Key aspects of the Financial Advisers Bill still under consideration

The Finance and Expenditure Committee has recently released its second interim report on the Financial Advisers Bill and has called for a further round of public submissions on its latest proposals. In this article, Bell Gully partner Haydn Wong re-looks at the main aims and expectations of the Bill as introduced last year and outlines the current changes under consideration.

Background

The Financial Advisers Bill was introduced into Parliament in December last year and received its first reading in February this year. Concerns about certain aspects of the Bill prompted Commerce Minister Lianne Dalziel to take the relatively unusual step of proposing changes to the Bill to be considered as part of the Finance and Expenditure Committee's review of it.

To date, there have been two rounds of public consultation on the Bill during the select committee process which have been followed by two interim reports on the Bill. The committee has again invited submissions on its most recent report which indicates that the committee is considering further changes in the direction of the Bill. Submissions close on 22 August.

However, it is still only concepts which are being debated. Again, the committee's latest proposed changes have not been supported by drafted amendments to the Bill, which leaves considerable scope for uncertainty in terms of practical outcomes since the devil will be very much in the detail to come.

In a recent speech to the Institute of Financial Advisers, Lianne Dalziel indicated that the decision on whether an updated draft Bill will be released for comment before it is reported back to Parliament is a decision for the select committee, but went on to note that she would be concerned at a delay which would not allow sufficient time for the Bill to pass before the General Election. Given that the final select committee report is due in Parliament by 1 September, it seems likely that any further amendments to the Bill will be in the Committee of the Whole House by way of a Supplementary Order Paper. Although the Minister has indicated that her officials will continue to work with industry during this phase of the Bill, the process will be necessarily pressurised given the tight timeframes that will apply at that stage and the scope for amendment limited as a consequence.

Aims and expectations

The Financial Advisers Bill forms part of the wider financial services law reform aimed at tightening the regulation of financial advisers and financial service providers and increasing protections for members of the public when seeking financial advice. However since the Bill was first introduced the Commerce Minister has indicated that the Bill has undergone a change in focus. The recent collapse of finance companies, together with industry feedback and investor responses, has meant that instead of the Bill being primarily about reviewing the regulations around the financial sector and encouraging industry participation, the focus "is now on rebuilding investor confidence as quickly as possible".

As drafted, the Bill has three aims:

• To ensure that members of the public can make informed decisions in deciding whether to use a financial adviser and in assessing a financial adviser's financial advice.

  Financial advisers will be required to disclose their experience and qualifications, certain criminal convictions, fees and potential conflicts of interest (which will replace the investment adviser disclosure obligations).

• To ensure that people acting as financial advisers have sufficient experience and expertise to provide advice in their particular area.

  The Bill requires that all financial advisers are registered and meet the criteria for receiving and maintaining registration.

• To hold financial advisers accountable for the advice that they give.

  The Bill imposes certain conduct obligations on financial advisers, including the obligation to act with integrity, to exercise reasonable care, diligence and skill, and a prohibition on engaging in misleading or deceptive conduct.

  The Bill's conduct and disclosure obligations are enforceable through a range of civil remedies, including compensation orders for compensating investors' losses and banning orders for advisers, and specific offences.

Who is a financial adviser?

The Bill regulates the giving of financial advice and the activities of financial advisers. Put broadly, only a registered financial adviser may give financial advice in the course of business to a member of the public.

The Bill then goes on to impose a number of requirements on financial advisers giving financial advice, including disclosure requirements and conduct requirements.

The key definitions that determined the scope of the Bill's application were originally cast in very broad terms, presumably to attempt to address the range of possible circumstances in which financial advice is given. Lianne Dalziel has since commented that it "was never the intent of the Bill to capture every person who discusses financial matters but it was necessary to start this way so [the Government] would have a clear picture of who should and who should not be covered" by way of receiving critical feedback in relation to those who should not be caught.

Financial advice is defined as providing a recommendation, opinion or guidance in the course of business on the financial implications of a financial decision. A financial decision, as the Bill was originally drafted, was defined to include saving, holding, investing or realising or borrowing money or property, giving a security (including a guarantee or indemnity) and making financial provision for the future.

As the Bill was originally drafted, it cast a wide net and relied on exemption-making powers to exclude any persons or classes of persons who were inadvertently captured. The cumulative effect of these definitions created considerable potential for capturing activities that most would not normally consider to be financial advice. For example, advice in relation to the sale of any asset is included, which could extend to sales of motor vehicles. A reliance on exemptions seems an inefficient way to prescribe the scope of the Bill, especially given the penalties associated with a failure to comply with its provisions.

