New Licensing And Compliance Regime For Financial Advisers

The Financial Services Legislation Amendment Act 2019 (FSLAA):

• Establishes a new licensing regime for providers of regulated financial advice to retail clients;
• Creates new duties and conduct obligations for all persons giving financial advice, whether to retail or wholesale clients, and a new Code of Conduct for those providing retail advice;
• Introduces a new client money or property service regime, in place of the Financial Advisers Act (FAA) broker regime; and
• Updates the Financial Services Providers (Registration and Dispute Resolution) Act 2008 (FSPA), to change its scope and prevent misuse by entities with limited New Zealand connection.

There is some transitional relief up to 15 March 2023 for meeting competency requirements and obtaining a full (rather than transitional) licence.

Financial Advisers Act Regime

The FAA regulates persons engaging in:

• Financial advice – providing a recommendation or opinion in relation to acquiring, disposing of, or holding a financial product, subject to certain exclusions. The provision of purely factual information (for example, the cost or terms and conditions of a financial advice product) is excluded;
• Discretionary investment management services – broadly, financial product investment decision-making made under a granted authority;
• Investment planning services – broadly, designing a plan, based on an individual’s current and future overall financial situation and investment needs, which contains recommendations or opinions on how to realise the individual’s identified investment goals;
• Broking services - receipt, holding, payment or transfer of client money or property as an intermediary for a client.

The FAA regime is complicated and the compliance obligations depend on:

• The type of financial product (category 1 – complex; category 2 – simple);
• Whether the adviser has retail and/or wholesale clients;
• Whether the financial adviser is providing personalised (identifiable client, tailored) or class (non-personalised) services, and
• Whether the financial adviser or client is onshore or offshore.

Advisers providing personalised advice to retail clients on complex products require Financial Markets Authority authorisation under the FAA. Other advisers require only registration.

There are also requirements relating to dispute resolution scheme membership, conduct and education standards, and disclosure.

Licensing Under FSLAA

FSLAA repeals the standalone FAA and inserts the new financial advice regulatory regime in the Financial Markets Conduct Act 2013 (FMCA), which is the key financial markets regulatory legislation in New Zealand.

When FSLAA comes into force, advisers will be either a Financial Advice Provider (FAP), a Financial Adviser (FA), or a Nominated Representative (NR) engaged by a FAP. There is also allowance for interposed persons (who will themselves be FAPs) and authorised bodies in business structures.

There will be two phases of licensing: transitional and full.

Transitional licences

All those providing financial advice should have a transitional FAP licence, or be operating under another FAP’s transitional licence by 15 March 2021.

A transitional licence enables FAs and NRs to continue providing the advice they were legally able to provide under the FAA before FSLAA came into effect. It is valid for up to two years, to 15 March 2023. All FAPs must have obtained a full licence by this time, and all FAs and NRs will need to be engaged by a FAP with a full licence.

A transitional licence can be obtained through a short, online application process, allowing the FMA to collate and consider limited information on FAPs.

There are two standard transitional licence conditions, relating to record keeping and having an internal dispute resolution process.

Full licences

A full licence entails a more demanding application process, requiring detailed business information to be provided to the FMA.

There are three classes of full licence, depending on the manner in which regulated financial advice may be provided by the FAP. The classes do not limit the types of financial advice that may be provided under the licence, as this is addressed by the competency requirements in the new Code of Professional Conduct for Financial Advice Services (Code).

The FMA has released the standard conditions it will impose on full financial advice provider licences. These relate to:

• record keeping;
• internal complaints processes;
• regulatory returns;
• outsourcing;
• business continuity and technology systems;
• ongoing eligibility, and
• notification of material changes.

New Financial Advice Duties And Obligations

Where advice is provided to either retail or wholesale clients, the adviser must:

• Give priority to the client’s interests, where there is a conflict of interest;
• Exercise the care, diligence and skill that a prudent person engaged in the occupation of giving regulated financial advice would exercise in the same circumstances;
• Not recommend that clients acquire financial products that have been offered in contravention of the Financial Markets Conduct Act or its regulations.

