Will the financial advice changes affect you?

The Economic Development, Science and Innovation Committee has reported back on the Financial Services Legislation Amendment Bill (FSLAB).

FSLAB will amend New Zealand's financial advice laws, by replacing the current stand-alone Financial Advisers Act 2008 with new rules contained in the Financial Markets Conduct Act 2013. It will remove some of the arbitrary distinctions and rules that currently exist, including the rules that prevent personalised retail robo-advice other than through the FMA exemption. All advice will be governed by a new Code of Conduct, which will be central to the regime.

FSLAB also makes some changes to financial service provider registration and dispute resolution requirements, mainly designed to prevent misuse of the register.

What's changed?

The reported back Bill contains a range of amendments, but most relate to points of detail. Some of the changes are significant, but there are no wholesale changes to the overall design of the regime.

The key changes are as follows:

  • Advice on switching funds within the same scheme (for example, from a conservative to balanced option within a KiwiSaver scheme) will now explicitly come within the regime. From an investor perspective this makes sense, as a decision to switch funds can be just as important as a decision to change schemes.
  • If their licence permits it, financial advice providers will be able to sub-contract giving advice to another entity, and to engage individuals through an intermediate entity – with those entities having duties and potential liability for that advice. These changes will provide flexibility around structuring and distribution that could be useful for those that can get their heads around (and get comfortable with) the matrix of duties and potential lability that arise. One interesting point of detail in the new provisions is that the sub-contracting powers apply to advice given to the 'lead' financial advice provider's clients – when in practice the ultimate recipients of advice may not have any direct client relationship with that provider.
  • Financial advice providers will need to have processes and controls that limit the nature and scope of advice that nominated representatives give, and allow the provider to regulate what advice is given by nominated representatives and in what circumstances. They will also need to ensure nominated representatives comply with those processes and controls, and monitor nominated representatives and the advice they give. The more detailed rules reflect the policy intention that nominated representatives will have a limited discretion, which sets them apart from financial advisers.
  • A minor change to the duty to prioritise clients' interests clarifies that a provider will discharge their duty by taking all reasonable steps to ensure that advice is not materially influenced by the provider’s own interests, or the interests of any connected person. The previous wording left open the possibility that providers would have to do more to satisfy this duty, so this change (while subtle) should provide some comfort.
  • A new regulation making power will allow planning advice about other financial products (like insurance, for example) to be brought within the regime. If regulations are made, these would join designing an investment plan as being financial advice.
  • During the transition period, entities who previously provided class advice through non-registered individuals will able to nominate individuals to continue providing class advice. Previously only QFEs would have been able to do so. That had been seen as a key advantage that QFEs would have had over other entities during the transitional period.

Changes to the financial service provider registration rules water down the proposed requirement that those wishing to register must provide financial services to persons in New Zealand (or need to be licensed in New Zealand). They will allow registration by an entity that comes within the scope of New Zealand's AML laws. This means those who genuinely provide financial services from New Zealand into other counties, without servicing New Zealand clients, will be able to maintain a registration – but it also leaves open some potential for misuse of the regime.

Finally, the proposed requirement that dispute scheme providers notify regulators of certain matters has also been narrowed. It will only apply to material breaches of the law, and not to material complaints.

Next steps

It's great to see progress on FSLAB and to have a feel for the likely final form of the Bill, which should be passed later this year. However, industry needs the Code of Conduct to understand exactly how the regime will look and to start planning for the change. It's now looking like that won't be in place until the end of this year at the earliest – which in turn pushes out commencement of the regime.

Get in touch!

When looking at a reported-back bill it's always fascinating to see what submissions are picked-up, and what ones aren't. There are some useful changes that could have been made, but weren't. That said, FSLAB is still a significant improvement over the current rules, and should improve the quality and accessibility of financial advice in New Zealand.

If you have any questions, or need advice on the changes and how they will affect you, please get in touch.

Nick Summerfield website2

Nick Summerfield

Partner

E: nick.summerfield@ah.co.nz

P: +61 9 984 4234

M: +64 21 242 7686

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