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217. An approved professional body is the industry voice in the co-regulatory model. The approved professional body uses its expertise to come up with industry-set standards.

218. The approved professional body provides an initial point of contact for intermediaries - and will act as the frontline supervisor. The Securities Commission then has the responsibility to apply the objectives of the Act and the co-regulatory model to balance the industry perspective (this could include considering whether or not standards act as barriers to entry, or whether standards are too low, when compared to other approved professional bodies). Approved professional bodies and the Securities Commission will share responsibility for administering the regime and for achieving the objectives of the legislation.

219. An approved professional body represents a range of similar intermediaries. The similarity can be due to industry sector or practices (which may be independent of industry or similar across a range of industries). Approved professional bodies don't have to replace self regulatory organisations - it's just that membership of an approved professional body will be mandatory for all high level financial intermediaries.

220. This section details the functions and rules of approved professional bodies.

221. Ministry officials have provided this information in an attempt to raise all relevant issues for prospective approved professional bodies. Any suggested options are not intended to be prescriptive.

222. Legislation is a useful way to set the entry requirements and the functions of an approved professional body. For the Minister to approve an approved professional body, the approved professional body would have to:

• Meet entry requirements;
• Have rules that describe the approved professional body's functions, and describe how the approved professional body will carry out its functions; and
• Comply with its own rules.

Entry Requirements

223. It is likely that an approved professional body will have to meet "fit and proper" requirements in order to accord with the FATF requirements on financial providers. This would require an entity to have a sufficiently rigorous corporate governance structure which could include:

• Access to trained staff;
• Audits to verify its processes;
• A governing board which has suitable experience, qualifications and systems to manage internal conflicts;
• Issuing an annual report to the Securities Commission;
• Explaining its role to consumers;
• Having and maintaining relationships with existing approved professional bodies in relation to sharing information; and
• Recognising cross sector competencies and practise standards from other approved professional bodies.

224. Ministry officials are considering whether there should be:

• a set corporate form for approved professional bodies; or
• some restrictions on some behaviour (e.g.), making a large profit at the expense of financial intermediaries - to address this, it is possible that approved professional bodies may be required to be "non-profit".

225. It will be up to each approved professional body to show the Securities Commission that they can act as a regulator for their area.

226. There has been some comment on "dealer" groups in relation to the Australian introduction of the Financial Services Reform Act 2001 (Aust). A dealer group is a group of advisers who have chosen to group together to share business practices. Approved professional bodies are not dealer groups, as approved professional bodies will act as co-regulators to set, comment on and report on industry practice.

Lobbying

227. The Taskforce suggested that approved professional bodies should not lobby.

228. Ministry officials think it important that approved professional bodies can still comment on matters such as law reform without fear that this may be caught within any restriction on "lobbying".

229. Subsequent feedback from stakeholders also suggested that approved professional bodies did still want to comment on matters affecting members.

230. Ministry officials consider that a restriction on lobbying is likely to be difficult to enforce, but that it would be useful to require approved professional bodies to consider how they act on their members' behalf.

Approved Professional Body to Set Functions

[Ministry officials have provided this information in an attempt to raise all relevant issues. Any suggested options are not intended to be prescriptive].

231. Legislation is likely to require an approved professional body to have rules, and to have its rules approved by the Minister. These rules will detail how that approved professional body can carry out its functions.

232. These functions may include:

• Registration - keeping a list of financial intermediaries to know who its members are and to monitor them.
• Competency - setting initial and ongoing standards for financial intermediaries for practice in that industry.
• Conduct - setting accepted practice standards which are in addition to those standards set in statute.
• Reporting and monitoring financial intermediary members - notifying the Securities Commission when an approved professional body becomes aware of breaches against statutory standards and meeting the reporting obligations to the Securities Commission (perhaps through an annual report).
• Discipline - having the ability to discipline members who breach approved professional body standards, and assisting the Securities Commission deal with breaches of statutory standards.
• Disputes - having the ability to deal with consumer complaints.

233. There is likely to be a requirement to make the approved professional body rules publicly available.

234. The approved professional body rules will have legislative backing in their application as it will be an offence for a member of an approved professional body to breach the approved professional body rules, for a high level intermediary to practise without being a member of an approved professional body, or for an approved professional body to not comply with its own rules. It is also likely to be an offence to hold yourself out as an approved professional body unless you are an approved professional body.⁶⁴

235. It is envisaged that approved professional body rules could include rules on:

• Its corporate structure including information on:
  • Corporate (or other) form;
  • Details of entities involved in the structure (e.g.) details on board members and directors;
  • Infrastructure;
  • Governance;
  • Funding;
  • Accounting to members; and
• The approved professional body functions (see paragraph 232) and how the approved professional body will carry out these functions (discussed below).

