The Financial Markets Authority (FMA) has highlighted the authorised body (AB) system as one potential problem area in its inaugural review of the new advice licensing regime.
Based on an in-depth probe of some 60 financial advice providers (FAPs), the regulatory monitoring report found the sector in generally good shape with a few caveats.
The study identified several “gaps, that if they remain unchecked, could escalate into poor outcomes for clients”, FMA director deposit taking, insurance and advice, Michael Hewes, says in the report.
Among other FAP compliance issues, the review uncovered regulatory leaks between the main licensing firms and associated ABs.
ABs are separate businesses but delegate regulatory compliance duties to a third-party FAP (or FAPs).
“Some FAPs with authorised bodies (ABs) had insufficient arrangements in place relating to the control and supervision of services provided by ABs,” the FMA report says. “This included a lack of supervision of policies and processes implemented and followed by each AB.”
Hewes said the review findings serve as a warning for FAPs to adopt “more rigour” in oversight of ABs operating under their licenses.
“Some FAPs seem to be taking on too many ABs,” he said. “It is a cautionary tale.”
According to the latest official data, the FMA has licensed about 1,455 FAPs with a further 1,135 ABs operating in the market.
Most ABs tend to focus on mortgage and insurance.
In addition to the AB-factor, the regulator underscored other FAP flaws including poor oversight of advisers and lack of quality assessment of advice.
“We observed that inadequate oversight is often aggravated by a lack of governance, a lack of compliance knowledge and maturity, and a lack of independence between those implementing compliance procedures and those who review compliance and detect issues,” the report says.
Aside from FAP-related problems, the FMA also found examples of poor adviser practices around communicating the advice, suitability, scope and needs analysis.
“In some instances, disclosure of commissions and incentives by advisers was inadequate or inconsistent across client documents,” the report says.
But Hewes said the report also provides examples of positive FAP and adviser practices to contribute to the ongoing professionalism of the sector.
“We encourage all FAPs and advisers to read this report to understand where their gaps might be and what are best practices,” he said.
The FMA review only covered the so-called Class 1 FAPs, which are single adviser operations, and Class 2 licences that can hold unlimited number of advisers but cannot employ ‘nominated representatives’.
Government data counts about 430 Class 1 FAPs and more than 960 Class 2 licensees as at last month.
Meanwhile, the FMA has slated the smaller universe of 55 or so Class 3 FAPs (which tend to be larger corporates) for an imminent stand-alone review.
However, some “findings and recommendations” of the just-published report “may be relevant for Class 3 FAPs”.
The-then Labour government introduced the new entity-licensing financial advice regime in March 2021 with a two-year transitional period before all FAPs required a full licence to continue in business.