All financial advisers will be required to put consumers’ interests first under regime-changing government proposals released today.
The client-first principal was among a raft of recommended changes to the Financial Advisers Act (FAA) that dispense with much of the current regulatory architecture, including product-based adviser designations and the distinction between ‘class’ and ‘personalised’ advice.
Instead of the existing triple-tiered advisory designations – authorised financial advisers (AFAs), registered financial advisers (RFAs), and qualifying financial entity (QFE) advisers – the Ministry of Business, Innovation and Employment (MOBIE) has proposed a dual-label system of ‘financial advisers’ and ‘agents’.
However, much of the current legislative complexity will be hived off to the Code of Conduct for financial advisers, which will have to be significantly redrafted to take account of its wider ambit.
“Financial advisers will be individually accountable for complying with the legislative and Code [of Conduct] obligations whereas financial advice firms will be accountable for their agents,” the MOBIE release says.
Both ‘financial advisers’ and ‘agents’ will have to comply with the client-first rule, according to the government proposals. While ‘financial advisers’ would be named in a public register, agents would remain anonymous to the public.
“In putting the interests of the consumer first they would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis,” the MOBIE release says. “In all cases, advisers and agents must put the consumers’ interests ahead of their own regardless of the differing financial incentives offered by providers.”
Financial advisers, including sole traders and ‘robo-advisers’, will be licensed as entities only, the government proposal says.
“This approach replicates the efficiencies of the current QFE model and applies it to all,” the release says. However, entity licensing in practice may vary depending on the size and nature of the advisory firm, MOBIE says.
As expected, the proposed new rules open the way for robo-options by removing the current requirement for “tailored advice” to be offered by a ‘natural person’.
The government proposals also mandate “simplified and shortened” disclosure documents that include details such as scope of service, remuneration and competence.
“In addition a client-care obligation will also be introduced, requiring advisers and agents to ensure that consumers are aware of the limitations of their advice, such as how many products and how many providers they have considered,” the MOBIE release says.
Paul Goldsmith, Commerce Minister, said disclosure templates would likely become available.
Disclosure, rather than banning or limiting practices such as hard- or soft-dollar commissions, would be the government’s weapon-of-choice in limiting consumer damage from any industry conflicts of interest, Goldsmith said.
“Sunlight is the best approach,” he said.
Goldsmith said providers would have to publish soft-dollar incentives – which were highlighted in a recent Financial Markets Authority (FMA) report on life insurance ‘churn’ – on a register.
But he said the ensuing consultation process would determine whether advisers would also have to disclose soft dollar benefits.
According to Goldsmith, the FMA insurance ‘churn’ report, as well as the earlier Melville Jessup Weaver study commissioned by the Financial Services Council, reinforced the government decision to bring all advisers under client-first obligations.
He said an exposure draft of the proposed FAA legislation should be available within “a couple of months”, to be followed by further public consultation.
The MOBIE release says the government intended “to introduce a Bill to the House at the end of 2016”.
As well as the revised FAA legislation, the government plans to amend the Financial Service Providers (Registration and Dispute Resolution) Act to tighten the rules on offshore firms registering in NZ.