Proposed changes to the Financial Advisers Bill

Haydn Wong, Partner and Charlotte Saunders, Solicitor | Friday 6 June 2008

The Financial Advisers Bill was introduced into Parliament in December last year and received its first reading in February this year. Concerns about certain aspects of the Bill prompted Commerce Minister Lianne Dalziel to take the relatively unusual step of proposing changes to the Bill to be considered as part of the Finance and Expenditure Committee's review of it. In this article, we discuss the proposed changes.

Aims and expectations

The Bill forms part of the wider financial services law reform aimed at tightening the regulation of financial advisers and financial service providers and increasing protections for members of the public when seeking financial advice.

The Bill has three aims:

• To ensure that members of the public can make informed decisions in deciding whether to use a financial adviser and in assessing a financial adviser's financial advice.

  Financial advisers will be required to disclose their experience and qualifications, certain criminal convictions, fees and potential conflicts of interest (which will replace the investment adviser disclosure obligations).

• To ensure that people acting as financial advisers have sufficient experience and expertise to provide advice in their particular area.

  The Bill requires that all financial advisers are registered and meet the criteria for receiving and maintaining registration.

• To hold financial advisers accountable for the advice that they give.

  The Bill imposes certain conduct obligations on financial advisers, including the obligation to act with integrity, to exercise reasonable care, diligence and skill, and a prohibition on engaging in misleading or deceptive conduct.

  The Bill's conduct and disclosure obligations are enforceable through a range of civil remedies, including compensation orders for compensating investors' losses and banning orders for advisers, and specific offences.

Who is a financial adviser?

The Bill regulates the giving of financial advice and the activities of financial advisers. Put broadly, only a registered financial adviser may give financial advice in the course of business to a member of the public.

The Bill then goes on to impose a number of requirements on financial advisers giving financial advice, including disclosure requirements and conduct requirements.

The key definitions that determined the scope of the Bill's application were originally cast in very broad terms, presumably to attempt to address the range of possible circumstances in which financial advice is given.

Financial advice is defined as providing a recommendation, opinion or guidance in the course of business on the financial implications of a financial decision. A financial decision, as the Bill was originally drafted, was defined to include saving, holding, investing or realising or borrowing money or property, giving a security (including a guarantee or indemnity) and making financial provision for the future.

As the Bill was originally drafted, it cast a wide net and relied on exemption-making powers to exclude any persons or classes of persons who were inadvertently captured. The cumulative effect of these definitions created considerable potential for capturing activities that most would not normally consider to be financial advice. For example, advice in relation to the sale of any asset is included, which could extend to sales of motor vehicles. A reliance on exemptions seems an inefficient way to prescribe the scope of the Bill, especially given the penalties associated with a failure to comply with its provisions.

It is therefore proposed that the scope of the Bill be narrowed in two ways:

• the Bill will only capture advice given in relation to specified "financial products"; and

• only persons who are, broadly, in the occupation of giving financial advice will be financial advisers for the purposes of the Bill.

Narrower definition of financial products

It is now proposed that advice in relation to a financial decision must relate to the buying, selling or holding of financial products. Financial products are defined as:

• securities (as defined in the Securities Act 1978); or

• any contract of life insurance, disaster insurance, general insurance and medical insurance; or

• any consumer credit contract (as defined in the Credit Contracts and Consumer Finance Act 2003).

This is a useful clarification of the scope of the Bill, which better aligns the Bill with the commonly understood scope of the regulation. In future, other products could be included within the definition of financial products through regulations.

Occupational focus

It is now proposed that a financial adviser will only refer to a person:

• whose primary occupation is to provide advice in relation to any savings or investment planning; or

• who regularly provides such advice in the course of their business.

This change is likely to be seen as more controversial. One could argue consumers should be protected from those who actually provide financial advice, regardless of whether they purport to have that as their primary occupation or regularly do so. In some respects, those who provide financial advice on an ad hoc basis may present an even greater risk in terms of competency.

If the change is adopted, based on the occupation of the adviser, consumers will need to establish for themselves whether they are dealing with a financial adviser, who is therefore required to comply with the Bill, or not.

