients
  • the tainting of wholesale clients by association is removed – the former model would have required all clients of a service to be treated as retail clients if the advice was provided to just one retail client; the Bill now permits providers to meet the applicable duties depending on whether each client is retail or wholesale,
  • a consumer credit exclusion has been included – a new exclusion has been included to cover firms who provide credit and give advice as an incidental part of their business, or lenders who may give advice in relation to a consumer credit contract or relevant insurance contract for the purpose of complying with the responsible lending principles in the Credit Contracts and Consumer Finance Act 2003, and
  • the accountability framework is largely unchanged – by placing civil liability on FAPs for contraventions by FAs and NRs, but FAPs will now have a defence from pecuniary penalties when an FA contravenes a legislative duty, if the FAP can show that it took all reasonable steps to ensure the FA did not contravene that duty.

The new Financial Advice Regime

The proposed financial advice regime in the Bill:

  • permits only Financial Advice Providers (FAPs) to give financial advice,2 either directly (e.g. online), or through Financial Advisers (FAs) or Nominated Representatives (NRs) (previously called 'Financial Advice Representatives in the Exposure Draft), both of whom must be engaged by a FAP to provide advice
  • requires FAPs to be licensed to give regulated financial advice to retail clients, but a licence will not be required if they provide advice solely to wholesale clients (the definition of which will be aligned with the FMCA wholesale definition)
  • creates new duties for FAPs, FAs and NRs to ensure that:
    • they give priority to the interests of their retail and wholesale clients
    • they disclose information set by regulations to retail and wholesale clients
    • their retail clients understand the nature and scope of the advice being given (including any limitations on this), and
    • before giving advice to retail clients, they meet standards of competence, knowledge skill, ethical behaviour and client care set out in the Code of Conduct
  • creates new duties for FAPs to: take all reasonable steps to ensure that their FAs and NRs comply with their duties; establish effective processes and controls to ensure that NRs comply with their duties, and ensure that the incentives they offer do not encourage their NRs to engage in conduct that contravenes a duty
  • promotes standardisation and permits robo-advice platforms by removing the requirement that personalised advice be provided by natural persons, and by doing away with the class/ personalised advice distinction and the dual categorisation of financial products.3

A two year transitional period will apply from when the Bill comes into force in May 2019.

The new Financial Service Providers regime

The Bill will prevent misuse of the Financial Service Providers Register (FSPR) by:

  • replacing the 'place of business' test,4 with a requirement that entities register on the FSPR only if they are in the business of providing financial services (rather than the vague 'promoting' term used in the Exposure Draft) to persons in New Zealand, or if they are required to be licensed or registered under any other Act, and
  • allowing regulations to prescribe a threshold below which the registration requirement may not apply and to specify warnings that must be included in advertising for financial services (e.g. that registration may not result in regulatory oversight).

Transition timeline

Approximate Date Action
Late 2017 Submissions may be made to the Select Committee on the Bill.
Now – August 2018 The Code Working Group will prepare the code of conduct before the commencement of the Bill.
Mid 2018 The Bill is expected to have passed its final reading in Parliament, though it is unlikely to be in force at this stage.
August 2018 The Code of Conduct will be approved by the Minister.
November 2018 – May 2019 FAPs will be able to apply for and obtain a transitional licence from the Financial Markets Authority (FMA). This will allow FAPs, and all FAs and NRs employed by them, to continue providing financial advice during the transitional period.
May 2019 The new financial advice regime, including the Code of Conduct, comes into effect. All new obligations and duties will apply.

Transitional licences will come into effect. All FAPs must hold a transitional licence, and all FAs and NRs must be engaged by a FAP with a transitional licence, to continue providing advice.

The Competency Safe Harbour also comes into effect. If FAs or NRs have not met competency standards, they may provide the advice that they were legally allowed to prior to the Bill coming into effect while they work towards achieving the new competency standards.
May 2021 The transitional period ends. All transitional licence holders must have obtained a full licence by this date to continue providing financial advice.

Conclusion

If you would like advice on how the FAA reforms will affect your business or assistance in making a submission, please contact any of the individuals featured below.

MBIE has also published final reports on the FAA / FSPA reforms and on the FSPA Registration Process, an overview of key themes from submissions, and a cabinet paper seeking approval for the final form of the Bill.

Quick Links

MBIE Consultation
Text of the Bill as introduced to Parliament 3 Aug 2017
MBIE Overview of the Bill and transitional arrangements 3 Aug 2017
MBIE Key Themes from submissions on the Exposure Draft 3 Aug 2017
MBIE Final Reports on the FAA reforms and FSPR reforms 3 Aug 2017
MBIE Exposure Draft Consultation 17 Feb 2017
Chapman Tripp
Brief Counsel on the FMA's proposed robo-advice exemption 23 Jun 2017
Submissions on the Financial Advice Regime Exposure Draft 30 Apr 2017
Brief Counsel on the FAA reforms – our preliminary views 1 Mar 2017
Brief Counsel on FinTech Regulation in Australia – Lessons for New Zealand? 4 Oct 2016
Brief Counsel on the FMA's noted issue of churn in the life insurance industry 1 Jul 2016

Footnotes

1 MBIE has published a more detailed list of changes arising as a result of submissions here.

2 Financial advice is given if the person (a) makes a recommendation or gives an opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product; or (b) designs an investment plan for a person, which includes recommendations or opinions on how to realise that person's investment goals, based on an analysis of their current and overall financial situation.

3 This step aligns with the FMA's recent proposed robo-advice exemption, which is due to be finalised in late 2017.

4 The Act currently requires entities to register on the FSPR if they are ordinarily resident in New Zealand, or have a place of business in New Zealand (regardless of where the financial service is provided). The Bill applies now only if the financial services are provided to persons in New Zealand.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Authors
Penny Sheerin
Bradley Kidd
Mike Woodbury
Emma Harding
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