The Financial Markets Authority (FMA) has released guidance on its approach to the application and enforcement of Code Standard 3 of the Code of Professional Conduct for Financial Advice Services (Code). The guidance is intended to help advisers assess whether they have met the requirement of having ‘reasonable grounds’ for financial advice given on investment products.
Links to the guidance and the FMA’s media release are available here and here.
Who needs to read it? Why?
Any individuals or entities who give financial advice to their customers should conduct their services in such a way that is compliant with the FMA’s expectations. This includes being conscious of when the FMA's guidance documentation may apply. This particular piece of guidance is relevant to situations where it is difficult or impractical to access information to support reasonable grounds for financial advice on an investment product.
What does it cover?
Code Standard 3
This guidance is in relation to Code Standard 3 of the Code, which 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.” If a financial advice provider is to ensure that the advice given is suitable for the client, there must be reasonable grounds for the advice.
Reasonable grounds for the financial advice means having grounds that a prudent person engaged in the occupation of giving financial advice would consider to be appropriate in the same circumstances, such as those in relation to:
- any strategy supporting the financial advice;
- any assumptions underlying the financial advice;
- any financial advice product covered by the financial advice; and
- the client’s circumstances that are relevant to the financial advice, such as their financial situation, needs, goals, and risk tolerance.
Code Standard 3 further states that the nature and scope of financial advice given should inform whether a detailed analysis of the client’s circumstances may be required, or whether it is reasonable to make assumptions about the client’s circumstances based on their particular characteristics. If the financial advice required a comparison between two or more financial advice products, the advice should be oriented around an assessment of each product.
Guidance on reasonable grounds for financial advice about financial products
This newest guidance by the FMA acknowledges the challenges that financial advisers might confront when advising on “high-risk, complex, or novel financial products” which make accessing information to support reasonable grounds more challenging.
An example of this is where financial advice is required for initial public offerings (IPOs) or smaller market capitalisation stocks, where “expert research” may not available. The FMA makes clear that this guidance is not intended to discourage financial advisers from giving views that are supported by expert research, but instead is intended to allow what is required by the “reasonable grounds” standard to be flexible depending on the nature and scope of the advice, as well as the relevant circumstances.
Key Principles
The FMA outlined the key principles that any financial adviser should meet when giving financial advice, which are as follows:
- meet professional responsibilities to clients as outlined in the Financial Markets Conduct Act 2013 and the Code;
- give financial advice that’s within the scope of an adviser’s professional services, competence, knowledge and skill;
- exercise professional judgement to the formulation of financial advice so that the adviser is able to explain the reasoning and the factors taken into consideration;
- consider relevant, material and sufficient information to inform financial advice and support having reasonable grounds;
- consider the client’s relevant circumstances such as their needs, goals and risk tolerance in order to give suitable financial advice;
- communicate clearly with the client so they understand the nature and scope of the advice given, including any limitations; and
- keep adequate records in relation to the financial advice service that clearly demonstrates how the advice given met Code Standard 3. This is particularly important where you have relied on limited information to give your advice.
Giving financial advice on IPOs and listed equity securities
The FMA acknowledges that IPOs and listed equity securities can have distinctive risks which often require more time to identify and assess, particularly when it comes to smaller market capitalisation stocks. This means that the standard for having reasonable grounds for advice given in regard to IPOs and equity securities is adjusted to accommodate for the different challenges.
In the guidance, the FMA states that it generally expects financial advisers, or those on whose assessment financial advisers rely, to consider the following fundamental information:
- For IPOs, the product disclosure statement or equivalent overseas disclosure information, as well as information on the register entry or equivalent overseas disclosure information.
- For listed equity securities, material information publicly released by the issuer should be considered as well as information about the issuer or the equity securities on NZX or other financial product market on which the securities are listed.
It is not expected that this fundamental information is verified.
Our view
Overall, the FMA reiterated its expectation that financial advisers focus on ensuring good customer outcomes, and ensure the financial advice given is suitable for the client. This guidance is helpful in clarifying what is required for financial advisers to discharge their Code Standard 3 duty, in particular addressing how the threshold to meet that duty has a level of fluidity depending on the financial advice in question, and the customer. We recommend that financial advisors pay close attention to the guidance in order to ensure advice is given in accordance with the FMA’s expectations.
What next?
If you have any questions in relation to this guidance or giving financial advice generally, please contact one of our experts.
This article was co-authored by Elise Plunket, a Solicitor in our Financial Services team.
