Today, the Financial Markets Authority (FMA) published its first monitoring report (the Report) of the financial advice regime, which came into effect on 15 March 2021. A detailed overview of the Regime can be found here.

The Report, which is available here, shows how a range of Financial Advice Providers (FAPs) responded to the obligations and licensing requirements under the Regime, which became fully effective from March 2023.

Who needs to read this? Why?

Under the regime, FAPs are held to higher standards of conduct by the FMA. FAPs provide advice on financial products and services including investments, insurance, consumer credit contracts (such as mortgages), and investment planning services. FAPs had the benefit of a two-year transitional period before the licensing and compliance conditions of the Regime became fully effective. These standards have required all FAPs, including sole advisors through to large providers, to ensure that they are complying with the new standards of the regime and lower their exposure to any penalties that may apply for non-compliance. All FAPs are encouraged to read the Report and consider how the insights and areas for improvements can be incorporated into their operations.

What does it cover?

The FMA conducted around 60 monitoring visits, covering over 350,000 clients, as part of the Report’s targeted sample of FAPs. The FMA Director of Deposit Taking, Insurance and Advice, Michael Hewes, said that the FMA is “generally encouraged by the way licensed FAPs have made progress at this this early stage in the new regime”.

The key areas that were covered in the Report include:

• Understanding of regulated financial advice: FAPs generally demonstrated a good understanding of regulated financial services and provided a combination of financial advice and information-only services. Gaps were identified where it was not clear to clients that FAPs were providing an information-only service instead of financial advice. 
• Understanding nature and scope of advice: FAPs generally demonstrated that the nature and scope of their advice was understood by their clients. Gaps were identified where the nature and scope of the advice was not discussed until after the advice was provided, where limitations were not explained and conflicting information was provided to clients, and where FAPs were unable to demonstrate through evidence that clients understood the nature and scope of the advice. 
• Giving suitable advice: FAPs generally demonstrated detailed product knowledge, an understanding of their client’s background, and strong relationships with business development mangers. Gaps were identified in FAPs’ knowledge about their clients due to an insufficient needs analysis or a lack of product comparisons, resulting in FAPs making recommendations about products that did not meet the client’s needs and risk tolerance, and which were based off assumptions about affordability. 
• Prioritising clients’ interests: FAPs generally demonstrated a strong focus on using good processes for higher risk practices. Gaps were identified in some FAPs’ ability to demonstrate that advice given was in clients’ interests, and in a lack of training on conflict of interest management. 
• Ensuring clients understand advice: FAPs generally demonstrated good practices around asking questions throughout the advice process, presenting risks and consequences to clients, and relaying any change in benefits to clients when making recommendations to replace existing products. Gaps were identified around FAPs taking sufficient steps towards ensuring client understanding, where some took no steps at all.
• Disclosure: FAPs generally had publicly available disclosures that were easy to locate and provided clear information to clients about dispute resolutions schemes (DRS). Gaps were identified in disclosure detail around commissions and incentives, the timeframe in which disclosures were to be provided to clients, the explanation of fees and expenses, disclosure inconsistencies across different documents, the explanation of the nature and scope of advice, and the inclusion of DRS information. 
• Continuing professional development (CPD): FAPs generally demonstrated CPD plans with a diverse range of planned learning. Gaps were identified where some FAPs relied solely on product webinars, did not consider regulatory framework updates, and did not complete any analysis of knowledge gaps. 
• Compliance oversight: FAPs generally used good tools and technology for the implementation of compliance oversight. Class 1 FAPs with registers generally demonstrated an outline of their duties and obligations alongside their policy processes. Class 2 FAPs often demonstrated a good compliance assurance programme (CAP) that covered all necessary compliance obligations. Gaps were identified where oversight was insufficient or was not conducted at all, and where oversight frameworks were poorly designed and failed to account for risk, advice quality, and where FAPs with a CAP in place did not follow it in practice.
• Record keeping: FAPs generally demonstrated effective customer relationship management (CRM) which met the needs of their clients dependent on size and complexity, therefore providing recording keeping practices and advice to clients more efficiently and effectively. Gaps were identified around the insufficient documentation of client interactions, disclosures, grounds for advice, conversations between FAPs and clients around risks and limitations, and steps taken to ensure client understanding. 
• Complaints: FAPs generally had robust complaints processes proportionate to their business’s size. Gaps were identified where FAPs did not have a good understanding of a complaint, where complaints processes were not being followed by FAPs, where complaints were not being recorded, where complaints management roles and responsibilities were unclear, and where there was limited oversight and reporting to management and the board about underlying systematic issues. 
• Business continuity and technology systems: Most monitored FAPs had a business continuity plan (BCP) that was appropriate for the size and scale of their business. Gaps were identified where some FAPs’ BCPs were narrow in scope, failed to sufficiently address personal risk, were not reviewed or tested annually, were not sufficient for the size and scale of the business and risk identified, and did not identify how critical technology systems would be recovered and restored.

Our view

We see the Report as a good opportunity for all FAPs to consider their practices in relation to the key focus areas of the Regime, and review and implement any changes to their practices or processes in relation to the Report’s findings. The Report will enable FAPs to address areas of weakness which see them run the risk of delivering poor outcomes to their clients, and risk regulatory intervention where compliance is poor. FAPs should read the Report and consider the ways that its insights can be used to make improvements to their business operations, where the willingness of FAPs to adapt their businesses to meet the new requirements under the Regime will work towards the strengthening of the sector as a whole.

What next?

The FMA will continue to engage with the advice sector based on the Report’s findings. This will ensure that FAPs have the opportunity to reflect on their own processes, and determine where their processes exceed, and where they fall short, of those of other FAPs.

Our experts would be happy to discuss any aspect of the Report or Regime outlined above.

This article was co-authored by Andrew Walker, a Law Clerk in our Financial Services team.