Financial Adviser Changes – Select Committee Report Released
Yesterday the Economic Development, Science and Innovation Committee released its eagerly awaited Report on the Financial Services Legislation Amendment Bill (FSLAB).
The Select Committee’s report is lengthy, with a range of amendments recommended. Whilst the changes do not amount to a complete re-write of the FSLAB, there are a number of key areas industry participants should be aware of, which we discuss below.
Who needs to read it?
All businesses involved in the provision of financial advice, financial services or financial products.
What does it cover?
The Report recommends the following key changes to the FSLAB:
Key additional changes to the Financial Markets Conduct Act 2013 (FMC Act):
Amendments to the definition of “financial advice” in section 431C so that the definition now includes, where a person:
- makes a recommendation or gives an opinion about switching funds within a managed investment scheme. Previously, the FSLAB was unclear on this point as switching funds is not an issue of a new financial product. This change makes it clear that product providers (or other parties) will need to comply with the new financial advice regime where giving opinions or making recommendations on fund switches.
Our view: This is a sensible clarification from the Select Committee that provides greater certainty on when such fund switching discussions will be subject to the new financial advice regime.
- provides financial planning of a kind prescribed by regulations. The Select Committee considered that the definition of “designs an investment plan for a person” could be overly narrow, and flexibility is required in case it is decided the definition should capture other planning advice, such as insurance advice. However, the Select Committee did not want to simply expand the definition in case of inadvertent capture of other services, such as budgeting services. The new definition by regulation allows flexibility in this regard.
Our view: These suggested changes give greater flexibility to appropriately tailor the meaning of investment plan, the equivalent of which (“investment planning service”) is a subject of confusion under the current Financial Advisers Act 2008 (FA Act) regime.
- Changes to include within the definition of financial advice service circumstances where a person engages an entity (rather than an individual) to give regulated financial advice on its behalf, for example through a sub-contracting arrangement. The changes also allow a provider to engage nominated representatives through an interposed person (i.e. a separate entity). These changes are subject, where the person giving the advice is an entity, to the conditions of the financial advice provider’s licence authorising the provider to engage the entity to give the advice. Consequent changes to the liability for breach of duty provisions (section 431G) mean that an entity giving advice on behalf of another person can be civilly liable for the contravention. Other consequential changes have been made to the duty provisions to reflect the above changes.
Our view: These are significant changes. They permit providers to contract out, under their licence, the provision of financial advice services to third party entities, allowing for greater flexibility in structuring financial advice businesses and the distribution of financial advice. However, providers contracting out the provision of financial advice need to understand they remain responsible for the advice provided, and for compliance with the amended duty provisions.
- Amending the duty in section 431J to give priority to client’s interests to clarify that a provider discharges this duty by taking all reasonable steps to ensure that the advice is not materially influenced by the provider’s own interests, or the interests of any person connected with the giving of the advice (for example, a person engaged by the provider).
Our view: This is a sensible change which should go some way to reduce industry concerns, by providing greater certainty as to the scope of the duty to give priority to client’s interests.
- Amending section 431Q to clarify that nominated representatives have limited discretion in giving financial advice. These amendments require providers engaging nominated representatives to have in place processes and controls that limit the nature and scope of advice that nominated representatives can give, and that allow the provider to regulate what advice is given and in the circumstance in which it is given. Providers are also required to have processes and controls to ensure that advice given by a nominated representative is commensurate with their competence, knowledge and skill.
- Making changes to the exclusions from regulated financial advice, in the new Schedule 5 of the FMC Act, to further limit the exclusion for lawyers, journalists, accountants and other occupations to advice given in the ordinary course of carrying on that occupation and that is an ancillary part of carrying on the principal activity of that occupation, being an activity that is not the provision of a financial service.
Changes to the transitional provisions
- Previously clause 75 in the new Part 6 of Schedule 4 of the FMC Act only permitted licensees who were qualifying financial entities (QFEs) before the start of the transitional period to nominate individuals as nominated representatives under a transitional licence. The Select Committee has suggested amending clause 75 to also allow entities registered on the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act) to appoint nominated representatives to provide class advice (in the manner they can under the FA Act) during the transitional period. This will allow non-QFE businesses to continue to provide class advice through their staff during the transitional period, while still being subject to the conduct and care duties of the new regime.
- Inserting a new clause 76(1A) in the new Part 6 of Schedule 4 of the FMC Act that provides that whether a person has a transitional licence or not must be disregarded by the FMA in deciding whether the person should be granted a full licence.
Key additional changes to the FSP Act:
- The Select Committee recognise that the proposed changes in the existing FSLAB to the “place of business test” in the current FSP Act are important, but that they could result in a loss of oversight of some providers that genuinely provide services from New Zealand to persons overseas. The Select Committee accepted that the Government needs to be aware of these providers, to comply with international standards on money laundering and the financing of terrorism. The Select Committee has included an additional paragraph 7A(1)(e) that provides that the FSP Act applies to a reporting entity to which the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) applies.
Our view: This is a positive change for legitimate New Zealand-based financial services exporters. It offers another avenue for registration for compliance-minded New Zealand businesses that export financial services, and who don’t have New Zealand clients and aren’t required to be licensed. However, it will be interesting to see whether essentially overseas businesses, with a limited New Zealand presence, may use this change as an opportunity to seek or to retain their FSPR registration, by becoming AML/CFT reporting entities (which is a simpler requirement than, for example, obtaining a licence from the Financial Markets Authority (FMA)). This change may also result in significant additional resourcing requirements for the AML/CFT supervisors.
- Including additional powers for the Registrar to require a person to provide information for the purposes of ascertaining whether the FSP Act applies to that person, and to deregister persons that do not provide that information.
- Including additional considerations that the Registrar must have regard to in considering whether a person’s failure to comply with a duty or provide information is sufficiently serious to warrant deregistration.
- Amending the duty on providers of approved dispute resolution schemes to inform regulators (the Reserve Bank, the FMA and the Commerce Commission) of a possible breach of relevant financial markets laws, so that that this duty only applies where the scheme provider has reasonable grounds to believe that a person has contravened, or is likely to contravene, the relevant laws in a material respect. The Select Committee also inserted a new regulation-making power to allow regulations to prescribe additional instances in which information must be shared.
Our view: This is a sensible limitation on the reporting requirements for approved dispute resolution scheme providers.
Our view of the changes
As expected, the Select Committee has not made major changes to the FSLAB. Rather, on the whole, its recommendations are sensible tweaks to address some of the issues raised during the Select Committee process. Many of the issues raised by submitters have not, however, been addressed.
The FSLAB remains on track to be passed later this year, in accordance with its original timeline. However, given recent announcements from the Code Working Group, there is uncertainty regarding the timing of the Code of Conduct for Financial Advice Services (Code). The Code is now anticipated two to three months into next year, around three to four months later than the original timeframe. If this delay eventuates, it is likely to push back the date for the new regime to take effect, from its original timing of October 2019.
If you have any questions in relation to the FSLAB or the changes suggested by the Select Committee, please contact one of our experts.