Rural eSpeaking, Issue 2: March 2010

Trust eSpeaking, Issue 10: March 2010

Commercial eSpeaking, Issue 24: February 2010

The Securities Commission has powers for enforcing the Act, monitoring industry standards and adviser conduct, handling complaints, determining breaches of the Act and imposing penalties.  A Financial Advisers Commissioner and a code committee have recently been appointed under the Act and are tasked with drafting a code of conduct for Authorised Financial Advisers. 

The code committee has recently published two discussion papers, first a proposal for minimum standards of competence, knowledge and skills for Authorised Financial Advisers and more recently proposed minimum standards of ethical behaviour and client care for Authorised Financial Advisers.  Also Guidelines have been issued for obtaining Qualifying Financial Entity (QFE) status.  QFE status would be mostly applicable to Category 2 advisers as discussed below.

The Act introduces two categories of financial products.  Those advising on Category 1 products have to be authorised by the Securities Commission and renewed each year.  Those advising on Category 2 Products only have to be registered with the Securities Commission when the Act comes into force.  The categories of financial products are:

Category 1

• A security (as defined in the Securities Act 1978 including life insurance)
• An estate or interest in land
• A futures contract

Category 2

• A call or debt security
• A bank term deposit
• Insurance products including term insurance
• Consumer Credit Contract

Financial advice is defined as making a recommendation or giving an opinion or guidance in relation to acquiring or disposing of a financial product. 

A financial planning service is to be Category 1 requiring authorisation.  Life insurance policies issued before 31 December 2008 are Category 2.

Disclosure Obligations

The Act provides for disclosure obligations to be complied with prior to giving financial advice.  Category 1 advisers will be subject to more onerous disclosure obligations. The Act provides various heads of compliance for disclosure.  A disclosure statement will be out of date if a material change occurs or if a reasonable person would consider that such change would materially affect a decision to proceed with that service. 

Conduct Obligations

Section 33 of the Act provides that a Financial Adviser when performing a financial adviser service must exercise the care, diligence and skill that a reasonable Financial Adviser would exercise in the same circumstances, taking into account the nature and requirements of the client.  This standard would be subjective, taking into consideration the circumstances of each case. 

Authorisation

The Act provides that Category 1 product advisers should be registered and authorised.  Category 2 product advisers need only be registered with the Securities Commission.  QFE (Qualifying Financial Entities) may be registered as entities and will be responsible for the front line compliance of registration and authorisation of their employees and/or agents and maintaining the compliance standards and procedures of the entity. However, authorised and registered advisers will be responsible for their own compliance with the conduct and disclosure obligations under the Act. 

The code committee has recently published two discussion documents and a QFE guide:

1.  A proposal of minimum standards of competence, knowledge and skills for authorised advisers and a basic requirement of level 5 of ETITO qualification has been mandated for authorised Financial Advisers.

2.   A proposal of minimum standards of ethical behaviour and client care for Authorised Financial Advisers.

3.  Guidelines for making Application for Qualifying Financial Entity (QFE) status. An Adviser Business Statement is required to be submitted before 31 July 2010. The Securities Commission is considering applications from 1 February 2010.

Enquiries can be made to consultation@financialadvisercode.govt.nz. 

Our firm has the view that accountants, lawyers, valuers and real estate agents have been granted a limited exemption to give advice that is a necessary incident of their own professional practice.  These professions will need to comply with their own professional codes of practice.  The code committee’s discussion document also clarifies that the authorisation process would apply to financial advisers who provide advice to Wholesale Financial Services Providers.  This would include professions such as Actuaries and Fund Managers.  The qualification requirements could be limited to knowledge of the Code in such cases.

The implications of this Act are far reaching and the Insurance and Financial Adviser community will need to prepare compliance documentation for the registration and/or authorisation process on commencement of the operational provisions of the Act and the code of conduct estimated for end 2010.  QFEs are required to file Business Statements before 31 July 2010 (the Commission is assessing applications from 1 February 2010).

The penalties under the Act are quite severe and those offering financial advice either as  Registered Advisers or Authorised Advisers will be advised to make preparation well in advance, prior to commencement of this new regime of regulation of Financial Advisers.  If you intend to apply for QFE registration your Business Statements should be lodged before 31 July 2010.

Our team of lawyers are able to assist you in submitting your applications.

Contact:

Sharmala David, Special Counsel, DDI: 04 916 0148

John Stevens, Director, DDI: 04 916 0131

(Sharmala has worked in Securities, Financial Services Compliance, Distribution and Franchising for over 20 years, John has worked in Financial Services and Property for over 30 years).

Newsbrief, Summer Edition: December 2009

Rural eSpeaking, Issue 1: December 2009

Property eSpeaking, Issue 2: November 2009

The Financial Advisers Act 2008 (the Act) was enacted in December last year with a lead in period for a code of conduct for authorised financial advisers to be established as a regulation.  In the past few months we have seen much progress being made under the auspices of the Securities Commission, which is the enforcement authority under the Act.  A Code Committee has been established and a draft proposal for minimum standards of competence, knowledge and skills for authorised financial advisers has been released recently.

What does this mean for Real Estate Agents?

The Act has far reaching implications for anyone giving financial advice on certain categories of financial products.  The products are:

Category 1

A security including life insurance

An estate or interest in land

A futures contract

 Category 2

A call or debt security

Bank term deposit

Insurance product including term insurance

Consumer Credit contract

A business as such is not included as a financial product but the land or lease associated with a business could mean that related advice falls under Category 1.

