Issues paper: Review of financial advisers / FSP regime

Issues paper: Review of financial advisers / FSP regime

Introduction

Yesterday, Commerce and Consumer Affairs Minister Paul Goldsmith released an issues paper for public consultation, as part of a review aimed at improving financial advisory legislation.

In releasing the issues paper, the Minister said that the aim of the review of the Financial Advisers Act and the Financial Service Providers Act is to increase consumer confidence in financial advisers and the advice they give, so that people can make informed investment decisions. As a result, MBIE is asking all stakeholders, including those working in the financial advisory sector, key questions such as whether people feel they have access to good quality financial advice and if they understand how advisers are regulated.

The issues paper also seeks to find out whether the complexity of the regulations has prevented people from considering advice and if compliance costs have made advice less accessible.

Summary of goals and key questions

The issues paper identifies 3 proposed goals for the key questions for feedback as being:

Goal 1: Consumers have the information they need to find and choose a financial adviser.

• Do consumers understand the regulatory framework?
• Should there be a clearer distinction between advice and sales?
• How should we regulate commissions and other conflicts of interest?
Goal 2: Financial advice is accessible for consumers

• Does the Financial Advisers Act unduly restrict access to financial advice?
• How can compliance costs be reduced under the current regime without limiting access to quality financial advice?
• How can we facilitate access to advice in the future?
Goal 3: Public confidence in the professionalism of financial advisers is promoted.

• Should we lift the professional, ethical and education standards for financial advisers?
• Should the individual adviser or the business hold obligations?

The issues paper seeks feedback on these and a number of other key themes including:

• Do people know how to find a financial adviser that suits their needs?
• Should improvements be made to the Financial Service Provider Register? How can we avoid misuse of the Register by overseas entities?

5-year review

The review of the Financial Advisers Act was mandated when the Act was finally implemented after a process that was tortuous and required a last-minute Band Aid round of changes. Regrettably, the workings of the financial advisers regime and its interaction with the companion piece of legislation (the FSP Act) is, at best, clunky. These difficulties appear to have been exacerbated over time with further mismatches appearing in the Financial Markets Conduct Act, the Non-Bank Deposit Taker regime and the NZX Participant Rules. Some of the overlaps and mismatches possibly reflect the impact of the last-minute changes (with the result that policy issues affecting consumer protection aims and an occupational licensing regime seem to have been overwhelmed by the detail of a range of provisions).

The manner in which the new regime is being used in some quarters is also a puzzling and largely unintended consequence – with instances of it being used as a shield or a sword in a range of litigation. And a recent announcement by the FMA about the removal of a number of offshore firms from the FSP register on the basis of concerns about whether the substantive business activities of a firm require it to be registered in New Zealand again highlight the extent to which some offshore firms seek to take advantage of reputation uplift available from brand New Zealand.

One of the key areas of concern about the current regime, largely I suspect as a result of its difficult start in life are difficult issues of application and seemingly over-lapping requirements that appear to create demarcation disputes between the various types of financial product and/or classes of licence. If these issues are ultimately creating a barrier to consumers seeking advice or advisers being able to respond to requests from their clients – then remedial action is required. If nothing else, the complexity of understanding key elements of the regularity regime must be seen as a major drawback towards the achievement of the original policy goals.

Another area of concern is that the financial advisers regime not be (or be seen to be) a roadblock to the advances of new technology and the use of the internet to greatly improve the delivery of services or the enterprise that is already being shown by the market in realising on the new opportunities created by the Financial Markets Conduct Act. For example, who would have thought 12 months ago that crowd-funding would have provided capital-raising opportunities for a wide range of existing mainstream businesses and not just start-ups.

Lessons from Australia

One of the features of the implementation of the regime appeared to be a determination not to follow Australia and deliver a top-heavy and very complex regulatory regime. After 5 years, I am not sure that our Australian-lite approach can be said to be working.

However, I am more confident that we continue to learn from the experience of a much larger, better established regime just next door that has grown as a result of the generation-long exposure to compulsory superannuation. This is not to say that the Australian regime and the recent Government back-tracking on recent proposals for reform (once described as a bonfire of the regulations) in the light of both industry opposition to some proposed tightenings and opposition from lobby groups of victims of the collapse of some financial advice firms during the GFC to any perceived relaxation of the rules is an example we wish to slavishly follow.

Timeline for the review

MBIE is seeking submissions on the questions raised by the issues paper by 22 July 2015. However, the review contemplates several further stages, with an options paper to be released late this year and final recommendations only going to the Minister by 1 July 2016.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.