Johnston Lawrence

Financial Advisers Act (2008) - Gaining momentum towards registration and authorisation of Financial Advisers

20 November 2009. by Sharmala David , tagged with Business Law | General News

Sharmala David and John Stevens comment on the implications for Real Estate Agents, branch managers and salespersons.

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

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