236. To carry out these functions and to set its rules, it is envisaged that the approved professional body would require the legislative power to collect information from financial intermediaries and be required to adhere to its own rules

237. It is likely that the legislation would grant approved professional bodies exemption from liability for the exercise of its legislative functions, except in the case of bad faith, or negligence.⁶⁵

Functions of Approved Professional Bodies - Register / List

238. The first function for an approved professional body is to know who its members are.

239. Ministry officials have assumed that the rules of the approved professional body will:

• Define its proposed membership; and
• Detail how the approved professional body plans to keep this information up to date and accurate.

240. The approved professional body could be required to keep a list to pass onto a public body responsible for collecting this information.

241. There are a number of purposes for keeping this information:

• For the benefit of the approved professional body - in identifying and monitoring its members.
• For the benefit of the Securities Commission - in identifying and monitoring the approved professional body to which financial intermediaries belong.
• For the benefit of the consumer - in knowing if an intermediary is a member of an organisation, and to know which dispute resolution methods are appropriate.

242. The information to be collected by each approved professional body from each high level intermediary, and provided to the public body, would be:

• name of high level intermediary;
• trading name;
• address (this could include physical as well as any internet address advertising services);
• approved professional body to which they belong;
• name of the area in which they are competent to provide advice. This means that there may have to be a set recognised category of competencies (see paragraph 245 below); and
• information on the place to go for dispute resolution.

243. Once the approved professional body has passed this list onto the public body, the approved professional body would also be free to have this list on their own website to promote their own members. The approved professional body would have the responsibility of making sure that both lists were up to date through regular communication with the public body.

244. This register / list run by the public body would also have a list of approved professional bodies to which high level financial intermediaries would have to belong.

Labelling

245. In light of the number of intermediaries practising across a range of areas, it may assist consumers and intermediaries if approved professional bodies could agree on a set list of categories of competencies. This would assist intermediaries in helping them decide which approved professional body to join, and would help consumers know the set area of expertise of their intermediary.

246. This would not be intended to affect existing separate brands of qualifications (e.g. CFP, CFA) rather it could be a useful way to introduce a common way of describing an area of practice. On this basis, the Ministry is keen to test reaction to the following categories:

• General insurance
• Life insurance
• Health insurance
• Mortgage broking
• Financial planning

247. Ministry officials are keen to hear views on whether it would help to classify competencies by general subject area or whether this should be left to the approved professional body to accurately define in its rules.

Functions of Approved Professional Bodies - Competency Setting

248. One of the most important roles of the approved professional body will be to set competency standards that prospective high level intermediary members must meet.

249. "Competency" refers to the initial required level of skill for an intermediary to practice in a particular sector, as well as the continuing level of skill that intermediaries are required to maintain.

250. It will be up to industry to identify what these initial and ongoing skills are. It would not be appropriate for government or the government regulator to set competency standards, as this is an area where approved professional bodies have the experience and expertise.

251. The industry will provide the frontline experience and expertise of what is required to practice in that area, and the Securities Commission and Minister will have the oversight to compare competency settings between approved professional bodies in light of the objectives of the Act and the co-regulatory model. The Minister and Commission will need to ensure that competency standards are suitable, but that they do not impose unnecessary barriers to entry.

252. It is anticipated that industry would develop competency standards or use existing standards to ensure that the objectives of the regime are met.

253. Competency standards will not be listed in legislation - rather the legislation will place the obligations on high level financial intermediaries to comply with approved professional body rules, which will set the competency standards.

254. It would be open for an approved professional body to have different competency standards for different parts of the industry - for example, an approved professional body could require those who have just graduated to show some kind of tertiary level specialisation. Those who have experience in the industry for some time may have to show a lesser qualification, or perhaps a practical test to be run by the approved professional body.

255. The approved professional body will have to maintain records of the initial and ongoing competency hurdles attained by the intermediary.

256. Ministry officials have received a number of comments on "grandparenting", the process under which intermediaries who have spent time in an industry are allowed to practise without having to meet new standards.

257. While there is likely to be a transition period to allow intermediaries to meet new standards, the Taskforce suggested that there should not be grand parenting on the basis grand parenting was to remain then this would create double standards that rewarded length of time in the industry. However, there is a risk that without grand parenting people may leave the industry.

258. If an approved professional body considers it to be appropriate, an approved professional body could acknowledge and recognise the value of an intermediary's experience as one part of a measure of competency by setting a way to measure experience to quality of services - (e.g.) conducting site visits/inspections to ensure that length of time does equate to good service. Again, this competency measure would be up to approved professional bodies to set (in a frontline role) and to discuss with the Securities Commission (as the oversight regulator).

259. Another competency setting measure that recognises experience could be through apprenticeships - it would be open for an approved professional body to recognise time spent by a potential financial intermediary working with a fully competent financial intermediary as a measure of competency, and to discuss this with the Securities Commission when formulating the approved professional body rules.