Following feedback after the first reading of the Bill (and at the request of the Government) the select committee issued an interim report proposing that the scope of the Bill be narrowed in two ways:

• the Bill will only capture advice given in relation to specified "financial products"; and
• only persons who are, broadly, in the occupation of giving financial advice will be financial advisers for the purposes of the Bill.

Narrower definition of financial products

It was proposed that advice in relation to a financial decision must relate to the buying, selling or holding of financial products. Financial products are defined as:

• securities (as defined in the Securities Act 1978); or
• any contract of life insurance, disaster insurance, general insurance and medical insurance; or
• any consumer credit contract (as defined in the Credit Contracts and Consumer Finance Act 2003).

Occupational focus

It was also proposed that the Bill be amended so that a financial adviser would only refer to a person:

• whose primary occupation is to provide advice in relation to any savings or investment planning; or
• who regularly provides such advice in the course of their business.

This change was seen as more controversial. One could argue consumers should be protected from those who actually provide financial advice, regardless of whether they purport to have that as their primary occupation or regularly do so. In some respects, those who provide financial advice on an ad hoc basis may present an even greater risk in terms of competency.

Latest approaches under consideration

In its latest interim report, the select committee has indicated that there has been qualified support to the proposal to narrow the application of the Bill and it will proceed with this approach by ensuring the focus is on financial products, rather than financial decisions or occupations.

Definition changes

The committee is now considering recommending that the reference to "implications of a financial decision" in the Bill as introduced be removed, and that "financial advice" be defined with reference to "financial products". The Committee is also considering amending the Bill to clarify that the definition of "financial product" could include debt, equity, credit, and risk products, as well as investment in real estate.

A tiered approach for financial advisers

In a third attempt to get the balance right for financial advisers covered by the Bill, the select committee is now considering taking a more middle-of-the-road approach.

The latest proposal would involve amending the Bill to establish two levels of financial advisory services, each with a different level of obligation imposed on the adviser. This is seen as having the advantage of allowing for more flexibility in dealing with the different occupations and as providing a more tailored regulatory response for different types of financial advice.

Under this proposal, "Category 1 Advisory Service" would include advice on complex securities or investment and savings planning. Any individual providing Category 1 Advisory Service would have to be authorised by the Securities Commission to provide such advice.

"Category 2 Advisory Services" would include advice on credit, general insurance or simple securities, such as bank term deposits or call accounts. Individuals falling under this category would not need to be authorised to provide these services, but would be subject to the basic disclosure and conduct requirements of the Bill and their own individual obligations under the Financial Service Providers (Registration and Dispute Resolution) Bill. It is also likely that most individuals falling under this category, namely those working for registered banks, insurance companies, credit unions and building societies would be covered by their institution's certification (see the discussion below).

However, early responses from the industry indicate that this two-tiered approach is not favoured by some. In particular, there is concern that in adopting a two tier approach there is a potential for some to exploit loopholes in the classification of products between the two categories and in the complexity of deciding which category an advisor is in.

Authorisation requirements for Category 1 Advisers

The select committee is also considering making some recommendations about how financial advisers will be required to seek authorisation from the Securities Commission. This is likely to involve the financial adviser being required to meet relevant competency levels, meet fit and proper person requirements and be registered under the Financial Service Providers (Registration and Dispute Resolution) Bill. Authorised financial advisers would be required to comply with any ongoing disclosure and conduct requirements specified in regulations, and the terms and conditions of their authorisation.

New disclosure obligations

The latest interim report notes that the committee is considering introducing tiered disclosure obligations for the different categories of financial advisers through the provision of a new regulation making power that would allow for regulations that specify disclosure obligations applying to different categories of advisers.

The Bill would be amended to ensure that there is a general obligation to make disclosure in addition to the existing obligations relating to the form and accuracy of disclosure, and the regulation making power would replace the specific disclosure obligations currently in the Bill.

Supervision of financial advisers – co-regulatory vs Securities Commission

Co-regulatory model

The Bill previously provided for a co-regulatory model with "approved professional bodies" responsible for the registration and monitoring of financial advisers and the Securities Commission responsible for registering and overseeing the approved professional bodies, and for ensuring the overall health of the financial advice industry. It was the approved professional bodies that were to set standards for financial advisers to join the body, monitor their members, carry out discipline, participate in dispute resolution and report to the Securities Commission.

The intention of the co-regulatory model was for each sector within the financial advice industry to establish its own approved professional body, to allow each sector to set rules relevant to the sector.

