Financial Advisers – A New Regulatory Framework
Background:
New Zealand requires competent and reliable financial advisers to play a key role in addressing information asymmetry in the financial sector. The current voluntary or sector specific industry self-regulation of advisers is failing to ensure that advisers are accountable to the public; members of the public are able to make informed decisions about their advisers; and that advisers have the necessary experience and expertise. New Zealand has also been assessed as only partly implementing international regulatory standards for the monitoring of financial advisers, and there is insufficient information, monitoring and compliance to provide a basis for trans-Tasman mutual recognition of advisers.
The objectives of the new regulatory framework (which were generally endorsed by submissions) are:
- Disclosure: ensuring adequate disclosure of advisers' conflicts of interests, fees and competency so that members of the public can make informed decisions about whether to use an adviser and whether to take their advice;
- Competence: members of the public having advisers available that have the experience, expertise and integrity to effectively match a members of the public with products that best meet their needs and risk profile;
- Accountability: advisers being held accountable for any advice given and that there are incentives for advisers to manage appropriately conflicts of interest;
Similar to all financial sector work, the aim of the regulation is the promotion of a sound and efficient financial sector in which the public have confidence in the professionalism and integrity of advisers; regulation that is well targeted and does not impose unnecessary costs; and encouraging innovative and competitive markets.
This paper establishes a regulatory framework for those who provide financial advice (including mortgage brokers, insurance brokers, investment advisers and financial planners). The purpose of the framework is to set clear standards of practice and competency to benefit these advisers and members of the public; to allow New Zealand to better meet international regulatory standards; and to provide a firm basis for trans-Tasman mutual recognition of financial advisers.
The regulatory framework will replace the voluntary self-regulation and existing sector specific legislation to ensure consistency across the financial advice giving sector. Responsibility will be placed, under a co-regulatory model on Approved Professional Bodies and the Securities Commission to regulate those who provide financial advice. The Minister of Commerce will approve the approved professional bodies, which will in turn approve membership by Financial Advisers. All Financial Advisers will be required to belong to a minimum of one Approved Professional Body
The framework will primarily apply to individual advisers. However, financial advice giving businesses will have the choice to join approved professional bodies as corporate members, and take over responsibility for their individual employees attaining the approved professional body standards.
Financial advice will include opinion/ recommendation/ guidance on the buying/ selling/ holding of financial products or investment and savings decisions given to a member of the public in the course of the adviser's business.
Who is a "Financial Adviser"?
A "Financial Adviser" is an entity or person who gives advice on financial products and/or investment and savings decisions to a member of the public. The new regulatory regime will primarily apply to individual advisers. However, businesses which employ financial advisers (e.g. banks, insurance companies, financial planning firms, etc) will have the choice to join APBs as corporate members. There will be no name protection for the term "financial adviser". The definition of Financial Advisers includes those people who call themselves mortgage brokers, insurance brokers, investment advisers, financial planners, including those who give pro bono advice, and real estate agents who provide opinions, recommendations and guidance on investment property (not primary places of residence).
What is "Financial Advice"?
"Financial Advice" includes opinions, recommendations, and guidance on the buying, selling and holding of financial products or investment and savings decisions, given to a member of the public, in the course of the adviser's business. This definition covers:
- some investment seminars
- certain radio broadcasts paid for by Financial Advisers (which have been advertised as providing advice)
- any material published by a Financial Adviser
- advice designed to sell third party financial products without regard to personal circumstances
It does NOT cover:
- social conversations
- acts of collecting information from members of the public (e.g. to complete an insurance policy) and placing promotional statements on display
- transmission of factual information given by an issuer or a product provider, or guidance about the procedure for buying/selling/holding financial products
- teachers talking about savings in classes
- news articles or commentary by journalists
- comments by government departments, regulators, or Ministers
- independent media commentary on bank products
- advice published at www.sorted.org on retirement savings and choices
What is a "Financial Product"?
