In late September 2008 the New Zealand Government passed the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008. What do these two Acts mean for general insurance brokers in New Zealand?
The Financial Advisers Act 2008 (FAA) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) bear little resemblance to the early policy proposals contained in the Ministry's discussion documents.
When the Government first signalled its intention to increase the regulation of financial intermediaries, many expressed concern that the Government would go too far and create regulatory overkill. Unfavourable comparisons were made with the Australian regulatory environment. Ironically, some now wonder if the FAA and the FSPA went far enough!
INSURANCE - CATEGORY 2 PRODUCT
The FAA regulates giving financial advice and making investment transactions in respect of 'financial products'. It divides all financial products into two categories: Category 1 products are seen as more complicated and risky to consumers and Category 2 products less so. A lower level of regulation applies to Category 2 products.
All general insurance policies and all life insurance policies (except for non-term life policies issued after 31 December 2008) are Category 2 products.
An insurance broker will be a 'financial adviser' governed by the FAA and will perform a 'financial adviser service' if he or she in the course of business and in relation to acquiring or disposing of any Category 1 or 2 product:
- Makes a recommendation.
- Gives an opinion.
- Gives guidance.
- Receives or handles money or other property on behalf of another person.
Thus, all insurance brokers are likely to be subject to the FAA. A person's duties would have to be confined to simply taking customer orders to avoid falling within the 'financial adviser' definition. We note that insurance company employees involved in direct sales are also likely to come within this definition.
As financial advisers in relation to Category 2 products, insurance brokers must be either:
- Individually registered under the FSPA, or
- An employee or agent of a qualified financial entity (QFE).
All individuals seeking registration will have to apply to the Registrar of Financial Service Providers. In order to qualify for registration, the individual must be a member of an approved dispute resolution scheme and not come within one of the ineligibility criteria set out in the FSPA.
It will be an offence not to be registered contrary to the FSPA. If convicted, an individual can be imprisoned for up to 12 months and fined up to $100,000.
The purpose of the register is to enable members of the public to access it to establish if an individual is registered and to see which dispute resolution scheme the registered individual belongs to. The register is likely to be available over the Internet.
An entity employing financial advisers or appointing financial adviser agents, can apply to the Securities Commission for QFE status. In order to qualify for that status, the entity must meet the following criteria:
- Be registered under the FSPA.
- Ensure its compliance, and its employees' and agents' compliance, with the terms and conditions of the grant of that status.
- Ensure its employees and agents comply with their obligations as financial advisers.
- Provide an annual report to the Securities Commission.
The purpose of QFE status is to avoid the need for all the entity's employees and agents who are financial advisers to be individually registered. Thus, banks selling insurance are likely to want to seek QFE status.
Insurance brokers must make disclosure to their clients in accordance with the Category 2 product disclosure requirements. Those disclosure requirements are to be prescribed in regulations which are yet to be passed. The FAA goes on to say any or all of the following information 'may' be so prescribed:
- The fact that the adviser is registered.
- The dispute resolution scheme the adviser belongs to.
- The location of the business and the contact details.
The use of the word 'may' leaves room for doubt on whether the information prescribed in the regulations can be more extensive than this.
The most contentious issue in the early days was the proposal to require insurance brokers to disclose the amount of their commission entitlement to insureds. The drafting of the FAA may be sufficiently wide for this requirement to reappear at some later stage in the regulations. Time will tell.
Under the FAA, financial advisers must:
- Exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances, taking into account (among other things) the nature and requirements of the financial adviser's client and the nature of the service performed for the client.
- Not engage in conduct (or advertise in a way) that is misleading or deceptive or likely to mislead or deceive.
Both Acts apply to a financial adviser service performed by a person in New Zealand regardless of where that person is resident, incorporated or carries on business. Thus, the Acts provide no protection to the public in New Zealand dealing with overseas insurance brokers.
INSURANCE CONTRACTS BILL
This proposed Bill is expected to regulate insurance brokers further. In particular, the Bill is expected to address the thorny issue of agency. The first draft of this Bill is not expected until midnext year.
The FAA and the registration requirements of the FSPA do not come into force until an unspecified future date. At least a two-year transition period is anticipated before insurance brokers will need to comply.
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