Pathfinder Asset Management has joined the growing chorus of industry participants calling for the controversial ‘financial adviser representative’ (FAR) designation to be dropped from proposed legislation and greater accountability for institutional advice providers.
In its submission on the draft Financial Services Legislation Amendment Bill (FSL), Pathfinder says the mooted FAR label is easily confused with the ‘financial adviser’ (FA) designation.
“We recommend adopting two entirely distinct terms that cannot be confused,” the Pathfinder submission says. “The terms need to clearly show that one category is very restricted in (1) work they can do for clients and (2) personal liability to those clients.”
Pathfinder says FAR should be replaced by something like ‘product specialist’ or ‘product representative’.
The Pathfinder submission – authored by principals John Berry and Paul Brownsey – says board directors should be personally liable for any FAR (or whatever the final agreed label) indiscretions a la the NZ health and safety regulations.
“The Health and Safety Work Act 2015 has introduced a positive duty on Boards to exercise due diligence to ensure that the organisation complies with its health and safety obligations (which leads to personal responsibility for directors),” Pathfinder says. “… If the accountability is not at the adviser (FAR) level then it should explicitly be imposed at the Board level. If Boards are uncomfortable with this, then they can employ FAs rather than FARs.”
In a similar vein, SIFA (fomerly known as the Society of Independent Financial Advisers) in a just-lodged FSL submission says it is “very disappointed that officials and Government have not seen fit to make a clear separation between sales and advice”.
“We reiterate our statements in other venues that in our view, this legislation will give carte blanche to the institutions to ‘sell’ their own products under the guise of ‘advice’,” the SIFA submission says.
However, SIFA says the proposed FAR and FA titles themselves were less important than underlying functionality and responsibilities.
“… it’s not what these people are called that matters, it is what they are allowed to do,” SIFA says.
The SIFA submission also highlights the fact that a large chunk of the final advice regime– which will mostly operate under the ageis of the Financial Markets Conduct Act – will be designed by regulation including: disclosure; licensing; and, the new financial adviser Code of Conduct.
SIFA, currently chaired by Auckland financial planner Robert Oddy, represents over 60 non-aligned advisers.
In a submission on the exposure draft made in his personal capacity, long-standing SIFA member (and co-author of the organisation’s FSL response), Murray Weatherston, singled out the proposed ‘client first’ rule as a potential flashpoint.
” I submit that it is critically important that the statute defines what the duty means. It should not be stated as a bald principle and be left to be decided what it actually means elsewhere,” he says in the submission.
Weatherston says the current FSL proposal, which limits the ‘client first’ rule to situations involving conflict of interest, was preferable – with a few tweaks – to the ‘aspirational’ approach favoured by the Code Committee.
In its submission Pathfinder admits the ‘client first’ provision “is something of a minefield”. But the boutique funds management firm backs the Code Committee’s ‘aspirational’ model.
“The Code needs an overarching obligation of client care – whether it is expressed as ‘client interests first’, ‘promoting the interests of the client’, ‘acting in the client’s best interests’ or something else, there needs to be an overarching principle that sets the tone for all obligations,” Pathfinder says.
The Pathfinder submission also says the FSL proposal to ban ‘inappropriate’ incentives reflects “a failure of the current ‘client first’ obligation”.
“If the ‘client first’ obligation was operating effectively, then there would be no concern around provider incentives influencing adviser behaviour,” the submission says.
Pathfinder says the bar for ‘inappropriate’ is set too low in the FSL draft where the law would ban incentives that are intended to, or are “likely to have the effect of encouranging” advisers to sell products against client needs.
“We suggest that this limb is changed to ‘may have the effect of encouraging [poor consumer outcomes]’,” the Pathfinder submission says.
The deadline for FSL submissions passed last Friday with a swag of organisations – including the Institute of Financial Advisers, Professional Advisers Association and the Financial Services Council – understood to have filed close to the cut-off point. Over 70 FSL submissions had been filed as at last Friday’s cut-off.