New FMA guidance for financial advice relevant to ECM transactions

23 February 2023

You would be forgiven for having missed that, during the brief period in early February 2023 between dramatic weather events, the FMA released its first guidance for the new Code of Professional Conduct for Financial Advice Services. The FMA’s guidance provides some useful commentary for financial advisers on what constitutes “reasonable grounds” when giving financial advice to clients considering investing in financial products.

This follows a consultation on the proposed guidance last year. We were pleased to see a number of our submissions have been addressed in the final guidance.

Why is the guidance required?

Code Standard 3 requires that

“[a] person who gives financial advice must ensure that the financial advice is suitable for the client, having regard to the nature and scope of the financial advice.”

Supporting commentary explains that ensuring financial advice is suitable for the client should include having “reasonable grounds” for the financial advice.

There has been some uncertainty about what a financial adviser should do to ensure that they can demonstrate that they had “reasonable grounds” for advice given. This has particularly been the case in situations where it is difficult to access information to support giving financial advice. For example, what is required for advice on smaller listed companies where third-party research is not available? The FMA is keen to avoid advisers having to retreat from those situations, which could result in New Zealanders having less access to financial advice. 

Issuer information is fundamental

From our perspective, the key conclusion from the guidance is that the FMA generally expects a financial adviser to consider fundamental information published by issuers. This means that the key documents for equity investments will be those made available by the issuer, like the product disclosure statement and register entry (for an IPO); or market releases (for follow-on offers).

Importantly, the guidance clarifies that external research is not required, although it might be helpful to support reasonable grounds for financial advice. Financial advisers are encouraged to use their own professional judgement to determine what information is relevant, material, and sufficient to inform their financial advice and support having reasonable grounds, considering the nature and scope of the advice and the relevant circumstances. More complex or novel financial products are likely to need more information to support financial advice. To assist financial advisers with this, the guidance includes six worked examples. 

Implicit in the guidance is that external research is not enough. Providing financial advice requires an adviser to consider their client’s circumstances, whereas research will only address the company’s activities. Research can be a helpful building block, but not a complete answer.

Questions for financial advisers

The key questions a financial adviser should be considering are:

  • Do you understand your client’s circumstances? What is their financial situation? What are their needs, goals and risk tolerance? Those factors need to be understood and considered.
  • What information is available about the company and the financial products? What information is relevant, material and sufficient to inform your financial advice? Have you considered the fundamental material published by the company? Is there other information available that might support your advice (e.g. research)?
  • Does your advice follow cogent reasoning based on your professional judgement? You should be able to explain your reasoning and the factors you took into consideration.
  • Is the advice within the scope of your professional competence, knowledge and skill?
  • Have you communicated your advice clearly to your client (including limitations to your advice)?
  • Are you aware of your professional standards? This includes ensuring that there are reasonable grounds for your advice.
  • Have you kept adequate records that show how your advice met your professional standards?

The guidance also includes a reminder that financial advice providers’ records (which are required as a condition of their licence) should clearly demonstrate how their advice met Code Standard 3.

Further advice

The guidance does not constitute legal advice. If you have questions about this guidance or advice on any other aspects on the Code of Professional Conduct for Financial Advice Services please get in touch with the contacts listed, or your usual Bell Gully adviser.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.