Johnston Lawrence

Financial Advising Franchises Faced with Regulatory Changes

10 July 2009. by Sharmala David , tagged with Business Law | Franchising | General News | Property

The Financial Services industry in New Zealand is made up of many of franchises, including some of our biggest brands. The recent introduction of The Financial Advisers Act 2008 will change and regulate the industry practices. Sharmala David of Johnston Lawrence Lawyers explains these changes – How will the ACT affect New Zealand Financial Advisors and their customers?

The Financial Advisers Act 2008 (the Act) establishes a regulatory regime for Financial Advisers. Whilst there have been many pieces of legislation in recent years which regulate Financial Advice in New Zealand in some limited form, this Act is all encompassing and can be viewed as the central regulatory regime for Financial Advisers. This would ameliorate any ambiguity for the profession. It provides the clarity the industry was looking for, and gives the public the long awaited access to an enforcement authority for pursuing action against errant Financial Advice.

The Act commenced on 5 December 2008, however the main operative provisions of the Act do not come into force till a later date to be announced in Regulations.

Operative Part

Section 9 of the Act describes three types of financial advisers:

1. Authorised and Registered Financial Advisers.
2. Registered but not Authorised Financial Advisers.
3. Neither registered nor authorised but employees of agents of a QFE.

A QFE is an Entity that is registered or entitled to be registered as an Authorised Financial Adviser and is not debarred from applying for QFE status. On the grant of QFE status the entity will discharge its ongoing complying obligations and comply with the terms and any conditions of the grant of QFE status. Employees and Agents of QFEs do not have to obtain individual registrations as Financial Advisers.

Disclosure Obligations

Comprehensive disclosure requirements are incorporated under the Act which will replace the Investment Adviser and Investment Broker regulations currently found in the Securities Markets Act 1988. Authorised Financial Advisers will be subject to more onerous requirements and will be required to disclose certain information prescribed by regulations in a written Disclosure Statement to be given prior to giving Financial Advice including the following:

• Relevant Experience
• Criminal convictions, Bankruptcy, or Insolvency
• Fees and Remuneration
• Material interests and relationships
• Financial Products regarding which advice is being given
• Procedures for handling Client monies and Property
• Indemnity Insurance
• Dispute Resolution arrangements
• Location of Premises and contact details
• Matters required to be disclosed as part of an Authorisation Process by the Securities Commission.

Category 2 Advisers are permitted a few less disclosures than the above. Two or more Advisers are permitted to make disclosure in a joint disclosure statement. Disclosures must be made before providing Financial Advice or as soon as practicable.

A Disclosure Statement is out of date if:

1. A material change occurs; or
2. If a reasonable person would consider that the change would materially affect a decision to:
(a) proceed with the service of the advisor; or
(b) proceed with advice already given.

A statement will not be out of date if additional written information is given which when used together with the original information updates the current Disclosure Statement.

Any advertisement advertising Financial Advisor services must contain a statement that a Disclosure Statement is available on request and free of charge.

Conduct Obligations

All Financial Advisers are required to exercise care, diligence and skill and not engage in misleading or deceptive conduct. Authorised financial advisers have additional requirements regarding receiving and holding client’s money and property on trust, accounting for client’s property and complying with the Code of Conduct which is to be published by the Commissioner for Financial Advisers and the Code Committee at a later date to be announced by the Securities Commission in regulations. The prime obligation for all Financial Advisers that is being introduced by this piece of legislation is contained in Section 33. A Financial Adviser when performing a Financial Advisor Service must exercise the care, diligence and skill that a reasonable Financial Advisor would exercise in the same circumstances, taking into account but without limitation the nature and requirements of the Financial Advisor’s client and the nature of the service performed for the client.

This section bears a resemblance to Section 137 of the Companies Act 1993 where the reasonable Director obligations are specified in that Act and the regime of proper Corporate Governance revolves around that provision. This section is subjective in scope and requires the care, diligence and skill that a reasonable Financial Advisor would exercise in the same circumstances, taking into account without limitation the client’s nature and requirements and the nature of the service performed for the client by the Financial Advisor.

Such a test of care, diligence and skill has not been introduced in legislation relating to Financial Advisors previously in New Zealand and will need to be tested in the Courts for any standard to be established and followed. As we have seen with Director’s duties and responsibilities in the past 15 years since the introduction of the Companies Act 1993, this section would provide the litmus test for Financial Advisors.

There are also further provisions dealing with conduct that is misleading and deceptive or likely to mislead or deceive, which again is a wider test and lowers the threshold for a breach to occur with the words “likely to mislead or deceive”. There is some comfort however in sub-clause 2 which provides that an offence is only committed if an adviser knowingly or recklessly misleads or deceives or is likely to mislead or deceive.

Enforcement

The Act introduces a much needed central supervisory regime for the financial adviser sector. The Securities Commission has the responsibility for enforcing the Act, monitoring industry standards, handling complaints, determining breaches of the Act and enforcing penalties. The Act provides for a Commissioner of Financial Advisers (the Commissioner) to be appointed who will be a member of the Securities Commission. The Commissioner has the responsibility for appointing a Code Committee which in turn will establish a code of professional conduct for authorised financial advisers and the Commissioner will chair the disciplinary committee established under this Act.

The code of conduct for financial advisers will specify minimum standards for Authorised Financial Advisers including standards of:

• Competence
• Knowledge and skills
• Ethical behaviour
• Client care
• Continuing Professional Training
(Different classes of authorised Financial Advisers would be categorised)

The code will come into effect following the Minister’s approval and Gazette Notification and will have the status of Regulations.

Complaints

Complaints may be made to the Securities Commission. The Commissioner may initiate a complaint. The Commission must investigate all complaints except when the complaint is vexatious or not sufficiently serious. Complaints about authorised Financial Advisers must be referred to the Disciplinary Committee chaired by the Commissioner.

Offences

A person who performs a financial adviser service without being registered commits an offence and is liable to a fine of $5,000.00 on conviction for an individual and $10,000.00 for an entity (PQE).

A person who performs a financial adviser service without being authorised that only an authorised financial adviser may perform commits an offence and is liable for a fine of $10,000.00 on conviction for an individual and $50,000.00 for an entity.

A person who breaches disclosure obligations under the Act commits an offence and is liable to a fine of $100,000.00 for an individual and $300,000.00 for an entity.

A person who knowingly or recklessly misleads or deceives under Section 34(1) of the Act commits an offence and is liable for a fine of $100,000.00 on conviction for an individual and $300,000.00 for an entity.

The operative provisions of the Act should come into force when the code of conduct for financial advisers is established as regulations by the Code Committee and the Commissioner. The current intention is that such provisions will come into force in the year 2010. There is time for the financial advice industry profession to prepare and familiarise itself with provisions of this Act. The force of law will most certainly raise public awareness of the duties and responsibilities of financial advisers to the public of New Zealand.

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