There is a broad definition of "Financial Products" covering all categories of financial product, including debt/equity, credit and risk products, investment (real) property and other tangible products where there is an investment and savings element.
Why are Financial Intermediaries now referred to as "Financial Advisers"?
The term "intermediary" has been dropped in favour of the term "adviser" as this more accurately reflects the focus of regime, the function of an adviser and is a term more commonly understood and recognised.
Will all real estate agents be classified as Financial Advisers?
Only real estate agents giving opinions, recommendations and guidance on investment property (not primary places of residence) will be considered as Financial Advisers.
Will lawyers giving financial advice be classified as Financial Advisers?
Officials are currently examining the extent to which lawyers should be exempt from the regime with the desire to avoid dual regulation, and if additional regulation for lawyers and/or accountants is necessary. Ministry of Economic Development and Ministry of Justice officials will consult with the NZ Law Society on this.
What is the Register of Financial Service Providers?
The publicly searchable register is the database of Financial Advisers that will be drawn from information provided by Approved Professional Bodies. It will enable the public to verify the professional status of a Financial Adviser. This information will be available through the Companies Office as a searchable "notice board" of Financial Advisers.
Who are "members of the public"?
The regulatory regime applies only when advice is given to a "member of the public". This is an accepted term, eg as defined in New Zealand's securities legislation, which includes natural persons as well as small businesses. This will meet submitters' concerns that financial decisions about asset protection and insurance are just as important for small businesses as for natural persons. For consistency, the same exemptions as in the Securities Act 1978 will be adopted here.
What does "Co-Regulatory Model" mean?
Co-regulation provides a means for government and industry to work together to achieve the objectives of competence, disclosure and accountability in a way that best meets the needs of financial advisers and consumers. Under the co-regulatory model, the Securities Commission will oversee the market as a whole, with the Approved Professional Bodies (APBs) functioning as front-line regulators of financial advisers.
What is an Approved Professional Body (APB)?
An APB is an industry-based self-regulatory organisation/entity approved by the Minister of Commerce. All Financial Advisers will be required to be a member of at least one APB. An APB will:
- maintain a register of its members
- pass this information to the publicly searchable register of Financial Service Providers
- set entry level standards
- set ongoing standards
- monitor members (on a risk based approach sufficient to enforce compliance)
- carry out discipline for breaches of APB rules (with sufficient powers to investigate possible breaches)
- participate in a dispute resolution process
- report to the Securities Commission on its own corporate governance as well as Financial Advisers' behaviour
What is the Securities Commission's role in relation to the Co-Regulatory Model?
The Securities Commission will
- make recommendations to the Minister of Commerce on Approved Professional Body (APB) applications;
- retain the authority to inquire into matters affecting members of the public and/or the market (which includes enforcing the statutory conduct and disclosure requirements through civil and criminal penalties).
- evaluate the performance of APBs.
- have the necessary powers to obtain information from an APB
- take over the responsibility for an inquiry from an APB where the Securities Commission is satisfied that the powers of an APB are inadequate for inquiring into or addressing particular misconduct or where a conflict of interest necessitates it
- direct the APB to adhere to its rules
- ensure the overall health of the sector
What is "corporate membership" of an Approved Professional Body?
Businesses which employ financial advisers (e.g. banks, insurance companies, financial planning firms, etc) will have the choice to join an APB as a "corporate member". In order to obtain corporate membership, a business must satisfy the APB that it has the necessary processes to ensure the competency and integrity of its employees. While individual businesses are not precluded from becoming an APB, this is unlikely to happen in practice, because of the potential conflict that would arise between the businesses obligations as an APB and as an employer. Instead, corporate membership allows businesses to retain responsibility for competency setting and monitoring, provided that, at a minimum, they meet the APB's standards.
Can I be a Financial Adviser if I don't belong to an APB?
No. The minimum requirements for individual Financial Advisers stipulate membership of at least one APB. Businesses have the option of corporate membership of APBs.
What happens if a Financial Adviser is expelled from an APB?
