The move to entity licensing will see most financial adviser regulation devolved to the Financial Markets Conduct Act (FMC) under draft reforms released last week.
In an “omnibus bill” exposure draft published last Friday by the Ministry of Business, Innovation and Employment (MBIE), the Financial Services Legislation (FSL) will replace the troubled 2008 Financial Advisers Act (FAA) while amending both the FMC and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPR).
According to the MBIE explanatory document, shifting advice regulation to the FMC is “due in part to the move to firm-level licensing for financial advice”.
“Firm-level licensing for certain financial market services is already a feature of the FMC Act, so regulating all market services under the FMC Act avoids duplication,” the MBIE document says. “Recognising that there are some unique features to the regulation of financial advice, the FMC Act will include some new sub-parts which relate solely to financial advice.”
Licensing advice firms rather than individuals – as per the current system – will shift NZ closer to the Australian model of adviser regulation. While the MBIE exposure draft closely follows the FAA reform proposals released last year, the detail includes a number of tweaks.
For example, the draft legislation drops the ‘agent’ designation for pure product salespeople for the more anodyne ‘financial advice representative’.
“We note that the term ‘financial advice representative’ replaces the previously announced term ‘agent’,” the MBIE release says. “This change responds to concerns about the term agent which is currently used differently in the financial advice industry.”
Elsewhere, the exposure draft both simplifies and widens the definition of ‘financial product’ that will be caught under the legislation – abolishing the cumbersome category 1 and 2 labels of the FAA in favour of a single, catch-all bucket while also handing the Financial Markets Authority sweeping powers to bring products into the regime.
The exposure draft goes further than the original proposals, too, by including wholesale advice in the ‘client first’ obligations.
“This aims to create a level playing field whereby all advice is subject to the same broad conduct standard,” the explanatory note says. “MBIE is seeking feedback through this consultation document on the implications of this change.”
Further, the exposure draft says advisers with a wholesale client base will have to meet retail obligations for all advice given if just one of the clients falls under the retail definition.
The government has also slated soft dollar commissions for investigation in the FSL explanatory note.
“MBIE has considered whether there should be formal reporting of soft-commissions (such as trips abroad and other non-monetary incentives). For example, this could take the form of a public register of soft-commissions paid by providers to advisers,” the exposure draft document says.
“In the first instance, the FMA will undertake further work on the impact of soft commissions on advice. This work will inform future policy decisions on whether additional disclosure and/or other actions are needed in relation to soft commissions.”
Submissions on the proposed adviser legislation close on March 31.
James Hartley, MBIE head of financial markets policy, told Investment New NZ earlier in February the FSL should be introduced to Parliament prior to the September election.
The MBIE explanatory document indicates the legislation should be passed and regulations complete by “2017/2018”.
Under the MBIE timetable, the governing new Code of Conduct for adviser should be in place by August 2018 with “existing market participants” to secure transitional licences in time for February 2019.
“Everyone must be fully licensed,” by February 2019, according to MBIE estimates.