New financial advisers’ regime
The new Financial Services Legislation Amendment Bill (Bill), currently before Parliament, will discard the RFA model and require all financial advisers to meet minimum standards of competence and conduct.
Minimum duty provisions will apply and should help restrict the ability for advisers to carry out conduct driven by sales incentives. In addition to the existing requirement to exercise care, diligence and skill, the duty provisions include new obligations to:
- prioritise the interests of the client if there is a conflict between the interests of the client, and the interests of the person giving the advice or any associated person (applicable to services provided to retail and wholesale clients); and
- in respect of retail services only, comply with the standards of ethical behaviour, conduct and client care required by the new code of conduct (which is expected to be released mid-2018).
In addition, financial advice providers must not give any of their nominated representatives (generally RFAs in the insurance context under the current FAA regime), any kind of payment or other incentive that is intended to encourage, or is likely to have the effect of encouraging, a nominated representative to breach a duty provision. This duty is intrinsically linked to the duty to prioritise the client’s interests. For the purpose of providing transparency and effectively assessing any conflicts between a payment/incentive and the duty to prioritise the interests of the client, we believe this duty should require clear disclosure of any remuneration or payments derived by nominated representatives.
We recognise that incentives are an important remuneration tool in the industry. The current drafting of this incentives duty (i.e. incentives must not be given which intend to encourage, or which are likely to have the effect of encouraging, a nominated representative to breach a duty provision), will mean that employers will have to look carefully at any remuneration structure with an element linked to sales. In our February submission on the Bill to the Economic Development, Science and Innovation Select Committee, we queried whether this duty should instead be restricted to incentives that “materially influence” the advice given.
We will need to wait until the Select Committee provides its response to the relevant submissions (and subsequently for the Act to be passed), to see where Parliament has landed on this front.
The new financial adviser regime is squarely targeted at ensuring advisers prioritise the interests of the client over their own. It also places emphasis on the role of providers in supporting good customer outcomes, by restricting their ability to provide payments or incentives to nominated representatives that might encourage them to breach a duty provision.
Although the FMA’s report focuses on the conduct and practices of advisers (rather than the providers that are offering the incentives), the FMA has identified future work on commissions and the behaviour and practices of providers in its 2017/2018 Annual Corporate Plan.
If you would like further information regarding the outcome of the FMA’s review, or would like advice on the application of relevant legislation to your business, please contact one of our insurance experts.
Who can help
Senior Associate - Financial Services
Maria is a Senior Associate in the Banking and Financial Services team, and is a financial services specialist. She has particular expertise in financial services regulation, assisting with reviewing and drafting offer documents, trust deeds, custody agreements and investment management agreements. She also advises on a range of issues related to offering securities and operating financial services or financial advisory businesses in New Zealand.
Maria works with retail and wholesale fund managers, trustee companies, insurers and other major financial institutions, advising on all aspects of the Financial Markets Conduct Act 2014 (particularly in relation to discretionary investment management services and managed investment schemes), the Insurance (Prudential Supervision) Act 2010, as well as financial advice and broking services regulation.
Maria started her legal career with Chapman Tripp, before working in offshore funds and banking for a Guernsey law firm. Returning to New Zealand at the end of 2016, Maria joined our firm in August of that year.