Though the start of the new compliance regime may yet seem miles away, adviser groups and compliance experts are urging brokers to get up to speed with everything they need to have in place for their licencing.
With the first stage of transitional licencing looking set to open this October, brokers are being advised not to let deadlines creep up on them, and have a solid plan as to how they want to go about getting their full Financial Advice Provider (FAP) licence.
Mortgage Link and Insurance Link recently held their annual conference for their advisers, and set out a rough timeline as to what they can expect when it comes to licencing. Currently, advisers have two options: to obtain their own licence, or to be nominated under someone else’s.
Below is a rough timeline pencilled in by Mortgage Link and Insurance Link, based on the information provided by MBIE thus far.
October 2019: Transitional licencing opens
Transitional licencing is looking likely to open in Q4 2019, though no solid dates have been set and this may yet change.
“At the moment, we’re working on a date of the 1st October,” FACTNZ consultant and compliance expert Angi Mann stated during the conference’s ‘Licence Ready’ workshop.
“Transitional licencing will be open for a period of six months, and during that time advisers need to either obtain their own transitional licence, or be nominated under somebody else’s. If you have neither of those things, you will be unable to provide regulated financial advice.”
April 2020: Transitional licencing ends, FSLAB regime begins
The projected date for the start of the FSLAB regime is currently the 1st April 2020. This is when transitional licencing ends, and advisers will then be given a two-year transitional period to obtain all their competency requirements and apply for a full FAP licence.
“We’ve made some very rapid progress in this space,” Mann explained. “We know exactly what the Code and the legislation says, so we’re just waiting on the regulator to confirm those dates. It will happen quickly, so you don’t have another two and a half years to be licence ready.”
Advisers will need to be completely compliant with the new rules and regulations as soon as the transitional licencing period ends. The two-year period will allow them time to prepare their full licencing application, obtain any new competency requirements and, if needed, sit their Level 5.
The information you’ll need to provide
In order to hold a FAP licence, advisers will need to provide evidence across a number of areas to prove that they have the appropriate skills and processes in place. These are detailed below.
“You need to demonstrate that you’re a fit and proper person to be holding a FAP licence,” Mann explained.
“First, this means demonstrating organisational capability – how can you look after your base of clients? What is your contingency plan if you’re injured or sick?
Secondly – operational infrastructure. It won’t be enough to say “I manage conflicts of interest” – you’ll need to show how you’re doing that, how you’re communicating information to the client and how you’re ensuring good advice outcomes.
Thirdly – financial resources. This still needs some clarification, but in Australia this involves providing bank statements to assure regulators that the business is financially sound.
Fourthly – governance. How do you create a ‘client first’ culture in your business? You’ll need to have policies processes and controls to demonstrate how you are able to do that.
Finally – culture and compliance arrangements. How do you check that your business does all the things you say it does?”
The legislative duties advisers must meet
The Financial Services Legislation Amendment Bill details a series of obligations that advisers will need to comply with, and these cover everything from meeting standards of competence, prioritising client interests, complying with the Code of Conduct and having complaints processes in place.
Mann says that while advisers with strong existing processes will not need to make many changes, these duties will place extra onus on the adviser to clearly demonstrate that they are compliant.
“I’ll particularly point out section 431I, which is the duty to ensure that the client understands the nature and scope of your service,” Mann said.
“The word “understands” is really critical here – it goes beyond getting the client to sign an agreement to your scope of service. It’s about what steps you’ve taken to ensure they really understand what’s on that paper, and ensuring they understand the implications of any limitations that you put on the service.”
“If you already have good processes, it’s likely that not much will change,” she added. “Some documents might need a bit of a tweak, but it’s really just about reinforcing the good work that advisers already do.”
What about enforcement?
While the law is there and the expectations are clear, the enforcement side of the process is perhaps less so. According to Crestone Compliance co-founder Charles Laing, the vague and principles-based nature of the Code of Conduct means the FMA will help bring clarity that legislation as the regime continues – something made possible by New Zealand’s precedent-based legal system.
“The legislation doesn’t say “you have to do 50 hours of CPD a year, ask this particular question in your fact-find, etc.” Laing said. “That’s because the FMA’s function is regulating conduct and enforcing misconduct breaches. Our legal system is based on precedents, so the FMA’s job is partly to help clarify the legislation by regulation and enforcement.”
“Because of this, enforcement will be ramping up,” he explained.
“They have begun issuing warnings and clarifying what their expectations are, so that when the new regime begins, they can say “you should have known better, and this is the consequence.”
But the FMA does not have infinite resources, and this means it may also be utilising a so-called “risk-based approach” where it identifies areas of the market where more scrutiny may be necessary. Laing says this will become an efficient way of auditing the industry, and will be a positive step towards greater customer trust.
“The two-year transitional period will give the FMA time to identify those who have come up against regulatory issues before, or those who are completely new, and then decide who they need to scrutinise more,” he explained. “The whole idea of the FAP licence is to give the consumer confidence that everyone who holds one has undergone some sort of scrutiny.”