There will be a requirement for information sharing between APBs and the Securities Commission. Depending on the nature and seriousness of the conduct that led to the expulsion, the Financial Adviser could be de-registered, or may be permitted to join a different APB.
What are the statutory conduct obligations and statutory disclosure obligations for Financial Advisers?
Financial Advisers are required to comply with the following statutory conduct obligations:
- belong to at least one APB
- provide all required information to the APB
- act in accordance with the proposed legislation
- exercise reasonable care, diligence, skill
- act with integrity
Financial Advisers are required to disclose to their customers, in writing, prior to advice being given:
- details of APB membership
- qualifications and experience
- access to dispute resolution
- past criminal convictions
- relevant remuneration / relationship
- the type of advice given
These disclosure obligations are consistent with those of the Securities Markets Act. In addition to the minimum requirements of the statutory conduct and disclosure obligations, APBs will make rules for their members covering these, and other, matters.
What happens if a Financial Adviser breaches the statutory obligations?
APBs will be empowered, and have an obligation, to investigate possible breaches of APB rules and carry out discipline. The Securities Commission will take over the responsibility for an inquiry from an APB where the Securities Commission believes that the powers of an APB are inadequate for inquiring into or addressing particular misconduct or where a conflict of interest necessitates it.
The Securities Commission will be given power under the regulatory framework to enforce the penalties and enforcement mechanisms for breach of Financial Adviser statutory obligations, rather than approved professional bodies taking on responsibility for prosecution.
Both criminal and civil penalties would apply for breaches of the statutory duties.
The Securities Commission is already empowered to apply to the Court for criminal penalties for investment advisers, one of the subsets of Financial Advisers (refer Securities Markets Act).
What competencies are required of Financial Advisers?
These will be determined by each APB. It is up to each APB to determine what qualifications/ certification they will require of their members. This could include, for example, independent third party qualifications, APB in-house training or recognition of prior work experience.
Can an individual Financial Adviser join more than one APB?
Yes, you can join more than one APB. The minimum requirements for individual Financial Advisers stipulate membership of at least one APB.
Are the disclosure obligations of individual Financial Advisers different from those of employees of a business with APB corporate membership?
Corporate members of APBs will be responsible for disclosure about the business, rather than about the individual employee, in the case of some employees, to avoid call centre employees and bank tellers having to provide full disclosure in writing prior to giving advice. This is on the basis that the cost to organisations of providing this information would not be sufficient to justify the benefit to the consumer of knowing (for example) the exact qualifications of every bank teller. Instead, it is proposed that corporate members would take on responsibility for disclosing competency levels and remuneration levels where these are set by the entity or for groups such as tellers or call centre staff.
Can a business have more than one APB corporate membership?
Yes. As for individual financial advisers, a business may become a corporate member of more than one APB.
What happens if there is no APB for me to join? Will there be a default APB?
No. In the event that there is no APB for a particular sector of the market, officials will work with industry to extend the existing capabilities of existing bodies, or to promote the establishment of an appropriate body in the transition period of this regulatory framework.
The transition period allowed for the regulatory framework should guard against concerns that there will not be a suitable body to which an adviser can belong.
What are the minimum requirements to become an APB?
An APB must be approved by the Minister of Commerce, who will be advised by the Securities Commission. The Securities Commission bases its recommendation of approval on whether or not the APB rules and processes would allow the APB to meet the International Organisation of Securities Commissions (IOSCO) criteria. These minimum standards for APBs are adapted from those set by IOSCO for "self regulatory organisations" and will help set limits on any behaviour which is uncompetitive or not in the best interests of the regulatory framework. APBs will be required to:
- have the capacity to carry out the purposes of governing laws, regulations and APB rules
- enforce compliance by its members and associated persons with those laws, regulations, and rules
- treat all members of the APB and applicants for membership in a fair and consistent manner (including accepting corporate memberships)
- develop rules that are designed to set standards of behaviour for its members and to promote public protection
- submit its rules for review and approval to the Minister of Commerce, and ensure that its rules are consistent with any public policy directives made by the Securities Commission
- co-operate with the Securities Commission and other APBs to investigate and enforce applicable laws and regulations
- enforce its own rules and impose appropriate sanctions for non-compliance
- assure a fair representation of members in selection of its directors/administration of its affairs
- avoid rules that may create uncompetitive situations and
- avoid using the oversight role to allow any market participant unfairly to gain advantage in the market.
