Fundamental changes proposed to new financial advisers legislation – better late than never

David Craig, Partner | Tuesday 4 May 2010

Financial advisers will welcome yesterday's announcement that Cabinet has approved a series of changes to the new financial advisers legislation. But they may also feel a sense of frustration that these changes are being proposed (relatively speaking) on the eve of the legislation coming into force. The Financial Advisers Act 2008 (the FA Act) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the FSP Act) were enacted in September 2008, but had been on the legislative drawing board well beforehand. The two Acts are expected to come into force in December 2010, although Commerce Minister Simon Power has recently announced that financial advisers will have until 30 June 2011 to become authorised (if necessary) and to complete all required training.

A consequence of these, and other recent, proposed changes is that an otherwise mundane implementation Bill, which would typically contain only technical and non-contentious provisions, will now contain provisions reflecting significant shifts in policy.

The announced changes cover three main issues, each of which has been the subject of submissions made by industry participants concerned at the inflexible and unworkable nature of the regime currently embodied in the two Acts. The three main issues are:

• the application of the legislation to advice provided to wholesale clients;
  
  
• the relatively constrained scope of the qualifying financial entity (or QFE) model; and
  
  
• the application of the legislation to generic, non-personalised (or "class") advice.

1. Wholesale clients

Currently, under the FA Act, a person providing advice on the more complex, or so-called category 1, products (whether at wholesale or retail level) would need to:

• register as a financial service provider under the FSP Act;
  
  
• comply with certain statutory conduct obligations under the FA Act;
  
  
• obtain Securities Commission authorisation;
  
  
• comply with the Code of Professional Conduct; and
  
  
• make certain disclosures before providing the advice.

However, in recognition of the additional negotiating power and sophistication that wholesale clients generally enjoy over retail clients, Cabinet has approved a carve-out that would exempt advice provided to wholesale clients from the last three obligations listed above. Furthermore, in relation to the first obligation listed above (i.e., the obligation to register as a financial service provider), Cabinet has recommended that, where advice is only provided to wholesale clients:

• registration need only occur at the entity level (currently, registration is also required at the individual level); and
  
  
• financial advisers based offshore need not be registered at all. The logical extension of this recommendation, although one not addressed in the Cabinet paper, is that offshore based entities providing any other type of financial service (i.e., a non-advisory financial service) should likewise be exempt from the registration requirement.

An important consequence of this exemption is that financial advice provided to wholesale clients need not be provided by an individual and can instead be provided by an entity. That said, Government officials have stated that it was never the intention of the FA Act to prohibit entities from providing financial advice through appropriately regulated individuals. Cabinet has approved amending the FA Act to clarify this point.

All of this, of course, raises the issue of who is a "wholesale client". The proposed definition is a hybrid that includes various concepts already embodied in the Securities Act 1978 and the Financial Reporting Act 1993. The definition includes:

• institutional investors who receive financial advice in the course of their business and whose business is acting as a financial service provider;
  
  
• large entities that, over the last two accounting periods, have:
  • gross assets of NZ$10m or more; or
  • annual turnover of NZ$20m or more; or
  • 50 or more full-time equivalent employees;
    
    
• investors receiving advice in relation to a security valued at more than NZ$500k; and
  
  
• "eligible investors" (whether individuals or entities) who are experienced in investing money or in the industry to which the advice relates and who the adviser considers on reasonable grounds are able to assess various specified matters relating to the advice. Eligible investors will be required to acknowledge their status in writing.

The "wholesale client" definition will inevitably be refined further in response to submissions made to the Select Committee considering the implementation Bill. However, the mere fact of the recognition of the need for a wholesale/retail distinction is a major step forward for this new regime.

In addition to the wholesale client exemption, Cabinet has proposed that private offers and offers to eligible persons under the Securities Act be excluded from the FA Act and the FSP Act to the extent that the advice relates to the offer and is provided by the issuer.

2. QFEs

Under the current QFE model in the FA Act, advisers employed by a QFE can advise on the simpler, or so-called category 2, products without needing to be individually authorised or registered. They can also advise on category 1 products issued by the QFE itself. The QFE then becomes responsible for overseeing compliance by the advisers with the FA Act.

However, this model is not particularly helpful for most large financial services providers, which tend to operate through a group structure. For example, the model only provides limited relief where one group member employs the advisers and another group member issues products covered by the advice given.

In order to overcome limitations such as this, Cabinet has proposed that a QFE will be entitled to designate its "specified entities", for which it will be responsible for ensuring compliance with the FA Act. In return for the QFE assuming that responsibility, advisers employed by the designated group will be able, among other things, to advise on category 1 products issued or promoted by any designated group member.

3. Class advice

Unlike the equivalent legislation in other jurisdictions, the FA Act does not contain an exemption for class advice. Such advice is generally prepared by a team of advisers, but is issued and distributed as advice from an entity. However, the FA Act currently requires class advice to be given by an individual adviser.

Cabinet has determined that an entity should be able to issue class advice. This exemption would require the entity, in preparing that class advice, to act with due care and skill and to act in a manner that is not misleading or deceptive. However, other conduct and disclosure obligations in the FA Act would not apply to class advice issued by an entity.

 

For further information please contact:

David Craig
Partner

Hugh Kettle
Partner

Murray King
Partner

David McPherson
Partner

Rachel Paris
Partner