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Authorisation and Registration of Financial Advisers - a leap forward in the financial advice sector

15 January 2010. by Sharmala David , tagged with Business Law | General News

In recent years there has been some reform of laws relating to financial advice.  However the last twelve months have been noteworthy in the radical strides made in the Financial Advice Sector.  The Financial Advisers Act 2008 (the Act) was enacted in December last year with a lead in period for establishment of a code of conduct for authorised Financial Advisers.  It gives the public access to an enforcement authority for investigating any grievances and mandates the registration and/or authorisation of all Financial Advisers.

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).

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