What is the approval process to become an APB?
- A potential APB will prepare its rules, governance structure and processes in consultation with the Securities Commission
- The potential APB submits its rules to the Minister of Commerce
- The Minister refers the rules to the Securities Commission for a recommendation within a set time
- The Securities Commission bases its recommendation on whether or not the APB rules and processes would allow the potential APB to meet the IOSCO criteria
- The Minister will then, within a reasonable time period, consider whether or not to approve the application to be an APB, taking into account the IOSCO criteria, the Securities Commission's recommendation, and public interest concerns
- The Minister then advises the potential APB whether or not they will be registered as an APB
- If the application is unsuccessful, the applicant can choose to start the application process again through consultation with the Securities Commission on the content of the rules
Are there any special requirements for Financial Advisers handling client monies?
Only those Financial Advisers who handle client money will be subject to additional conduct and disclosure obligations. Under these additional obligations it is proposed that the Securities Commission have the responsibility for monitoring advisers against these additional conduct requirements.
Will Australia recognise Financial Advisers who comply with this Act?
The basic principle guiding harmonisation in this area is that regulated entities operating in both countries will only need to fulfil a particular requirement once. This will facilitate the ability of Financial Advisers to operate in both countries, setting the regulatory basis for mutual recognition of Financial Advisers.
The Securities Commission will not be replicating the Australian Securities and Investments Commission (ASIC) role; it will instead focus on the health of the overall industry (and oversee APBs), while APBs will be responsible for the day-to-day monitoring of advisers. New Zealand and Australian officials are continuing to liaise to resolve any issues that may arise in the implementation of the regime.
When will the new Financial Advisers regulatory regime be in place?
- Legislation is expected to be passed in 2008
- APBs are expected to be in place by 2010
- The full regime is expected to be in force by 2012
What other legislation will be affected by the new Financial Advisers regulatory regime?
Financial advisers will continue to be subject to the general consumer protection requirements of the Fair Trading Act 1986 and Consumer Guarantees Act. These obligations will be supplemented with specific conduct and disclosure obligations under the proposed new legislation. This is consistent with the approach taken under other securities legislation, which complements the general coverage of consumer protection legislation.
Existing requirements on some financial advisers under the Investment Advisers (Disclosure) Act 1996 and Securities Markets Act 1988 will be replaced by the new Financial Advisers legislation, although note that the final form of the proposed legislation has not yet been settled.
The new legislation will not result in duplication with the Credit Contracts and Consumer Finance Act 2003 (CCCFA) in relation to disclosure for credit products, as the CCCFA expressly exempts contracts with an investment element, whereas the Financial Advisers' framework focuses only on investment and savings decisions.
What happens when a Financial Adviser breaches their statutory obligations?
APBs will be empowered, and have an obligation, to investigate possible breaches of APB rules and carry out discipline. The Securities Commission will take over the responsibility for an inquiry from an APB where the Securities Commission believes that the powers of an APB are inadequate for inquiring into or addressing particular misconduct or where a conflict of interest necessitates it.
The Securities Commission will be given power under the regulatory framework to enforce the penalties and enforcement mechanisms for breach of Financial Adviser statutory obligations, rather than approved professional bodies taking on responsibility for prosecution.
Both criminal and civil penalties would apply for breaches of the statutory duties.
The Securities Commission is already empowered to apply to the Court for criminal penalties for investment advisers, one of the subsets of Financial Advisers (refer Securities Markets Act).
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