New Zealand: Financial Adviser and Financial Service Provider regimes: More Exemptions

NZ Funds Management Update
Last Updated: 6 May 2010
Article by Alasdair McBeth, Tracey Cross and Rachel Taylor

Cabinet has agreed to a number of recommendations regarding further exemptions to the FAA and the FSPA. These are likely to lead to a further supplementary order paper to the Financial Service Providers (Pre-Implementation Adjustments) Bill. To view the Cabinet Paper, click here

The significant recommendations proposed in the Cabinet Paper released on Monday concern advisers to wholesale clients, the application of the FAA to private offers, Qualifying Financial Entity (QFE) status for groups of related entities, the application of the FAA to generic advice and the exemption powers of the Securities Commission and the Minister of Commerce.

Wholesale Clients - Broad exemptions have been recommended for advisers who provide financial adviser services to 'wholesale clients', on the basis that these clients have the necessary negotiating power and sophistication in financial matters to demand appropriate standards from their adviser without statutory protection. 'Wholesale clients' will be defined to include institutional investors, large entities (as defined in the Financial Reporting Act 1993), investors receiving advice on securities valued over $500,000 and other eligible investors, both natural persons and entities, who are experienced in investing money and who the adviser considers are able to assess:

1. the merits and value of the advice;

2. the value of the financial product;

3. the risks involved in the financial product and in receiving advice from an adviser who may not be subject to the statutory standards;

4. that person's information needs;

5. the adequacy of the information given by the adviser; and

6. the risks involved in receiving advice from an adviser who is not a member of a Dispute Resolution Scheme.

If the adviser is satisfied of these matters on reasonable grounds, and the investor acknowledges their status as 'eligible' in writing, then the adviser would not be required to comply with the disclosure requirements, authorisation requirements and dispute resolution requirements of the FAA and the FSPA. Advisers to wholesale clients would still be subject to the statutory conduct obligations under the FAA, including the obligations to act with due care, skill and diligence and not to engage in misleading or deceptive conduct. It is also recommended that advisers who are exempt from the Securities Act 1978 also be exempt from the FAA.

The Cabinet Paper further recommends that advisers to wholesale clients should be required to be registered as financial service providers under the FSPA, except that registration should only occur at an entity level. Additionally, it is recommended that financial advisers based offshore who provide advice to wholesale clients should not be required to be registered under the FSPA, in light of concerns that the registration requirement may have a 'chilling effect' on provision of advice by offshore wholesale financial advisers.

Private offers - The paper also acknowledges concerns that the application of the FAA to private offers or offers made to eligible persons under the Securities Act 1978 will create unnecessary compliance costs. In addressing this concern, the paper proposes to exclude financial advice given to recipients of private offers and eligible persons on the basis of wealth or experience (as defined in the Securities Act 1978) from the FAA.

QFEs - The paper recommends that firms that operate as groups of related entities (for example where different entities issue products, employ advisers and manage the business) should be allowed to apply for QFE status covering the entire group's 'specified entities'. In cases where the management functions of the group are shared between several entities, it is proposed that those management entities should be jointly and severally liable for compliance with the FAA by all the specified entities in the group.

Generic Advice - The paper recommends amending the FAA to permit an entity to provide generic or 'class advice' which is not personalised (such as information brochures) without this constituting provision of financial advice under the FAA.

Exemption Powers - Finally, the paper proposes to extend the power of the Securities Commission to allow it to grant exemptions from compliance with Code obligations and the obligation to be authorised. It is also proposed that the exemption powers of the Minister be extended so that regulations may specify any person or class of persons of any activity or class of activity that does that constitute a financial advisers service.

As always, we are available to assist you in determining what effect the further exemptions outlined in the Cabinet Paper would have on your business if they are adopted.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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