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Standard financial advice provider licence conditions out for consultation

June 25, 2020

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On 17 June 2020 the Financial Markets Authority released a consultation paper outlining the proposed standard licence conditions for full licences under the new financial advice regime. 

 

There are eight standard conditions. Every licensed provider will be subject to the same standard conditions regardless of their licence class (from the three proposed by FMA). In other words, there are no concessions for providers operating under one of the simpler licence categories.

 

Record keeping and complaints processes

 

The first two proposed standards conditions relate to record keeping and internal complaints processes. These conditions will also be imposed on transitional licenses. No changes to these two conditions are proposed, although the explanatory notes have expanded. The FMA say this is to provide additional guidance on expectations, based on questions to date and findings from monitoring.

 

In our view these conditions are non-contentious. There are some points of detail around the record keeping condition that we don’t like, but we think it’s better to carry over the existing conditions unchanged than to revisit them now.

 

Outsourcing

 

Proposed condition four relates to outsourcing. The condition will require providers outsourcing a system or process that is material to providing financial advice services to have arrangements for complying with their licensee obligations. Similar conditions are imposed on other licence types. 

 

The explanatory note provides further detail as to what the FMA expects. This includes being satisfied the outsourced provider can perform to the required standard, having suitable contractual arrangements, and ensuring records held by the outsourced provider are available where required. 

 

The standard condition and explanatory note largely reflect best practice, but clarity on what the FMA considers to be material outsourcing would be useful – the examples provided aren’t particularly enlightening. 

 

Professional indemnity insurance

 

Providers would be required by proposed condition five to hold professional indemnity insurance that is “adequate and appropriate” for their retail advice business. That insurance will also need to cover the actions of anyone providing advice on the provider’s behalf. No set level of cover is imposed, but the FMA say it should match the nature, scale, and complexity of the financial advice service. 

 

While the FMA believe most of the industry already holds adequate cover, this requirement could add to the regulatory burden for those who don’t. This could include small advisers who (for whatever reason) haven’t held insurance in the past, and larger providers who are in a position to self-insure. In addition, actually securing insurance of this nature can sometimes be a problem. Where a provider doesn’t have insurance, the FMA’s intention is to waive the condition but require clients to be told.

 

Having suitable insurance cover often makes good business sense, but there are legitimate reasons not to do so. In our view, the range of options around insurance doesn’t lend itself easily to a standard condition. Ultimately the purpose of insurance is to mitigate the risk of clients being left out of pocket. We think this would be better dealt with as part of the licensing process, as a broader assessment of providers’ ability to make clients whole.

 

Business continuity arrangements

 

In the current environment it is unsurprising that business continuity has a strong focus. Proposed standard condition six will require an appropriate business continuity plan, and that cybersecurity in critical technology systems is maintained. Where a material cybersecurity breach occurs providers will have to notify the FMA.

 

The proposed explanatory note confirms that business continuity arrangements extend beyond technology systems to include wider business processes and outsourced arrangements. Recent events have shown that providers are able to quickly respond to interruption, so for many it may simply be a case of ensuring plans are up-to-date.

 

Regulatory returns, ongoing eligibility, and reporting

 

The third condition will require licensed providers to submit regulatory returns to the FMA. This is likely to be factual information, with the detail to be set later. Other licensed entities (and current AFAs and QFEs) have similar requirements. We see this as non-contentious.

 

Providers will be required by condition seven to continue to meet the licence eligibility criteria. This means, for example, that the provider’s policies, processes, systems, and controls must be kept up to date and remain effective, and that directors and senior managers must continue to be fit and proper people. The FMA say more detail on this standard condition will be included in the licensing guide (we really need to see that…), but at a conceptual level the condition makes sense.

 

The eighth condition will require providers to notify the FMA of any material change to the nature of their financial adviser service or the way it is provided. The explanatory note includes detailed guidance on what the FMA considers to be a material change. The condition would apply if, for example, a provider decides to introduce a digital advice service, which makes sense. The explanatory note confirms there’s no requirement to tell FMA of a change to the type of advice provided, the products advised on, or the number of financial advisers or nominated representatives.

 

The draft explanatory note refers to notification where there is a change to the way the provider meets the Code’s competency standards, which the FMA consider to be a change to the “nature” of the financial advice service. This isn’t particularly intuitive and we think there is scope to change the wording of either the condition or explanatory note to make it easier to follow.

 

While these three conditions are technical in nature, in our experience providers tend to trip up on these the types of conditions more often than “headline” conditions like outsourcing or insurance. It’s easy to make a change in your business and forget to tell the FMA, and even with the best of intentions documented policies can sometimes fail to keep up with business developments. Providers will need to be particularly vigilant of these requirements.

 

Now is the time to have your say

 

The FMA is seeking submissions on the draft licence conditions until Friday 7 August 2020. More information about making submissions is on the FMA website.

 

There is a lot of detail in the standard conditions. While at a conceptual level they largely make sense, there are points of detail that need further work. Anyone who intends to apply for, or operate under, a full licence needs to take the time to think carefully about how they will meet the conditions. Now is the time to speak up with any concerns.

 

The FMA’s consultation also covers the proposed full licence classes. Our article on the three proposed licence classes, and what they will allow, is here.

 

Get in touch!

 

Anthony Harper has extensive experience in licensing issues and regulatory reform, and are actively supporting clients across the sector on financial advice reform. If you have any questions, or need assistance in your business, please get in touch: nick.summerfield@ah.co.nz | 09 984 4234 | 021 242 7686.

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