The Financial Adviser Code Committee call to loosen the proposed ‘client first’ definition in draft legislation amounted to a grab for power that would lead to “bad law”, according to veteran NZ financial adviser, Murray Weatherston.
In its submission on the Financial Services Legislation (FSL) exposure draft last week, the Code Committee, panned the move to closely define the ‘client first’ rule under a conflict of interest test.
The client first rule, embodied in Code Standard 1 (CS1), was a “paramount obligation”, the Code Committee submission says.
“It is a philosophical statement as to how financial advisers subject to the Code are expected to behave in any scenario. It is aspirational in nature,” the submission says. “Treating it as a black letter law concept is not appropriate.”
However, Weatherston, who also filed a FSL submission last week, said while ‘aspirational’ standards might fly within voluntary organisations, legal obligations required tighter definitions.
“It’s one thing to be fined a maximum of $10,000 for a breach of CS1 by the Financial Adviser Disciplinary Committee (FADC),” he said. “It’s another matter entirely when under the FMC my company could be liable for a $5 million fine.”
Weatherston said outsourcing control of the client first definition to the new Code Committee would be like creating a driving speed rule where no-one knew the actual limit until they were pulled over.
In his personal FSL submission he says:” 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.”
The submission says adopting an amendment along the lines suggested by the Code Committee “would be bad law”.
“… it certainly would not be clear and effective, as we would have absolutely no idea what was intended,” Weatherston says.
While broadly agreeing with the exposure draft proposal to define client first as a factor only when an adviser “knows or ought reasonably to know” of a conflict of interest, he said the law could do “with a couple of tweaks”.
In the submission, Weatherston says removing the conflict of interest provision relating to “any other person” and “or doing anything in relation to the giving of advice” would clarify the law.
Despite being at odds on the core issue of client first, Weatherston said many of the Code Committee submission points were valid.
For example, the Code Committee submission says the ‘any other person’ clause defining conflict of interest “is unhelpfully broad, and will be problematic for those giving regulated financial advice to apply in practice”.
The submission also calls for greater regulatory oversight of individual advisers under the proposed new law, rather than focusing mainly on the responsibilities of advisory business entities.
According to the Code Committee submission, “there is no mechanism for preventing a financial advice representative who personally acts in breach of the New Code from moving from one financial advice provider to another with no public record of past misdemeanours”.
Furthermore, the submission says the new law should do more to reduce the number of professional carve-outs for groups such as accountants or lawyers.
“The reason this is a concern for the Code Committee is that it undermines the credibility of the regime and raises concerns over the tilting of the playing field against financial advisers who are required to abide by the Code and other statutory obligations,” the submission says.
Elsewhere the Code Committee says changing the proposed ‘financial advice representative’ label – which describes individuals who can deal only in products offered by their employer or responsible entity – to something ‘provider representative’ would reduce confusion for consumers.
“Doing so would overcome the representation implied by the currently proposed term that representatives are personally delivering financial advice, instead emphasising who it is they represent,” the submission says.
Meanwhile, across the Tasman, the country’s largest – mainly bank-owned – financial advice groups copped more flak last week in a follow-up report from the regulator detailing how those institutions had “dealt with poor advisers”
In spite of some improvements, Australian Securities and Investments Commission (ASIC) deputy chair, Peter Kell, said in a release “there is further work to be done to assist in re-building consumer trust and confidence in the financial advice industry”.
The ASIC report lists a number of areas due for improvement, including:
- failure to notify ASIC about serious non-compliance concerns regarding adviser conduct
- significant delays between the institution first becoming aware of the misconduct and reporting it to ASIC
- inadequate background and reference-checking processes, and
- inadequate audit processes to assess whether the advice complied with the ‘best interest’ duty and other obligations.