Concerns with the co-regulatory model

There were two main concerns with the co-regulatory model. First, the many high-profile collapses of finance companies and associated allegations of sub-standard financial advice have made it less palatable for the financial advice industry to be seen as largely self-regulated. While the Securities Commission would have had an overall supervisory role, when it comes to monitoring individual financial advisers the responsibility would lie with the approved professional bodies.

The second concern was that it would take too long to set up the approved professional bodies. Although some sectors already have a self-regulating body that could be adapted into an approved professional body, such as NZX for listed securities advisers, a number of sectors do not. By moving to the Securities Commission as the sole regulator, the Commerce Minister indicated that the time required to introduce the new rules could be shortened from four years to two.

Securities Commission as the sole regulator

These concerns around industry self-regulation and timing have led to the proposal that the entire responsibility for regulation be placed on the Securities Commission. The Commission will undertake all of the functions previously assigned to approved professional bodies.

It is proposed that the Securities Commission would consult with the financial adviser industry and that the commission would include at least one person from the industry.

While the co-regulatory model is no longer considered a viable option, concerns are still being voiced over the proposal to provide regulatory oversight by the Securities Commission rather than through industry-led approved professional bodies. Some of the issues which are raised with this centralised approach include:

• how the Securities Commission will organise itself to ensure the efficient processing of registration and accreditation of investment advisers;
• how the Securities Commission will develop the registration and accreditation requirements for different sectors of the financial adviser industry and the degree of, and effectiveness of, consultation with industry in this regard; and
• the complications caused by the Securities Commission acting as rule setter, exemption provider, investigator, prosecutor and, to an extent, enforcer of the requirements of the Bill and the requirements for registration and accreditation.

New Commissioner of Financial Advisers

Further discussion on how some of these issues are to be addressed is provided in the latest select committee report. The committee notes that it is considering the establishment of a Commissioner of Financial Advisers as part of the Securities Commission. This, it notes, would help ensure that the Securities Commission can act as both a statutory enforcer as well as the regulator.

Under this proposal, all functions of the Securities Commission would be exercised by the new commissioner, except for investigations and the enforcement of breaches of statutory obligations (criminal breaches). The commissioner's role would include responsibility for establishing a code of conduct and undertaking disciplinary proceedings for breaches of that code of conduct. To assist the commissioner's decision making, the committee further proposes that a Rule-Making Committee and a Disciplinary Committee be established to ensure that the commissioner receives advice from the industry when exercising his or her judgement.

Institutional accreditation system

The other aspect of change to the regulatory regime is the newly-introduced concept of an institutional accreditation system. Certain institutions, particularly banks, have pointed out that it would be unduly costly and onerous for all their employees to be individually registered and that it should be sufficient for the institution alone to be accredited. Under the proposed institutional accreditation system, an employee of an accredited institution would not need to be individually accredited, so long as the only financial advice that the employee gives is in relation to products offered or sold by his or her employer.

The certification of an institution would enable an institution to meet the obligations of all financial advisers affiliated with that institution, and would allow an institution to standardise compliance for advisers affiliated with that institution.

The criteria for an industry to be accredited have not yet been established so it is difficult to assess the merits and risks of this system. The Minister of Commerce and the latest select committee report have indicated that the institution would have to show that it has processes in place to ensure that any employees or agents covered by its certification have appropriate product and client knowledge and that the institution is accountable for advice it gives (for example, through a customer complaints resolution mechanism). Such institution would also need to be registered under the Financial Service Providers (Registration and Dispute Resolution) Bill.

In a recent speech the Minister of Commerce has also indicated that certified institutions would be responsible for identifying those employees or agents who need to be individually authorised by the Securities Commission where the type of advice given by them falls outside that covered by the institution's certification.

It is unknown what would qualify as an institution. If the definition is broad, this could lead to a quasi-approved professional bodies model for those that satisfy being, to an extent, self-regulated. In its latest report the select committee has indicated that this accreditation model would be available for use by a range of financial institutions, including banks, insurance companies and credit unions.

In any event, this outcome represents something of a compromise that simplifies the situation for those advisers that come within its ambit. The committee is however now considering requiring individual financial advisers covered by an institution accreditation to still meet their individual disclosure obligations under the Bill.

As with many of the proposed changes, the robustness and effectiveness of the system will depend on yet-to-be announced details.

To access a copy of the Second Interim Report on the Financial Advisers Bill and a copy of the Bill visit parliament's website at www.parliament.nz. For an article by Banking and Finance partner David Craig on other aspects of the recent financial services law reforms, please click here.

 

For more information please contact:

Haydn Wong
Partner

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