The Financial Services Legislation Amendment Bill has been improved in the Select Committee process, although most of the changes are minor.
Next up will be the consultation on the draft Code of Conduct, which will need to deal effectively with the broad range of regulated advice – not an easy task.
We take you through the revised Bill.
Definition of financial advice broadened
"Financial advice" now expressly includes recommending, or giving an opinion on switching funds within a managed investment scheme, and any financial planning services prescribed in the regulations.
Licensing requirements won't apply to advising wholesale clients
Licensing is now required solely for persons providing regulated financial advice to retail clients. But certain duties will still apply to advising wholesale clients, such as the duty to give priority to the client's interests and to exercise care, diligence and skill.
Drafting improved on duty to give priority to clients' interests
The Select Committee has helpfully clarified that unreasonable steps are not required to be taken to give priority to client's interests, in response to our oral submissions.
Scope extended to cover providers who subcontract advice to other entities
The Bill now applies where a financial advice provider subcontracts an entity (e.g. a broker house or a sole adviser company) to provide advice on its behalf. Previously, the Bill applied only where individuals were subcontracted, not entities.
Sub-contracted entities (interposed persons) will have a duty to take all reasonable steps to ensure their underlying advisers comply with their duties, and may need to be licensed or registered as a condition.
Constraints on nominated representatives now specified
The processes and controls applying when a nominated representative is engaged have now been specified. They now must:
- limit the nature and scope of the advice given
- allow the financial advice provider to regulate the advice given and circumstances in which it is given, and
- ensure the advice given is commensurate with the nominated representative's competence, knowledge and skill.
Financial advice providers must also ensure that their processes and controls are complied with and monitor their effectiveness.
Exclusion of lawyers and other occupations clarified
Financial advice given in the ordinary course of business by certain professions (for example, a lawyer, conveyancer, accountant, journalist, real estate agent or valuer) will continue to be excluded, provided the advice is ancillary to the relevant occupation.
Restrictions on engaging new representatives during transition, softened
Previously, only QFEs, or members of QFE groups, could engage nominated representatives under a transitional licence.
Now non-QFE businesses currently providing class advice can engage non registered staff as nominated representatives during the transitional period, at which point the financial advice providers will be subject to the new conduct and care duties in respect of those staff members.
AML reporting entities added to the Financial Service Providers Register
Reporting entities covered by the Anti-Money Laundering and
Countering Financing of Terrorism Act 2009 must now also register
on the FSPR, if they were not already required to do so.
To ensure compliance with these requirements, the Registrar has been given information gathering and deregistration powers.
Broader obligations on approved dispute resolution schemes to report legislative contraventions
Government-approved dispute resolution scheme providers will be under an altered duty to report to the Reserve Bank, Financial Markets Authority or Commerce Commission where they have reasonable grounds to believe that a scheme member has contravened, or is likely to contravene, the legislation administered by those agencies.
SO MUCH DEPENDS ON THE CODE
The Bill provides a licensing framework and specifies certain core duties and liability allocations, but much of the regulation will come from the Code of Conduct currently being drafted.
We hope the Code will specify requirements suitable for the wide variety of regulated advice that can be provided - from simple recommendations to invest in term deposits, through to detailed financial planning, portfolio construction or advice on complex or specialist products.
CHAPMAN TRIPP COMMENTS
While the changes are relatively minor, they have improved the Bill in many respects.
Those seeking to introduce a "salesperson" title to distinguish between "single provider product", and "independent", advisers have been disappointed. We think the salesperson title would have been more useful to brand unregulated selling activities, such as exempted "information only" marketing, or where the adviser makes it clear that he/she is unqualified to give advice and is acting solely as a salesperson. In those cases, where the client would not be expected to put any great weight on the advice, full regulation may not be warranted.
Practical limits on product comparisons
Helpfully, the Committee has acknowledged that advisers can give advice on single products and do not have to compare them to all products on the market, provided the scope of advice is disclosed and conflicts are managed.
We would recommend that advisers disclose the extent to which they have undertaken product comparisons, as part of explaining the scope of their advice.
Travel agents and motor vehicle dealers are in
MBIE's Departmental Report (paragraph 22 of Part A) indicates that travel agents and motor vehicle dealers will be subject to the new requirements. But, if they remain unlicensed, they can still avail themselves of the "information only" exemption and pass on the insurers' promotional material without any recommendation or opinion - they just have to refrain from saying things like "this is a good policy".
The Bill is expected to be passed this year. In the meantime:
- the Financial Advice Code Working Group will consult on a draft Code of Conduct (which has been delayed),
- MBIE will engage with consumers and industry to develop the draft regulations (including those relating to the new disclosure requirements) with consultations to follow later this year on licensing fees and levies, and
- the FMA will be engaging with the industry in preparation for licensing.
The Select Committee's report is accessible here.
Chapman Tripp submissions to the Select Committee are accessible here.
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.