Where advice is provided to retail clients, the adviser must also:

• Follow the new disclosure regulations, making prescribed information available at various points in the advice process. Any information made available to clients must not be false, misleading or incomplete;
• Comply with the requirements of the new Code to:
  • treat clients fairly;
  • act with integrity;
  • give financial advice that is suitable;
  • ensure the client understands the financial advice, and
  • protect client information.

(There are also competency requirements in the Code which will apply from 15 March 2023.)

• Take reasonable steps to ensure that the client understands the nature and scope of the advice given, including any limitations on the nature and scope of the advice.

 Financial advice providers must also:

• Make sure anyone they engage to give advice under their licence complies with all the relevant duties;
• Ensure that they do not give, or offer to give, any inappropriate incentives if they engage NRs;
• Have appropriate processes and controls in place when they engage NRs. These should allow the FAP to control the advice being given and the circumstances in which it is given;
• Tell the FMA if they materially contravene their obligations, or if certain changes are made, including changes to directors or senior people.

New Code Of Professional Conduct

From 15 March 2021, anyone providing financial advice to retail clients will be required to comply with the new Code of Professional Conduct for Financial Advice Services (the Code).

The Code is divided into two parts:

• Part 1: Ethical Behaviour, Conduct, and Client Care, and
• Part 2: Competence, Knowledge, and Skill.

The Code comprises nine standards that are generally principles-based in nature. In order to assist compliance, the Code provides commentary for each standard and, in Part 2, ways of demonstrating the standards.

Existing advisers have a two year exemption in which to meet the competency requirements under the Code. This expires on 15 March 2023. Until then, financial advisers under a transitional licence will be able to continue to provide the regulated financial advice they provided under the previous regime.

Disclosure Obligations

FSLAA provides for new disclosure requirements by way of regulations which apply from 15 March 2021. The Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020 set out the information that must be disclosed and when that information must be disclosed.

They require disclosure at four key points in the financial advice process:

• Information to be made publicly available at the outset on a website (if the provider has one) or on request;
• Information to be given to the client when the scope of advice to be given becomes known;
• Information to be given to the client when the advice is given, and
• Information to be given if a complaint is received.

Financial Service Providers (Registration and Dispute Resolution) Act 2008

The Financial Service Providers (Registration) Regulations 2020 and the Financial Service Providers (Exemptions) Amendment Regulations 2020 (the Regulations) also apply from 15 March 2021.

The Regulations are designed to prevent misuse of the Financial Service Providers Register (FSPR) by including a minimum threshold that must be met by certain entities to register on the FSPR. The Regulations also require certain providers to include a warning statement that registration on the FSPR does not mean active regulation in New Zealand.

Persons who have been in the business of providing a financial service in New Zealand for at least 12 months, will not meet the prescribed threshold if:

• During the relevant period, the financial service is provided to fewer than 10 New Zealand residents, or
• The amount determined for the relevant period in accordance with a prescribed formula is less than NZ$10,000.

Conclusion

The changes resulting from FSLAA affect all financial advisers and those providing financial advice services to clients in New Zealand. They represent a significant progression for the industry and are expected to lift service standards and improve customer outcomes.

Penny Sheerin
An expert in financial services laws, Chapman Tripp Partner Penny Sheerin advises extensively on the full range of legislation affecting financial service providers, including financial advisers under the new Financial Services Legislation Amendment Act. Penny also advises fund managers, insurers, brokers, discretionary investment management scheme providers, derivatives issuers, non-bank deposit takers and payments system providers. She counsels clients on the establishment, restructuring, distribution and compliance of financial products, including KiwiSaver. She is experienced in obtaining licences, and has managed numerous applications to, and negotiations with supervisors and regulators, including the Financial Markets Authority, NZX, Companies Office and Reserve Bank of New Zealand.