Functions of Approved Professional Bodies - Conduct standards

260. In addition to competency setting, an approved professional body could also set codes of conduct for high level intermediary members. These codes of conduct are in addition to the statutory standards discussed at paragraph 129.

261. The approved professional body codes would not be in legislation, but financial intermediaries would have a statutory obligation to comply with the approved professional body rules.⁶⁶ This leaves the approved professional bodies with more room to amend their codes of conduct under the process described at paragraph 305.

262. Ministry officials note that the approved professional body could, if it wishes, include the following matters in their codes of conduct:

• business practice - for example, how an adviser conducts his/her business - how they maintain records of advice, client files, professional indemnity insurance;
• advice giving procedures (e.g. needs analyses / risk assessments);
• ethical standards;
• how an intermediary would address conflicts of interests between an intermediary's obligations to the client and any product provider / other entity;
• procedures for intermediaries to comply with statutory disclosure obligations;
• intermediaries to adopt risk management practises; and
• processes for dealing with client funds or acting as client nominee.

263. An approved professional body may choose to address risk management by requiring professional indemnity insurance of all its members. This would then ensure that, provided that an entity was not in breach of its insurance, there would be some means of protecting consumers and the intermediary.

Functions of Approved Professional Bodies - Monitoring and reporting

264. An approved professional body may have responsibility for monitoring financial intermediary members to see if they are meeting approved professional body standards, and to report this to the Securities Commission, as well as reporting on the status and operations of the approved professional body itself.

265. The level of monitoring and reporting could be set by approved professional bodies as part of their rules and then approved by the Minister on the recommendation of the Securities Commission. Alternatively, there could be some consistent monitoring and reporting requirements specified in legislation.

Monitoring

266. There are a range of options that approved professional bodies could consider as part of their monitoring processes for financial intermediary members, each with different costs attached. Monitoring processes could either be set by approved professional bodies or contained in regulation.

267. The Ministry is keen to ensure that financial intermediaries adhere to standards, so that industry and consumers can benefit from advisers who meet set standards of behaviour, but not to the extent that monitoring compliance results in excessive fees for consumers or excessive administrative resources or time restraints on intermediaries.

268. Monitoring options could include:

• Low cost options (e.g.) requiring financial intermediaries to attest that they have complied with a set of standards. This option relies on financial intermediaries understanding their obligations and behaving honestly and gives intermediaries responsibility for their actions. This could be complemented by relying on complaints from consumers and industry.
• A potential higher-cost option is regular physical site inspections run by approved professional bodies. This option could provide greater assurance to consumers, approved professional bodies and the Securities Commission that financial intermediaries are complying with their set obligations.
• Other monitoring options could include consumer and industry surveys including shadow shopping/mystery shopper tests⁶⁷ and random site visits. The cost of this monitoring can vary, as can the benefit, depending on the range of questions asked and the sample size, and the frequency and the extent of random inspections. This could be undertaken by either approved professional bodies or potentially the Securities Commission.

269. Imposing significant monitoring obligations on approved professional bodies could be costly for them, particularly in their start-up phase when they will not have a financial base from member fees. The costs of imposing monitoring requirements will need to be weighted against the benefits of that monitoring.

270. The Ministry is considering ways to deal with these costs. One option is to take a phased approach to the implementation of monitoring requirements, starting with lower-cost approaches with the potential to strengthen those requirements at a later point. Another option is for the Securities Commission to undertake some of the initial monitoring, for example, the shadow shopping.

Reporting

271. An approved professional body may have responsibility to report to the Securities Commission on:

• levels of compliance by financial intermediaries; and/or
• on the operation of the approved professional body itself.

272. This reporting is suggested to be necessary to ensure that there is a close relationship between the approved professional body in its frontline role, and the Securities Commission in its oversight role. This reporting could occur at regular intervals (e.g. - 6 monthly or annually) as well as ad hoc reporting if matters arise, and could be specified in regulation to ensure consistency across approved professional bodies.

Regular Reporting

273. Regular reporting could take the form of an annual report which could include details on:

• membership numbers;
• number of disciplinary matters considered;
• number of disputes reported;
• approved professional body corporate governance details;
• financial accounts for the approved professional body;
• any other details about how an approved professional body is complying with its statutory obligations and functions; and
• any other details raised by submitters.

274. This report could be delivered to the Securities Commission and made public, unless there was any commercially sensitive information.

Ad Hoc Reporting

275. Ad hoc reporting would mostly relate to an approved professional body reporting information on breaches of statutory standards or its rules, but could also include information relating to sudden trends.

276. This ad hoc reporting would be subject to less formal procedures. The approved professional body and the Securities Commission could consider whether or not such information could be treated as confidential if required.

