Disclosure of commissions could be one of the major challenges for financial advisers in new regulations laid down by the Ministry of Business, Innovation and Employment (MBIE) last month, according to compliance specialist, Steven Burgess.
Burgess, Compliance Refinery director, said while the final disclosure regulations bring much-needed clarity, financial adviser businesses would have to take particular care around the new commission requirements.
Under the new rules, due to take effect on March 15 next year as the delayed Financial Services Legislation Amendment Act (FSLAA) regime finally kicks off, advisers will have triple-layered obligations covering publicly available information followed by more detailed disclosures required both at the points when the ‘scope’ of advice is known and attached to actual recommendations.
The regulations demand advisers disclose commissions “or other incentives” at both the scope of advice and final recommendations phases.
According to the disclosure rules, advisers must provide a “brief explanation” of commissions or incentives to clients covering:
- when, or the circumstances in which, it will or may be given;
- who it would be given by and to whom;
- its amount or value (or how that would be determined); and,
- the steps that have been or will be taken to manage the conflicts of interest.
“Complying with all these measures could be difficult for advisers who sell multiple product lines with many products in each,” Burgess said. “FAPs [financial advice providers] will have to be organised and have strong processes in place.”
And while the final regulations closely follow the draft proposals released last year, the signed-off version offers slight relief with an extra “materiality threshold to disclosures of limitations, conflicts, commissions and incentives to avoid over-disclosure”.
“Disclosure [of commissions/incentives is] only required if a reasonable client would expect the information to, or to be likely to ‘materially influence’ the relevant decision,” the new regulations state.
However, Burgess said the material clause could cause some confusion given the subjective judgments involved.
“We expect in most cases advisers will still have to disclose all commissions and incentives as per the regulations – particularly as the ‘materiality threshold’ has yet to be tested,” he said.
Elsewhere MBIE notes the updated regulations also further reinforce the need for advisers to disclose commissions and incentives at both the scope and final advice stages.
MBIE says the new rules include examples “to clarify that a specific commission figure must be disclosed at the point of giving advice if known, even if the range was already disclosed earlier and the final figure is within the range”.
However, Burgess said despite some inevitable fish-hooks, the new rules should “make disclosure more meaningful and timely”.
“We all understand the limitations of disclosure and how clients interact with disclosure. These new regulations aim to provide better information for clients when they need it,” he said. “One great feature of this regime is that if a client has already received disclosure and there are no material changes, disclosure is not required to be provided again.”
Generally, the new disclosure regulations should simplify the process for most advisory firms, Burgess said – although the experience will vary for existing authorised financial advisers (AFAs), registered financial advisers (RFAs) and those coming into a regime for the first time.
Most AFAs and RFAs – governed, of course, via the new Financial Advice Provider (FAP) structure under FSLAA – would be able to adapt many existing disclosure practices for the new regime, he said.
Nonetheless, some new disclosure requirements would require extra effort, Burgess said, including complaints-handling.
“The changes here are significant and will require integration into your complaints-handling process and record-keeping,” he said. “If a complaint is not resolved within two days adviser must provide the client with: an overview of the internal complaints process; and, certain information regarding the disputes resolution scheme and its processes.”
MBIE notes the final regulations also ease some requirements of the earlier draft covering disclosure of third-party implementation fees, naming of product providers and the need to supply ‘hard copy’ documentation to clients.
The updated version as well removes the “requirement to provide individual contact details and to identify individual nominated representatives”, MBIE says.
“This is in response to feedback that the previous requirement would have added compliance cost and added little value, particularly in high-volume straightforward advice situations.”