Financial advice regime in full effect – FMA outlines advisers' duties

Guidance comes as transitional period ends

Financial advice regime in full effect – FMA outlines advisers' duties

Insurance News

By Terry Gangcuangco

The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko is making sure there is no room for confusion as to what is expected of financial advice providers (FAPs) in New Zealand, now that the transitional licensing phase has ended. As part of its guidance, the FMA has outlined FAPs’ duties under the in-full-effect financial advice regime as it relates to retail clients.

The below duties, which were inserted by the Financial Services Legislation Amendment Act 2019 into the Financial Markets Conduct Act 2013 (FMC Act), apply to regulated financial advice, regardless of it being provided directly or on behalf of someone else. Licensed FAPs who engage others to work with them, meanwhile, have additional duties to take note of.   

Meet competence standards

In its obligations fact sheet, the FMA said FAPs should meet the relevant competence standards while at the same time complying with continuing professional development requirements in the code of professional conduct for financial advice services.

“The competence standards are equivalent to the qualification outcomes of the New Zealand Certificate in Financial Services (Level 5),” said the regulator. “The qualification outcomes you need vary based on the type of advice you’re giving.

“While many people will choose to get the standard Level 5 qualification, you may demonstrate you have met the standard in other ways, as long as you can do so in an objective, measurable, and independently verifiable manner.”

Essentially what’s required of any FAP is having appropriate knowledge, skills, and competence.

Comply with ethical behaviour, conduct, and client care standards

Under the second duty, FAPs are called on to treat their clients fairly and professionally. This obligation entails acting with integrity; giving suitable financial advice; ensuring the advice is understood; and protecting client information.

Doing the above, said the FMA, gives clients the confidence to participate in financial advice services.  

Ensure your client understands the nature and scope of your advice

Part of a client’s understanding is knowing what products a FAP can advise on, as well as what the adviser can or cannot do in their capacity.

“Your client must be clear about what sort of advice they will receive from you and what will not be covered,” said the regulator.

“This duty recognises the advice can be limited – for example, you may only cover a client’s life insurance needs, or you may only consider certain providers’ products when making recommendations.”

The FMA said reasonable steps must be taken to ensure that clients understand any limits prior to being given advice.

Give priority to your client’s interests

Under the fourth duty, advisers are expected to provide advice that is suitable for their clients.

“You must put your client’s interests first when giving advice,” said the FMA. “If you know (or you should reasonably know) about a conflict between your interests and those of your client, you must give priority to your client’s interests.

“This duty also applies to conflicts between your clients’ interests and the interests of those connected with the giving of the advice. This will include your associates, the financial advice provider you give advice for, and the provider’s associates.

“For example, you should only recommend products most suitable for your client, regardless of the level of commission you receive from them. A useful question to ask is ‘would the advice be the same in the absence of the conflict?’”

Exercise care, diligence, and skill

As part of the new financial advice regime, FAPs are mandated to exercise care, diligence, and skill. The goal is to promote confident participation in financial advice services by helping ensure professional standards and giving clients access to suitable, quality advice.

“When you give advice,” said the FMA, “you must exercise the same care, diligence, and skill that a prudent person in the same occupation would exercise in the same circumstances.”

Disclose prescribed information

To help clients make decisions about financial products and services, they should get timely, accurate, and understandable information. To ensure this happens, FAPs are mandated to disclose certain information.  

The MBIE (Ministry of Business, Innovation & Employment), which previously published the applicable disclosure requirements, notes on its website: “Anyone who gives regulated financial advice to a retail client will be required to disclose information regarding: the licence they hold and certain duties that they are subject to; the financial advice services that they can provide, the range of products they can advise on, and any limitations on the advice; the applicable fees and costs associated with the advice; the commissions, incentives, and other conflicts of interests that could impact the advice; the complaints handling and dispute resolution process; any previous disciplinary history, and certain criminal convictions or civil proceedings; and, in the case of financial advisers, bankruptcy proceedings within four years of the date of discharge.”

The government agreed on the disclosure requirements in 2019.

Not disclose information that is false or misleading

In relation to the disclosure duty, advisers are also expected not to provide false or misleading information to clients.

“When you disclose prescribed information, you must not make information available if it includes a statement that is (or is likely to be) false or misleading, or it leaves out required information that is materially adverse from the client’s point of view,” said the FMA.

“A statement about something in the future (for example, whether or not something will be done or happen) would be misleading if you had no reasonable basis for making that statement.”

Not recommend products offered under a regulated offer that contravenes the FMC Act

Lastly, FAPs have the duty not to recommend products if they know, or should know, that the regulated offer requirements were not complied with.

According to the regulator, this ensures that clients are not recommended products where usual retail investor protections required under the FMC Act regime are not available.

Meanwhile, the duties that apply to wholesale clients are the following: give priority to your client’s interests; exercise care, diligence, and skill; do not recommend products offered under a regulated offer that contravenes the FMC Act; disclose prescribed information (if any requirements apply to wholesale advice); and do not disclose information that is false or misleading.

As of March 17, 2023, according to the FMA, there are more than 2,500 FAPs in the country that are either directly licensed or operating as an authorised body. Additionally, there are over 8,800 advisers who will be linked to FAP licences on the Financial Service Providers Register by June. As for nominated representatives associated with Class 3 FAP licence, the count stands at 11,957.

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