277. The Commission would have the ability to carry out inspections and request further information from the approved professional under certain circumstances.

Functions of Approved Professional Bodies - Discipline

278. The Taskforce suggested that the co-regulatory model could include a separate disciplinary body. Ministry officials suggest that to avoid additional costs, the role of the disciplinary body could be carried out for low level breaches by the approved professional body (perhaps an independent board of the approved professional body) and, for high level breaches, by the Securities Commission.

279. The role of the approved professional body in relation to statutory breaches has been discussed earlier in the paper. This section deals with financial intermediaries breaching non statutory standards.

Discipline for Breach of Non Statutory Standards

280. Approved professional bodies may have the ability to discipline those approved professional body members who do not comply with the internal approved professional body rules, without recourse to the Securities Commission.

281. This is on the basis that:

• the approved professional body would be best placed to judge the seriousness of the breach of the specific approved professional body rule; and
• not all matters would require the Securities Commission to exercise their powers.

282. The approved professional body could be free to set a threshold in relation to disciplinary matters, so that, under this threshold, the approved professional body will consider all matters, and over this threshold, the Securities Commission will consider all matters.

283. This threshold could refer to:

• the offence that the financial intermediary is accused of:
• e.g. an intermediary failure to meet a reporting deadline could be dealt with by the approved professional body, but a failure to comply with a competency standard could be more serious, and hence dealt with by the Securities Commission;
• the number of times an intermediary breaches the non statutory standard;
• e.g. if an intermediary has breached an approved professional body rule three times, then the repetition is sufficient to put at risk the reputation of the market, and it is appropriate for the Securities Commission to consider the matter.

284. The Securities Commission would have a chance to comment on the approved professional body threshold through the initial rule approval process (see paragraph 302).

285. Any approved professional body process for hearing disciplinary matters is likely to require an independent, or unbiased process and an ability to punish inappropriate intermediary behaviour.

286. Approved professional bodies could report results of disciplinary processes to the Securities Commission, and allow appeal functions to the Securities Commission. Appeals from, and reviews of Securities Commission decisions would be to a Court.

Functions of Approved Professional Bodies - Dispute Resolution

287. The Taskforce suggested that there should be a separate dispute resolution body.

288. As dispute resolution procedures could be applicable across other sectors of the financial system, Ministry officials are preparing a discussion paper on dispute resolution which will be released for public feedback as part of the Review of Financial Products and Providers. A number of options will be presented, including the option of an industry-based dispute resolution body or bodies. These options will consider the ideas of having:

• one dispute resolution body for the financial sector which is paid for by industry or
• different ombudsman with various levels of sharing of facilities from such things as call centres, to staff. This option would require either an existing body taking on intermediaries or the industry forming an ombudsman scheme itself.

289. The Taskforce also suggested that an approved professional body would have the responsibility of dealing with initial dispute resolution (in some cases, perhaps after initial internal dispute resolution through a business). This is on the basis that an approved professional body is best placed to know the common issues that arise and how best to deal with them.

290. For an approved professional body to exercise initial dispute resolution, it is assumed that an approved professional body would have to show that it was able to provide an independent and unbiased way to deal with disputes. This may require:

• An independent body set up to hear complaints, perhaps a consumer representative, or at least some measure of independence.
• A ways to record the hearing and the finding.
• Processes that are not too confronting for consumers.

291. Officials understand that an approved professional body undertaking a function like this could be costly, as the number of complaints heard by each approved professional body may not be sufficient to warrant the cost.

292. Under any option, approved professional bodies would also have to agree to work with other approved professional bodies, the Securities Commission and other dispute resolution mechanisms to share information on disputes resolution.

Cross Sector Competencies

293. Approved professional bodies will have to maintain a close working relationship with the Securities Commission and other approved professional bodies, on the basis that there may be some shared membership across approved professional bodies by high level intermediaries because some high level financial intermediaries are likely to practise across a range of industries.

294. Ministry officials are keen to avoid a situation where high level financial intermediaries have to belong to a number of approved professional bodies and to meet different standards just to continue practising.

295. To address this, Ministry officials have suggested a few options:

• a high level intermediary could join the approved professional body which represents their principal area of practice. This approved professional body would then set the competency and conduct standards for that area of practice. To practise in another area, the intermediary would have to undertake the competency/conduct requirements set by an approved professional body in that other area. However, the intermediary would not have to join two approved professional bodies, or report to more than one approved professional body, as the principle approved professional body would undertake all administrative roles in relation to the intermediary.
• approved professional bodies could allow "associate" memberships, so that high level intermediaries who already belong to an approved professional body could have an associate membership with a second approved professional body and only meet those rules which relate to competency and conduct, with lower fees.

296. These options are open for approved professional bodies to consider, in light of the obligation on high level intermediaries to belong to at least one approved professional body.