New Zealand hopes increased disclosure and conduct obligations will prevent financial adviser misconduct occurring on its side of the Tasman.
New Zealand's Financial Services Legislation Amendment Bill, which commenced its third (final) reading on Tuesday 2 April, introduces a range of reforms to "ensure that the conduct and client-care obligations of financial service providers and the regulation of financial markets remain fit for purpose." The new regulatory regime is intended to improve access to, and the quality of, financial advice.
A number of the changes in the Bill introduce obligations which already exist in some form in Australian law, but in other ways New Zealand has diverged from Australia, such as in choosing not to introduce a ban on commission payments.
All advice subject to standards of conduct and competency
Previously in New Zealand conduct obligations and competency standards varied according to different categories of advice. The reforms increase the standards of behaviour required and apply those standards across the industry.
Best interest duty to be introduced: Any individual or firm giving advice must give priority to the client's interests. This aligns New Zealand with Australia where a best interest duty has been mandatory since 1 July 2013.
New code of conduct to apply to all financial advisers: In relation to retail clients, all persons providing financial advice must comply with a code of conduct. The code of conduct, currently in draft, will set minimum standards of: ethical behaviour; conduct and client care; competence, knowledge and skills; and provide requirements for continued professional development.
Improved consumer understanding
To improve consumer understanding, those providing financial advice will have a duty to ensure consumers understand what advisers can do for them and there will be improved disclosure requirements.
Recommended disclosure requirements to be introduced: The detail of the disclosure requirements will be defined in regulations which will be released for consultation around May 2019. The following categories of information have been proposed by the Minister:
- the licence held by the financial advice provider and whether there are any relevant conditions on it;
- information about duties that the person giving advice is subject to (eg. best interests duty);
- the financial advice service that can be provided, the financial advice products and product providers that can be advised on, and other limitations on the advice;
- the applicable fees and costs relating to the financial advice, including the basis on which they are charged;
- the commissions or incentives that may be received by the financial advice provider and the individual giving advice, or any other conflicts of interest, that a client might perceive as having potential to materially influence the financial advice;
- the complaints handling and dispute resolution arrangements;
- information about Financial Adviser Disciplinary Committee proceedings within the past five years, where the disciplinary committee publicly notified the action;
- information about certain criminal convictions, civil liability findings, or adverse findings from a court or other tribunal within, at most, the last five years, if these would be perceived as relevant to a client’s ability to rely on the advice;
- in the case of financial advisers, any instances of being adjudicated bankrupt, or admitted to the no asset procedure, within four years of the date of discharge.
It is also recommended that disclosure be required at the time the information becomes relevant, to avoid complex and bulky upfront disclosure of information that does not become relevant for some time or may not be relevant to the individual circumstances of a customer.
In Australia, key disclosure documents for retail clients (Financial Services Guides and Statements of Advice) are required to contain a number of the kinds of disclosures described above. However, some of the suggestions go beyond the requirements of those documents for example the recommendation to disclose what duties the person giving advice is subject to, and the detail of an adviser's disciplinary history.
Commissioner Hayne recommended amendments to require financial advisers where there is a lack of independence to provide a written statement explaining simply and concisely why the adviser is not independent, impartial and unbiased. Whether this requirement will be incorporated directly in New Zealand is likely to be evident in May 2019 when the draft regulations are released.
Financial advice providers to ensure compliance with obligations
Firms who engage financial advice providers to give advice of their behalf must take all reasonable steps to ensure each of its financial advisers and nominated representatives complies with their duties. Failure to take those reasonable steps may result in pecuniary penalties (in addition to compensatory orders).
In Australia, the obligations of AFSL holders captured in section 912A of the Corporations Act 2001 include that the AFSL holder must take reasonable steps to ensure that its representatives comply with financial services laws.
The Bill proposes that financial advice providers with nominated representatives must have in place clear and effective processes, controls and limitations relating to the financial advice that may be given by its nominated representatives and must not give a nominated representative a payment or other incentive that is likely to encourage them to breach one of their duties. This is intended to ensure that institutions cannot incentivise their staff (such as through sales targets and bonuses) if the incentive is likely to have the effect of encouraging poor conduct. In Australia a general ban on conflicted remuneration achieves this outcome.
Approach to conflicted remuneration remains a key difference
New Zealand has not adopted a ban on conflicted remuneration as exists in Australia (albeit with exceptions). The view has been taken that a ban on commissions would reduce access to financial advice for those who are unwilling or unable to pay for it. Rather than banning or restricting commissions the Bill aims to address the impact of these incentives through universal duties of conduct and client care, and improved disclosure requirements.
However, the appropriateness of commissions remains a live topic of debate with New Zealand's Commerce and Consumer Affairs Minister announcing that the Government will release a consultation document in May 2019 on the structure of commissions paid by banks and insurers to financial advisers, insurance agents, and mortgage brokers.
Further changes signalled
The New Zealand Reserve Bank's Conduct and Culture review of banks published in November 2018 concluded that current regulatory settings do not provide sufficient scope for regulators to hold banks to account for their conduct.
We can therefore expect to see further reform in New Zealand, as Australia too considers regulatory amendments to implement Commissioner Hayne's recommendations. In what form the amendments will take and whether the approaches on both sides of the Tasman will be aligned remain to be seen.