Part Two: Introduction
Purpose Of This Discussion Document
The purpose of this discussion document is to consider the detail of the regulations under the Financial Advisers Act 2008 that need to be made to specify the content and form of disclosure for financial advisers.
Overview Of This Discussion Document
The disclosure regulations under the Financial Advisers Act 2008 will prescribe the content and form of disclosure required for each of the three categories of persons with disclosure obligations defined in the Act : authorised financial advisers, financial advisers in relation to category 2 financial products, and qualifying financial entities (‘QFE' or ‘QFEs').
This document discusses the general approach to the form and content of disclosure requirements for financial advisers. It then goes on to discuss the detail of requirements for authorised financial advisers and financial advisers in relation to category 2 financial products. The paper then briefly discusses QFE requirements.
The Ministry is seeking feedback on the proposed disclosure obligations for each of these categories. At this time, the Ministry is proposing that regulations be made for these three categories only. However, the Ministry also seeks feedback as to whether there is a need to consider regulations in regards to joint disclosure (section 31).
This discussion paper discusses certain mandated wording and form for disclosure documents. However, any particular language used is simply to aid the discussion of content requirements and is not necessarily a proposal for the final wording that will be required. The Ministry intends to engage a communications adviser to assist in ensuring that the relevant information is conveyed effectively to consumers.
This document was prepared with the input of an industry working group on financial adviser disclosure requirements. The Ministry would like to thank the group for their contributions to this work.
Background
Financial Advisers Act 2008
The purpose of the Financial Advisers Act 2008 is to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers, by:
- requiring disclosure by financial advisers- so ensuring that investors and consumers can make informed decisions about whether to use a financial adviser and whether to follow a financial adviser's advice;
- requiring competency of financial advisers- so ensuring that there are available to investors and consumers financial advisers who have the experience, expertise and integrity to match effectively a person to a financial product that best meets that person's need and risk profile; and
- ensuring that financial advisers are held accountable for any financial advice that they give and that there are incentives for financial advisers to manage conflicts of interest appropriately.
The Act specifies who may perform a financial adviser service and the financial products and services on which they may advise.
The Act establishes different tiers of disclosure and conduct obligations according to the complexity and risk posed by the advice given. Those who wish to provide advice on securities, futures contracts, or an interest in land, or who provide a financial planning service, will be required to be authorised by the Securities Commission1 and will also need to register as a financial service provider2.
Those who wish to provide advice on a call debt security, a bank term deposit, an insurance product (excluding a life insurance product issued after 31 December 2008) or a consumer credit contract will be required to be registered but not authorised.
The Act also provides for an entity licensing model, under which advisers who operate as part of a qualifying financial entity may provide certain financial adviser services without being registered or authorised in their personal capacity. In this case, the entity takes on the responsibility of ensuring that the individual advisers within its organisation comply with the requirements of the Act. To become a qualifying financial entity, the entity must obtain approval from the Securities Commission.
The Act will replace the existing obligations for investment advisers, brokers and sharebrokers. At present, investment advisers and brokers are regulated by Part 4 of the Securities Markets Act 1988 and Securities Markets (Investment Advisers and Brokers) Regulations 2007. This existing legislation will be repealed and revoked respectively once the Act comes into force. In addition the Sharebrokers Act 1908 will be repealed and use of the name ‘sharebroker' will be restricted to authorised financial advisers who are members of a registered exchange. Once the current legislation is repealed, the Financial Advisers Act will govern both these areas.
Financial Sector Reform
Last year three pieces of legislation were passed to improve the regulation of financial institutions, financial products and financial providers:
- The Financial Service Providers (Registration and Dispute Resolution) Act 2008;
- The Financial Advisers Act 2008; and
- The Reserve Bank Amendment Act 2008.
Full implementation of these Acts is scheduled to be completed by December 2010.
The main requirements arising from this new legislation are:
- Registration of all financial service providers to provide a means of identifying and monitoring financial service providers;
- Prudential regulation by the Reserve Bank of non-bank deposit takers;
- Regulation by the Securities Commission of financial advisers to encourage professionalism and public confidence in the sector; and
- Providing for comprehensive consumer dispute resolution and redress mechanisms.
New and existing regulation of the financial sector seeks to achieve the following outcomes:
- A sound and efficient financial sector;
- Investment that encourages growth and innovation;
- An environment that facilitates wealth accumulation; and
- Confidence in the sector to encourage participation by consumers and market participants.
The need for sound regulation of the finance sector has been heightened by both the recent collapse of numerous New Zealand finance companies and the current global financial crisis.
Implementation of the Financial Advisers Act 2008 and Financial Service Providers (Registration and Dispute Resolution) Act 2008
The mechanisms to implement the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 are currently being developed, with the aim of full implementation of both regimes by December 2010. The implementation process contains numerous components, with several government agencies participating. Although both Acts are scheduled to come into force in December 2010, our intention is to have the various components of the regime in place well ahead of this date so that industry has sufficient time to adapt and become compliant. The main projects are as follows:
- Companies Office – Building the register for financial service providers.
- Minister of Consumer Affairs - developing the dispute resolution framework. The Ministry of Consumer Affairs is currently seeking feedback on the dispute resolution framework.3
- Code Committee - drafting the Code of Professional Conduct for authorised financial advisers. The Committee will be made up of both industry and consumer representatives and will be appointed by the Commissioner for Financial Advisers. The appointment process is currently underway4.
- Securities Commission - preparing the processes for the approval and supervision of financial advisers. Feedback is currently being sought on this area.
- Minister of Commerce - developing the disclosure regulations. The Ministry of Economic Development is leading this process. These regulations are the topic of this discussion document.
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