Transitional regime for DIMS providers announced

19 June 2014

Transitional regime for DIMS providers announced

Introduction

Earlier this week, Commerce Minister Craig Foss announced changes to the regulation of providers of Discretionary Investment Management Services (“DIMS”) – affecting the in the Financial Markets Conduct Act 2013 and the Financial Advisers Act 2008.

DIMS include any service where the provider decides which financial products to buy or sell on behalf of their client, without having to get their client’s agreement to the transaction.

The introduction of a licensing regime for DIMS providers under the Financial Markets Conduct Act is aimed at promoting “confident and informed participation” in New Zealand’s financial markets – and the new licensing regime is aimed at reducing the risks to investors by ensuring they are able to make decisions based on sound information.

The key regulatory changes announced this week include:

• Alignment of the requirements for DIMS under the Financial Advisers Act with those that will apply to other DIMS providers under the Financial Markets Conduct Act.

• An exemption for financial advisers who only manage their clients’ investments in limited situations, (contingency DIMS) such as when the client is on holiday.

• A transition period for existing DIMS providers – allowing them until 1 June 2015 to apply for a licence and until 1 December 2015 to update their client documentation. (Note that new providers will need to comply from 1 December 2014.)

• A reduction in the base fee for a DIMS licence by 40% – from $3,565 to $2,139. This is aimed at making DIMS licensing more accessible for smaller providers, such as many smaller financial advisory businesses.

FMA guide to help smaller financial advisers with DIMS licensing

To coincide with the Minister’s announcement, the FMA has released a guide on the application process to help smaller financial adviser businesses with the DIMS licensing process.

In doing so, the FMA has noted that the changes will provide flexibility in the licensing arrangements for DIMS. In particular, it is said that single adviser or smaller AFA-led businesses that offer relatively straightforward services for their clients will benefit from the changes – and will have more time to apply for licensing.

DIMS and Licensing

A DIMS is an investment arrangement where the provider makes buy–sell decisions about their client’s portfolio (rather than client making those decisions.

It includes arrangements where the client has the right to be consulted, or can change a decision they have previously made. DIMS cover a wide range of services and can vary considerably.

From 1 December 2014, a provider will need a licence to provide DIMS if they are:

• an Authorised Financial Adviser (AFA) and want to provide class DIMS to retail clients; or

• not an AFA and want to provide any type of DIMS to retail clients.

Also from 1 December 2014, AFAs authorised to provide DIMS under the Financial Advisers Act will be able to provide personalised DIMS to retail clients and will still be able to provide any type of DIMS to wholesale clients. However, anyone who provides a class DIMS to retail clients must have a DIMS licence under the FMC Act.

To achieve this outcome, a new definition of ‘personalised DIMS’ will be added to section 15 of the Financial Advisers Act. It will provide:

15(2A) … a discretionary investment management service… is a personalised service or a personalised DIMS if—

(a) the service is provided to a named client or a client who is otherwise readily identifiable by the financial adviser exercising the investment authority under that service; and
(b) the investment strategy implemented in, or to be applied under, the investment authority has been designed to take account of the client’s particular financial situation and goals or any 1 or more of them (rather than merely being customised from an investment strategy that applies to a class of clients, for example, by selecting options or by making minor changes to the class strategy or authority).

And, by definition, anything that is not a ‘personalised DIMS’ is a class service.

Whilst the scope for smaller providers to obtain a licence is welcomed, licensing involves quite a paper trail. Helpfully, the FMA notes that (for AFAs) it is recommended that any decision about whether to provide class or personalised DIMS should be based on what type(s) of service they are capable of providing to the required professional standard and what services you consider to be in your clients’ best interests.

Further information

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