FMA issues public warning to financial adviser

On 5 March 2021, the Financial Markets Authority (FMA) issued a public warning to an Authorised Financial Adviser (AFA) in relation to advice that had been given to their clients concerning KiwiSaver and other investments as a result of COVID-19 market volatility. The public warning comes after the FMA issued a formal warning last year in May 2020 to the financial adviser and discovered further concerns with the AFA’s advice process.

These warnings are meant to provide a message to the wider financial services industry of the FMA’s expectations for providing suitable advice to customers in extreme market conditions.

The FMA’s media release is available here and the public warning can be accessed here.  Also, click here to read the formal warning issued last year.

Who needs to read it? Why?

We encourage all financial advisers and financial advice providers to consider the FMA’s comments and review its advice processes, especially looking ahead to the new financial advice regime which comes into force next week on 15 March 2021.

What does it cover?

The FMA’s public warning sets out the AFA’s actions (or lack of) as well as how it led to contravening the Financial Advisers Act 2008 (FA Act). We set these out below.

What did the AFA do?

In March 2020, following uncertainty caused by COVID-19, the AFA sent a bulk email to clients urgently recommending they move their savings in KiwiSaver plans and similar investment funds to ‘low risk’ funds.

The FMA was alerted to the communication after receiving a complaint from one of the AFA’s clients and issued a formal warning. On making inquiries, the FMA found further concerns with the AFA’s advice processes such as not explaining the risks of switching investment funds multiple times within a short period.

What provisions in the FA Act were contravened?

In the public warning, the FMA noted that the AFA was in violation of the FA Act, specifically:

  • section 22, which provides that a financial adviser must make disclosure before providing personalised services to retail clients; and
  • section 33, which requires that financial advisers must exercise care, diligence, and skill that a reasonable financial adviser would exercise when providing a financial adviser service.

In the email, the AFA failed to adequately disclose the risks associated with their recommendation as well as not disclosing limitations to their advice – including, that it did not take into account personal circumstances, may not be suitable for all clients, and that clients should discuss their personal circumstances and goals with an adviser before acting on the advice.

The FMA also considers the AFA’s status as an AFA supported an expectation of “high level” of care, diligence and skill, especially given the circumstances around the COVID 19 pandemic where clients were more vulnerable.

Next steps for the FMA and the AFA?

There are no civil penalties associated with contraventions of sections 22 and 33 of the FA Act.

The FMA previously issued the AFA with a formal warning without publicly naming the AFA because of ongoing enquiries. As the investigation has concluded, the FMA felt in the interests of fair, efficient and transparent financial markets that the warning be made public and that it was appropriate to link the AFA to the prior formal warning.

The FMA was satisfied there was a low risk of similar misconduct by the AFA in the future. The FMA particularly notes the AFA’s corporation and willingness to take meaningful steps to address the concerns contributed to not taking additional enforcement action.

Moving forward, the AFA’s remediation plan is said to include corrective disclosures to clients, a review of past client advice, ongoing monitoring and oversight of service provided, and regular reporting to the FMA by independent consultants.

Our view

COVID-19 particularly highlighted the vulnerability of retail clients and the need for better conduct from the financial services sector in order to support purposes of the Financial Markets Conduct Act, including the confident and informed participation of businesses, investors, and consumers in the financial markets, as well as promoting and facilitating the development of fair, efficient, and transparent financial markets.

The public warning is also a signal to all financial advisers and financial advice providers of the regulatory tools available to the FMA to enforce compliance and hold advisers accountable for breaching its obligations. It comes at an important time as the new financial adviser regime is about to come into force next week from 15 March 2021. Though the above contraventions concern the FA Act, similar obligations and duties carry through to the new financial advice regime (which does not distinguish between personalised and class advice).

The FMA’s actions are consistent with a key feature of the FMA’s Statement of Intent published last year, which noted the priority being given to deterrence of misconduct.  We anticipate that the FMA will continue to take a proactive approach to monitoring financial advisers and financial advice providers in the years to come, especially under the new licensed advice regime.

What next?

If you have any questions in relation to this article or would like to learn more about your obligations under the new financial advice regime and discuss how we can help you, please contact one of our experts.

Who can help