Spotlight on "reasonable grounds" as FMA consults on guidance around financial advice on equity investments

6 July 2022

In its first proposed guidance for the new Code of Professional Conduct for Financial Advice Services, the FMA has focused on Code Standard 3 - particularly what constitutes “reasonable grounds” for financial advice given to clients when they are considering investing in IPOs and listed equity securities.

The purpose of the guidance is to both help support financial advisers to provide quality advice, and improve access to advice, on these products.

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

In the proposed guidance, the FMA confirms that it is generally of the view that advisers will need “to access or undertake research to support reasonable grounds for advice on IPOs and listed equity securities”, and goes on to address what makes research ‘fit for purpose’ in this context.  

The consultation acknowledges that research is often not available for smaller companies, and the FMA does not intend to discourage those giving financial advice from being able to give opinions or recommendations relating to those companies.  If market participants are concerned that the FMA’s guidance might have a chilling impact on the provision of financial advice relating to smaller companies, they should raise that with the FMA through the consultation process. 

The consultation

The proposed guidance follows on from an earlier targeted consultation. In this consultation the FMA is seeking feedback on a list of questions, which include:

  • whether it is possible to have "reasonable grounds" for advice on IPOs and listed equity securities, where research is not available and/or is not needed;
  • whether the FMA’s proposed guidance should be neutral about the source of research used to support “reasonable grounds”;
  • for research to be ‘fit for purpose’, does it need to:
    • describe the company’s activities – why it exists and how it generates cashflow or intends to do so;
    • encompass (quantitatively and qualitatively) the relevant financial and operational aspects of the company, its risks, its value drivers, its outlook, and the quality of its management; and
  • whether research should be in writing and documented to a standard the financial advice profession would expect for the nature and scope of the advice.

Market participants should consider the extent to which they currently use research in the provision of advice and whether the draft FMA guidance is consistent with that practice. 

Submissions on the draft guidance close on 5 August 2022.  Bell Gully will be making a submission, and welcomes feedback from clients and other interested parties on this consultation.

If you have any questions about the consultation please get in touch with the contacts listed, or your usual Bell Gully adviser. Further details on the consultation are on the FMA’s website here.

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.