Financial advice is defined as making a recommendation or giving an opinion or guidance in relation to acquiring or disposing of a financial product described above.  A limited exemption is granted to Real Estate Agents, as long as the Real Estate Agent is giving advice or making an investment transaction in the course or his/her occupation as a Real Estate Agent and if the advice or transaction is a necessary incident of working as a Real Estate Agent. 

The words “necessary incident” are not defined and there is no precedent for the use of this expression in other legislation. 

The same limited exemption is also given to lawyers, chartered accountants and valuers.

It is our view that a Real Estate Agent should not depart from the agency activity for which the agent is licensed under the Real Estate Agents Act 2007.  If an opinion or recommendation is given about an interest in land which is outside the scope of the agency role, taking into account that the agent is usually representing the vendor, it would fall within the regulatory regime of the Financial Advisers Act and the code of conduct prescribed under that Act.  Complaints could be made to either the Securities Commission, and be investigated by the Financial Advisers Commissioner or under the Real Estate Agents Act disciplinary regime.  The Securities Commission has powers to investigate the conduct of non-authorised advisers as well as authorised advisers.  There is also the possibility of investigation and prosecution by the Commerce Commission under the Fair Trading Act.

Disclosure Obligations

The Act provides for disclosure obligations to be complied with prior to giving financial advice.  Category 1 advisers will be subject to more onerous disclosure obligations.  The disclosure statement would need to disclose matters such as:  

• Relevant experience
• Criminal convictions, bankruptcy or insolvency
• Fees and remuneration
• Material interests and relationships
• The nature of products being authorised to advise on
• Procedures handling client monies and property
• Indemnity insurance
• Dispute resolution arrangements
• Address details
• Any other matters required to be disclosed as part of the authorisation process

A disclosure statement will be out of date if a material change occurs or if a reasonable person would consider that such a change would materially affect a decision to proceed with the service. 

Conduct Obligations

Under section 33 of the Act a financial adviser when performing a financial adviser service must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances, taking into account without limitation, the nature and requirements of the client.  Such a test of care, diligence and skill required of directors of companies is contained in the Companies Act 1993.  Under the provision in the Financial Advisers Act, financial advisers would be required to satisfy a higher threshold of competence and conduct which would be subjective depending on the circumstances of each client. 

Offences

The penalties for breaches of the Act are: 

• A person performing a financial adviser service without being registered or authorised is liable to a fine up to $5,000.00 on conviction and $10,000.00 for an entity (QFE - Qualifying Financial Entity as described by the Act).  
• A person performing a service that only an authorised financial adviser may perform is liable for a fine up to $10,000.00 or $50,000.00 for an entity.  
• A person who breaches disclosure obligations is liable to a fine up to $100,000.00 or $300,000.00 for an entity.  
• A person knowingly or recklessly misleading or deceiving is liable for a fine up to $100,000.00 or $300,000.00 for an entity.

A QFE is a Qualifying Financial Entity that could be authorised itself and would take responsibility for its employees and agents and for their registration and authorisation, however the Authorised Financial Adviser (AFA) will be responsible for his/her own conduct obligations under the Act.

The recently released consultation document (October 2009) containing proposed minimum standards of competence knowledge and skills for authorised advisers also introduces a new category of authorised advisers who provide financial advice to wholesale financial service providers.  This would include professions such as Fund Managers, Actuaries etc, having to comply with the Act and prescribed authorisation regulations and Code of Conduct.

Educational Requirements

The Educational Unit standard prescribed by the Code Committee for authorised financial advisers can be found in www.etito.co.nz.  ETITO will ensure that training providers are able and ready to perform modular and full course training throughout New Zealand.  Tools are also made available for advisers to self assess their own level of competence against the prescribed unit standards to assist with assessing if they require further training.  Information is available at www.etito.co.nz.  Enquiries about the proposed minimum standards should be made to consultation@financialadvisercode.govt.nz. 

Real Estate Agents Providing Investment Advice

The limited exemption given to Real Estate Agents under the Act to give advice which is a necessary incident to the performance of a Real Estate Agent’s functions will only allow the agent to act as facilitator for the sale and purchase of a property or business.  If the agent expands their participation to include advising on property investments, market conditions, timing of investments etc, caution should be exercised not to express opinions or recommendations relating to the investment under offer.

Real Estate Agencies could register as QFEs under the Act.  This would be a course of action to follow if investment/financial advice is contemplated as a business activity of an Agency.  Individual advisers would then have to follow the educational requirements and the Agency will be responsible for the front line compliance of registration and educational requirements of its employees and agents.  Advisers would be personally liable for their conduct and disclosure obligations under the Act.

For further information contact Sharmala David or John Stevens.

Sharmala David, a Special Counsel at Johnston Lawrence Limited, Lawyers,  specialises in securities law, franchising and financial adviser compliance. 

John Stevens, a Director, has been a senior legal adviser to REINZ and the industry for over 30 years. 

Email: sharmala@johnlaw.co.nz, DDI: 04 916 0148 /  john@johnlaw.co.nz, DDI: 04 916 0131

The various requirements for registration and authorisation for giving financial advice about real estate were considered together with the competency, conduct and disclosure obligations under the Act. 

The powers of the Securities Commission for enforcement of the Act and penalties for breaches were identified and discussed. 

After much discussion and participation from the audience it was evident that caution must be exercised in marketing and selling real estate in order that provisions of the Financial Advisers Act 2008 are not breached. 

The Financial Advisers Act’s operative provisions are expected to be in force in 2010.

Similar issues will arise for chartered accountants, valuers and lawyers.

For any clarification and enquiries contact:

Sharmala David, Email: sharmala@johnlaw.co.nz, DDI: 04 916 0148

John Stevens, Email: john@johnlaw.co.nz, DDI: 04 916 0131

Fineprint, Spring/Summer Edition: 2009