Australia: NZ Funds Management Update - New Rules For Financial Advisers

Last Updated: 29 September 2008
Article by Sue Brown

The Financial Advisers Bill (Bill), amended at the final hour by a last minute Supplementary Order Paper (SOP), passed through Parliament under urgency yesterday with unanimous cross-party support. The Government is confident that the Bill will accomplish its objective of encouraging the sound and efficient delivery of financial advice and boost confidence in the use of such advice.

The Bill is designed to regulate the activities of financial advisers to ensure they are competent, skilled and accountable for the financial advice provided to investors.

Major changes

The Bill has been significantly altered in the wake of Select Committee consideration and now provides for three categories of financial adviser. A financial adviser who is:

  1. Both authorised by the Securities Commission and registered under the Financial Service Providers (Registration and Disputes Resolution) Bill (authorised financial adviser).
  2. Registered but not authorised.
  3. Neither registered nor authorised but who is an employee or agent of a qualifying financial entity (QFE).

The Bill governs the provision of 'financial adviser services' where a person gives financial advice, makes an investment transaction, or provides a financial planning service in the course of his or her business. The Bill also focuses on financial products in contrast to financial decisions, as was originally proposed. In this respect the Bill separates products about which advice is given into two categories. Only 'authorised financial advisers' are permitted to give financial advice about category 1 products, which comprise complex products such as futures contracts or securities (other than a call debt security or bank term deposit). Authorised financial advisers may make investment transactions in respect of category 1 products and provide financial planning services. Under the Bill an issuer or trustee making an investment transaction in relation to a security is not performing a financial adviser service.

Individuals who are registered but not authorised are only permitted to give advice or make investment transactions in relation to category 2 products. These are simple products such as consumer credit contracts, insurance products (excluding life insurance policies issued after 31 December 2008) and bank term deposits.

Individuals (whether registered or not) who are employees or agents of a QFE may, in the course of the QFE's business, give financial advice or make investment transactions in relation to category 2 products. Employees of a QFE may also give financial advice or make investment transactions in relation to category 1 products of which the QFE is the issuer. QFE status is aimed at large organisations enabling them to avoid the excessive compliance costs that would result should they be required to register all of their employees who provide financial advice. The QFE is then responsible for the conduct and disclosure obligations of its employees under the Bill. All individual advisers, including category 1 advisers employed by a QFE, still need to be individually authorised. This ensures there is a level playing field between advisers who work for such organisations and those who operate independently.

A significant change to the Bill is the removal of the co-regulatory model initially proposed, with the Securities Commission now the sole regulator. This change is considered an appropriate response to the collapse of the finance company sector.

Finally, the Bill sees the establishment of a Commissioner of Financial Advisers (Commissioner) who will be a member of the Securities Commission. The Commissioner will be responsible for establishing a code of conduct for investment advisers and their ongoing monitoring and disciplinary proceedings. The Commissioner's role will include appointing a committee that will be responsible for producing a draft code of conduct which will require Ministerial approval before coming into force.

But issues remain

This new approach attempts to distinguish between the complexity of the financial products advisers deal in with the regulatory response tailored accordingly. Commerce Minister, Lianne Dalziel, has expressed her approval at the changes saying they address the issues of the past and ensure that there is the strength of central supervision while still retaining the experience and knowledge of industry participants.

While the Bill addresses many of the concerns previously raised by members of the industry, the speed with which the changes have been pushed through, particularly in light of the number of new proposals introduced in the Bill, has raised concern that the legislation is inadequately thought through.

One such area of concern relates to the approach to defining financial advice. The focus of the Bill on financial products creates potential loopholes for providers to manipulate their product descriptions so that they fit within category 2 products and are not subject to as stringent regulation. In this respect it is possible that many of the Blue Chip products, which have led to such huge investor loss, would fall within category 2 products. In addition, it is not easy to distinguish between which sorts of products require higher protection and which do not. Investors investing in category 2 products may still suffer significant loss in the event of bad advice and, therefore, still require protection.

Concerns have also been raised as to the role of the Securities Commission, under which the Commissioner will be established, and the fact that the Commissioner will be responsible for not only creating standards but also for policing compliance and enforcing breaches of those standards which will necessarily involve conflicting interests. The role of the Commissioner will be significant and its success will likely hinge on the willingness of the appointee to liaise with and involve industry participants.

A major concern relating to the position of employers who offer superannuation scheme membership to their employees, and whether their actions in so doing would be considered advice under the Bill, has been rectified in the SOP. Unless the assistance of employers includes, or is accompanied by, a recommendation or opinion as to suitability of the financial product offered through the workplace, it is not considered to be providing a financial adviser service. Some definition problems however remain.

Much work remains to be undertaken despite the passing of the Bill and there will need to be significant consultation on what will be required to become an 'authorised financial adviser' and what steps will need to be taken to achieve 'QFE' status. Also left for further clarification is the procedure of the code and disciplinary committees, although it is understood that both committees will rely heavily on industry participation.

The Minister has acknowledged concerns that despite the passing of the Bill various issues may remain unresolved. In this respect, and as a result of the considerable detail which is to be included in regulations, a working group is to be established encompassing representatives from the industry, the Ministry of Economic Development and the Securities Commission to provide important feedback as such matters are further clarified.

While Parliament has passed the Bill it requires royal assent before it becomes law. The industry is concerned that it will take at least a year before the details are worked through and longer before the rules can be introduced. One thing is certain, we haven't seen the last discussion of the rules relating to financial advisers with further refinement to come.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

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 and no liability will be accepted for any losses incurred by those relying solely on this publication.

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