A wide range of entities could provide online advice under government proposals to rewire the Financial Advisers Act (FAA).
In its FAA review ‘Options paper’ released last week, the Ministry of Business, Innovation and Employment (MOBIE) has given online advice – known colloquially as robo-advice – a ringing endorsement while proposing to extend the ambit of the legislation beyond the current human limits.
“The FA Act requires advice to be provided by a natural person and is therefore a barrier to the provision of online (or ‘robo’) advice,” the MOBIE paper says. “Internationally robo-advice has a rapidly growing market share and is increasing the accessibility of advice for young, internet-savvy investors who may otherwise struggle to access advice due to the smaller size of their investments.”
Robo-advice could be offered by financial institutions under the auspices of a qualifying financial entity (QFE) or by financial adviser businesses, the MOBIE paper says, following the proposed law change.
The MOBIE paper is generally upbeat about the potential for robo-advice to deliver financial guidance to a broader wedge of the NZ population than the traditional advisory businesses have to date. However, humans would retain liability for the actions of their advice robots, the FAA review says.
“To provide for robo-advice, we consider that a licensing regime of online financial advice platforms is required in order to ensure accountability and consumer redress,” MOBIE says. “Such a regime also provides for flexibility since regulatory conditions could be imposed through the individual licensing process.”
While banks may be the primary beneficiaries of the proposed robo-rules, the FAA options paper says other providers, including financial advisory firms could also go down the automated-advice avenue.
But the licensing regime for advisers does look set for a shake-up with MOBIE favouring a one-name-fits all approach for the industry rather than the current dual label system.
As well as abolishing the distinction between registered financial advisers (RFAs) and authorised financial advisers (AFAs), the Options paper floats the idea of advisory businesses holding the licence as opposed to individuals – similar to the Australian dealer group model.
“Under entity licensing, the business would be responsible for ensuring that their employees or nominated representatives comply with the relevant requirements and for engaging with the regulator,” the paper says, outlining its preferred option.
However, entity licensing could exist alongside licences for individual financial advisers, which may act as an aspirational professional designation
“This option would provide advisers with a higher status to aim for and could increase professionalism of the advice industry,” MOBIE says.
The move would somewhat complicate MOBIE’s preferred option to create one class of financial adviser – all of whom would be subject to the same requirement to put clients first – along with another group of ‘salespeople’ who would face less onerous client interest obligations.
In another iteration, MOBIE proposes creating an additional class of ‘expert financial adviser’, possibly adding EFA to the 12 acronyms listed in the paper’s preamble.
“Expert Financial Advisers would be those who could provide the most complex or high-risk financial advice services,” the Options paper says, adding the definitions of EFA activities would need further clarification.
MOBIE also says a revised FAA could do away with the current dual-category financial product system as well as the distinction between ‘class’ and ‘personalised’ advice.
Despite admitting the boundary between ‘wholesale’ and ‘retail’ clients can be confusing, the paper recommends keeping the current definitions but potentially moving to an ‘opt-in’ regime.
Commissions on financial products would probably be maintained under the proposals as they stand, however, the MOBIE does not rule out any ban or restriction of conflicted remuneration.
In a release announcing the Options paper, Commerce Minister, Paul Goldsmith, said: “Current rules around the disclosure of commissions and potential conflicts of interest are inconsistent. The options paper canvasses different approaches to achieve greater consistency across the board.”
The complex series of MOBIE proposals are grouped under nine ‘discrete’ headings – including advisory restrictions, robo-advice, disclosure, competency, and, ethical obligations. MOBIE then recombines the options into a series of three ‘packages’
“Importantly, while we are seeking feedback on which, if any, of the three packages are preferred, none are set in stone,” the MOBIE paper says. “They are intended as a basis for discussion with stakeholders about the pros and cons of each and what may or may not work in practice.”
The government has listed two deadlines for submissions on the FAA proposals: January 29, 2016, for feedback on items covering misuse of the Financial Services Providers Register; and, February 26 for all other review components.