FMA consultation on financial advice provider full licences

On Wednesday 17 June, the Financial Markets Authority (FMA) released a consultation paper detailing the standard conditions it proposes to impose on holders of financial advice provider (FAP) full licences and the classes of financial advice service that it proposes to create for this full licensing.

This consultation relates only to the second of the licensing phases under the Financial Services Legislation Amendment Act 2019 (FSLAA) regime, being full licensing. The standard conditions that FAP transitional licences are already subject to will not be affected.

The consultation paper and the consultation page containing details on how to make a submission can each be found on the FMA’s website.

Who needs to read it?  Why?

This consultation will be of significance to anyone that currently gives, or is expecting to give in the future, financial advice, as it will give an insight into what they will likely need to comply with and allow them to have input into the development process.

What does it cover?

Once the FSLAA regime is in full effect, a provider of regulated financial advice to retail clients in New Zealand will be required to hold a FAP licence. The holder of a transitional FAP licence will need to apply for and obtain a full FAP licence within two years of the regime coming into effect.

Classes of licence

The FMA proposes dividing financial advice service into three different classes for full licensing purposes, so that applications can be more efficiently assessed. These classes are based on the manner in which regulated financial advice may be provided, rather than the types of financial advice that may be provided.

The proposed classes of full licence are as follows.

  • A Class A licence will cover the service of the licence holder providing regulated financial advice to retail clients on the licence holder’s own account and/or through a sole adviser practice structure. It will not permit the use of interposed persons, authorised bodies, multiple financial advisers or nominated representatives.
  • A Class B licence will cover the service of a FAP (whether the licence holder or any authorised body) providing regulated financial advice to retail clients on the FAP’s own account and/or through one or more financial advisers. It will not permit the licence holder or an authorised body thereof to engage nominated representatives, and interposed person arrangements will require specific approved from the FMA.
  • A Class C licence will cover the service of providing regulated financial advice to retail clients in any manner, subject to the limitations in the Financial Markets Conduct Act 2013.

The holder of a Class A licence can only provide the type of service covered by that licence, while a Class B licence also covers the services covered by a Class A licence and a Class C licence also covers the services covered by a Class B and a Class A licence.

The licence fees, which will be set in regulations, will depend on the class of licence.

Standard conditions

The proposed standard conditions will apply equally to all three of the classes of licence described above. The FAP holding the full licence, as well as each of its authorised bodies, will need to comply with them.

The proposed standard conditions cover:

  • creating and maintaining records;
  • having an internal complaints process;
  • providing the FMA with regulatory returns;
  • having appropriate arrangements for any outsourcing;
  • having and maintaining adequate and appropriate professional indemnity insurance;
  • having and maintaining appropriate business continuity and technology systems;
  • meeting ongoing eligibility and other requirements; and
  • notifying the FMA of material changes.

These are set out in more detail, with explanatory notes, in the consultation paper.

Consultation

The consultation paper sets out a number of questions for submitters to address. These relate to:

  • whether the submitter agrees or disagrees with the proposals;
  • what similar processes are already in place for the submitter’s financial advice business that would meet the proposed requirements;
  • what additional costs or other adverse impacts the proposals would have for and on the submitter’s financial advice business;
  • whether the proposals would create a barrier to enter the market; and
  • whether the submitter has any other comments on the proposals.

Our view

The three classes of full FAP licence are sensible and should be easily understood by advice businesses, although the divisions are likely to be more relevant for the FMA’s own analysis of the market rather than for customer-facing purposes.

The industry will, however, need to consider the standard conditions carefully to identify whether they create any inefficiencies or unreasonable layers of cost or compliance which go beyond what the legislation already demands.

The consultation confirms that the FMA views the granting of full licences as being when it will undertake a more detailed evaluation of the applicants. This is consistent with our experience to date that, unless there are evident issues, most applicants for transitional licences are being granted those transitional licenses in a straightforward manner.

What next?

Any submissions on this consultation must be made by 5pm Friday 7 August 2020.

Full licence applications will open when the FSLAA reforms come into force, which is currently anticipated to be no earlier than March 2021.  The application form and associated guide are in development, and will be published when they are finalised.

If you have any questions in relation to the FMA’s proposals, the consultation process or the financial advice reforms more broadly, please contact one of our experts.

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