The financial services industry has been waiting with bated breath (given the upcoming General Election) for the introduction of the Financial Services Legislation Amendment Bill (Bill), which was introduced to Parliament on 3 August 2017. This Bill follows an exposure draft (Exposure Draft) released for consultation earlier this year. The Bill overhauls the existing Financial Advisers Act 2008 regime (FAA Regime) and at a high level its changes include:
- Bringing financial adviser regulation into the Financial Markets Conduct Act 2013 (FMC Act).
- Creating new types of financial advisers.
- Removing distinctions between class and personalised advice and between category one and category two products.
- Requiring providers of financial advice to be licensed (at a firm level).
- Introducing a new Code of Conduct which will apply to everyone providing financial advice.
- Allowing the provision of robo/digital advice.
- Requiring registered financial service providers to have a stronger connection to New Zealand.
This update focuses on the differences between the Exposure Draft and the Bill as introduced to Parliament and some of the aspects you need to be aware of as we continue to digest it further.
The Bill has seen some changes to terminology. The concept of a 'financial advice representative' has been changed to 'nominated representative' to clearly distinguish it from a financial adviser and to convey the limited nature of advice that representatives will be able to provide given their lower level of accountability. We submitted on this point in the consultation process and we are pleased that MBIE has taken on submitted feedback.
Another change is the use of 'broker' and 'broking service' which were terms carried over from FAA Regime. 'Provider' and 'client money or property service' are used in the Bill, which we think are sensible changes given the use of the term ‘broker’ in the FAA Regime differs from the common understanding of the word.
Retail and wholesale
The Exposure Draft, with regard to licensing, provided that if a financial advice provider was required to be licensed as a result of providing services to retail clients, its licensee obligations would apply in respect of its service as whole (including services to wholesale clients). As we noted in our submission, this differed from all other licensing under the FMC Act where a wholesale offering is not factored into licensing and related conditions, our view being a consistent approach was required. This aspect has been removed from the Bill.
Consistency has also been achieved in the Bill with the definition of 'wholesale client'. The Exposure Draft had different criteria for determining 'wholesale clients' and 'wholesale investors'. The wholesale client definition in the Bill now cross-refers to the existing definition of wholesale investor in Schedule 1 of the FMC Act. This will avoid the potential for confusion.
Inclusion in the Exposure Draft of the duty to put the interests of clients first has been a hot topic. The Bill seeks to clarify this duty, referring to it as the duty of a person providing financial advice to give priority to a client’s interests, including by taking all reasonable steps to ensure that the advice is not materially influenced by their own interests or those they are representing or with whom they are associated. The MBIE summary of key themes from submissions confirms that the duty remains limited to conflict management. The broad reference to 'conflict with the interests of the person giving the advice or any other person', which many submitted on, has been amended to refer to 'the interests of a person associated with A'. The reference in the Exposure Draft to 'in doing anything in relation to the giving of advice' has been omitted from the Bill, the issue being there was no clear scope of when the duty would begin and end.
Overall, we think the changes around this duty are heading in the right direction. However the real challenge will be advisers applying the duty in practice, in particular understanding what the expectations will be around taking 'all reasonable steps'. For example, will appropriate disclosure be sufficient?
Another change in the adviser duties section is a softening around the duty to ensure the client understands the nature and scope of advice. While the exposure draft required a client to ‘agree’ on the nature and scope of services, the Bill requires an adviser to take reasonable steps to ensure the client understands the nature and the scope of advice being given, including any limitations. This reflects the reality that in some instances advice doesn’t involve direct contact with a client risking a lack of clarity as to what would constitute ‘agreement’.
Accountability and liability
Under the Exposure Draft a financial advice provider was required to ensure each of its financial advisers and representatives complied with the prescribed duties. This has been changed in the Bill to a requirement to take all reasonable steps to ensure compliance. Where a financial advice provider has taken reasonable steps it will not be liable for pecuniary penalties where a financial adviser has breached a duty under the Bill. In respect of nominated representatives (previously financial advice representatives) there have been no changes to the Exposure Draft which places accountability on financial advice providers to have appropriate systems in place to ensure compliance, with the provider being liable for any breach of a representative where reasonable steps have not been taken.
Regulation of providers of client money or property services
Aside from a change in terminology, for the most part, the obligations of providers, previously referred to as brokers, remains the same as under the existing FAA regime. Providers will need to be registered, and belong to a dispute resolution scheme, but will not need to be licensed. One notable change, however, is that the Bill now acknowledges that, in certain circumstances, client money or property might not be held separately from the money or property held by a provider on its own account. These circumstances and potential additional duties or requirements will be prescribed by regulation.
Several new financial advice exclusions have been inserted into the Bill. These cover situations where incidental advice is given in connection with providing credit under a credit contract, and situations where advice is given by a lender to a borrower in relation to a consumer credit contract or insurance contract where the lender has certain responsibilities under the Credit Contracts and Consumer Finance Act 2003. We support the inclusion of these exclusions.
The earlier proposals for transitional arrangements reflected in the Exposure Draft have been included in the Bill. MBIE’s summary of key themes from submissions noted the broad support, via submissions made, of the transitional arrangements. One change is that the new regime will take effect by a date to be set by Order in Council, rather than six months from approval of the Code of Conduct, as previously proposed. The requirement for existing financial advice providers to hold a provisional licence remains as at May 2019, with full licensing required by May 2021.
Amendments to the Financial Service Providers (Registration and Dispute Resolution) Act 2010 (FSPR Act)
As a consequence of the changes made to the FAA Regime, the Bill also amends the FSPR Act. These include changes to categories of financial services, and registration of financial advisers, together with when financial advisers are exempt from the requirement to be a member of a dispute resolution scheme. The Bill also introduces new provisions relating to information sharing between regulators and powers relating to de-registration.
Other developments of note
Since the exposure draft was released for consultation the Minister of Commerce and Consumer Affairs has appointed a Financial Advice Code Working Group (Code Working Group) to develop the new code of conduct for financial advice. In June, FMA also released a consultation paper on a proposed exemption to allow personalised robo-advice to be provided ahead of the expected date for the reform of May 2019 at the earliest. We submitted in support of the proposal. An update providing more detail on this consultation is available here.