In future, other occupations could be covered by the Bill through regulations. This proposed regulation-making power would allow flexibility in dealing with different occupations by including the ability to impose additional conditions on specific occupations.

Supervision of financial advisers – co-regulatory vs Securities Commission

Co-regulatory model

The Bill previously provided for a co-regulatory model with "approved professional bodies" responsible for the registration and monitoring of financial advisers and the Securities Commission responsible for registering and overseeing the approved professional bodies, and for ensuring the overall health of the financial advice industry. It was the approved professional bodies that were to set standards for financial advisers to join the body, monitor their members, carry out discipline, participate in dispute resolution and report to the Securities Commission.

The intention of the co-regulatory model was for each sector within the financial advice industry to establish its own approved professional body, to allow each sector to set rules relevant to the sector.

Concerns with the co-regulatory model

There are two main concerns with the co-regulatory model. First, the many high-profile collapses of finance companies and associated allegations of sub-standard financial advice have made it less palatable for the financial advice industry to be seen as largely self-regulated. While the Securities Commission would have had an overall supervisory role, when it comes to monitoring individual financial advisers the responsibility would lie with the approved professional bodies.

The second concern is that it would take too long to set up the approved professional bodies. Although some sectors already have a self-regulating body that could be adapted into an approved professional body, such as NZX for listed securities advisers, a number of sectors do not. There is a perception that in the current environment, we cannot afford to wait the length of time it may take for approved professional bodies to be set up. By moving to the Securities Commission as the sole regulator, the Commerce Minister indicated that the time required to introduce the new rules could be shortened from four years to two.

Securities Commission as the sole regulator

These concerns around industry self-regulation and timing have led to the proposal that the entire responsibility for regulation be placed on the Securities Commission. The commission will undertake all of the functions previously assigned to approved professional bodies.

It is proposed that the Securities Commission would consult with the financial adviser industry and that the commission would include at least one person from the industry.

While it appears that the co-regulatory model is no longer considered a viable option, there remain a number of issues with this centralised approach:

• how the Securities Commission will organise itself to ensure the efficient processing of registration and accreditation of investment advisers;

• how the Securities Commission will develop the registration and accreditation requirements for different sectors of the financial adviser industry and the degree of, and effectiveness of, consultation with industry in this regard;

• the complications caused by the Securities Commission acting as rule setter, exemption provider, investigator, prosecutor and, to an extent, enforcer of the requirements of the Bill and the requirements for registration and accreditation.

We have seen some response to these issues but, given the late stage of these changes and the fact that they are not supported by drafted amendments to the Bill, the devil will be very much in the detail to come.

Institutional accreditation system

The other aspect of change to the regulatory regime is the newly-introduced concept of an institutional accreditation system. Certain institutions, particularly banks, have pointed out that it would be unduly costly and onerous for all their employees to be individually registered and that it should be sufficient for the institution alone to be accredited. Under the proposed institutional accreditation system, an employee of an accredited institution would not need to be individually accredited, so long as the only financial advice that the employee gives is in relation to products offered or sold by his or her employer.

The criteria for an industry to be accredited have not yet been established so it is difficult to assess the merits and risks of this system. The Minister of Commerce has simply indicated that the institution would have to show that it has processes in place to ensure that the relevant staff have appropriate product and client knowledge and that the institution is accountable for advice it gives (for example, through a customer complaints resolution mechanism).

It is unknown what would qualify as an institution. If the definition is broad, this could lead to a quasi-approved professional bodies model for those that satisfy being, to an extent, self-regulated.

In any event, this outcome represents something of a compromise that simplifies the situation for those advisers that come within its ambit. Other different forms of adviser networks are unlikely to satisfy the requirements and will be subject to what will probably be a more onerous and costly registration regime.

As with many of the proposed changes, the robustness and effectiveness of the system will depend on yet-to-be announced details.

For an article by Banking and Finance partner David Craig on other aspects of the recent financial services law reforms, please click here.

For more information please contact:

Haydn Wong
Partner