The Financial Markets Authority (FMA) has signaled the need for greater regulatory scrutiny over advisers who recommend direct equities.
In a consultation paper published last week, the FMA says advisers must source credible research and clearly document the process when urging clients to buy listed shares or take up initial public offerings (IPOs).
Linking the proposals to suitability obligations under the new Code Standard 3, the regulator says clearer guidance is now necessary as advisers “do not always have access to expert research for IPOs or listed equity securities – in particular, for smaller market capitalisation companies”.
“We do not intend to discourage those giving financial advice from giving opinions or recommendations not backed by expert research, as this could result in New Zealanders having less access to financial advice they may otherwise benefit from, and lower levels of interest – and liquidity – in smaller market capitalisation stocks,” the FMA consultation paper says.
“However, there must be reasonable grounds for all financial advice, including advice given in the absence of expert research. IPOs and listed equity securities (particularly smaller market capitalisation stocks) can have distinctive risks which often require time and direct engagement with the company to identify and assess, to gain an adequate grasp of what the company does, what drives its value, and its capability to manage the risks it faces.”
While the FMA takes a flexible line on the source and content of equities or IPO material used to justify an adviser recommendation, it says any research “does need to be fit for purpose”.
“It should also be in writing and documented to a standard the financial advice profession would expect for the nature and scope of the advice and the circumstances,” the paper says.
The FMA consultation also sets out examples of when research may not be necessary to back direct share advice (such as recommending clients don’t go ‘all in’ on a single stock).
Submissions are due by August 5 before the FMA publishes a final guidance, its preferred instrument for steering industry through regulatory grey areas.
Last week, for instance, the regulator issued a new guidance on compliance with financial statement reporting obligations, flagging a few “areas of interest” over the next three years.
The FMA financial statement oversight powers apply across all entities regulated under the Financial Markets Conduct Act including licensed fund managers.
Notably for the funds management sector, the regulator will closely monitor climate-reporting and related party disclosures in financial statements during the next “reporting cycle”.
“Adequate disclosure of related party transactions is critical for investors to understand the relationships the entity has and the impact these relationships and transactions have on the business,” the FMA note says.
“Although related party transactions may occur in the course of normal business, because the entities are not entirely independent of each other, the transactions may carry a higher risk of material misstatement.”