The decision to become a QFE (Qualifying Financial Entity) should not be taken lightly as it comes with significant liability and cost. However, if a business is currently operating, or intends to operate, in the financial services industry in New Zealand, and is likely to provide advice to clients or customers, then it may have little choice other than to become a QFE. Specialised legal advice should be sought regarding the pros and cons of becoming a QFE, and deciding where the current or proposed operation is likely to attract the gaze of the FMA regarding QFE status.
When considering QFE status, it is important to look at both the letter of the law regarding who needs to be a QFE and also the ‘spirit’ of the law in this area. The ‘spirit’ is often hard to clarify but to Strategi Ltd, it means demonstrating professionalism, good prudent governance, and a willingness to operate in the client’s best interests.
The letter of the law may say that an organisation does not need to be a QFE today as it does not come under the auspices of the Financial Advisers Act 2008 or the Financial Service Providers Act 2008. However, take a look around the industry at your competitors. Are some or all of them QFEs and if so why? The likely answer is that a part of their business is captured by that legislation so as a result the entire business ends up having to be a QFE. This means that all areas of the business adopt the compliance standards that are expected of a QFE.
Your QFE competitors have effectively created a benchmark of professionalism relating to how products are sold or advised upon. A non-QFE selling the same products as a QFE may in the future be judged against the processes followed by that QFE. Therefore, even if you decide not to become a QFE, you should at least conduct a detailed review to ensure your processes are commensurate with those of leading QFEs who deal with the same products as yourself.(Strategi can advise on and assist with this process review.)
The QFE application process
An organisation needs to work closely with its legal adviser to ensure that the correct company structure is in place prior to commencing the application process. Once this is completed, then Strategi would be engaged to provide a complete end-to-end QFE application. Throughout the application process, Strategi would liaise with the relevant legal, accounting and other advisers of the entity to ensure all bases are covered.
The QFE application would entail:
- Join a Disputes Resolution Service: This is the first step in the process of registering as a Financial Services Provider. Not all dispute resolution services (DRS) are the same. Strategi will explain how each one is different, the advantages and disadvantages to you, and help you identify which may be most applicable for your circumstances.
- Apply to register as a Financial Services Provider: At this early stage, Strategi would spend time helping you identify exactly what sort of services you intend to supply. This will save time later in the Adviser Business Statement (ABS) development.
- Develop an ABS: This is the real time consuming job. An ABS is a key document that the FMA will want to scrutinise as it identifies where you are now, where you want to be at the time of approval, and how you intend to get there. The ABS helps both you and the FMA better understand your business, and to assess where there are weaknesses in processes and how these will be rectified. Strategi will work closely with senior management and guide them through the ABS development process plus help design systems and documentation where these are currently lacking. Newly created documents will need to be signed off by your solicitor and board to ensure they are compliant. Strategi will provide guidance in this area.
- Walking the talk: The ABS is not an aspirational document. You must be able to deliver and demonstrate what is stated in the ABS. You must be able to demonstrate competency and capability in a number of key areas; otherwise the approval of your ABS could be significantly delayed. Strategi, together with Strategi Institute Ltd (which is a registered and accredited Private Training Entity specialising in the financial services industry) would, if required, develop training programmes for staff and advisers to up-skill them to meet the requirements stipulated in the ABS.
How long does this process take?
Obtaining QFE status is not a quick process. The speed of approval is determined by how robust your ABS is and how well developed your current systems and processes are. If an organisation needed to start from scratch, then the entire application process may take 4-6 months depending upon how quickly draft documents are turned around by various parties.
If an organisation has been operating in New Zealand for a number of years, has an excellent reputation, good compliant processes, and staff who are able to spend time working with Strategi on the ABS development, then the application process may be reduced to 3-4 months.
Strategi will be able to provide a time estimate after conducting an initial review (gap analysis) of what processes and documentation the organisation already has in place.
How much will it cost?
The cost is variable and is determined by:
- How clear you are about what you want to achieve and what sort of advice you are intending to provide.
- How compliant and complete are current processes and documents, and what additional documentation and processes are required to be developed.
- The level of competence, knowledge and skill of existing staff and what is required of them to ensure they meet the QFE requirements.
- What internal staffing resources are available to assist Strategi in developing the ABS and how knowledgeable senior management and the board are in issues associated with Financial Adviser Act 2008 compliance.
Strategi can provide a price estimate or fee range once the initial review (gap analysis) has been completed.
- Strategi is uniquely positioned and experienced to assist organisations to become a QFE.
- Strategi can provide an end-to-end solution including advising on registration, selection of a DRS, construction of an ABS, development of additional documentation and processes, plus staff/adviser training.
- The entire process could take 3-6 months.
- An organisation should start now with the QFE application process if there is an intention to become a QFE within the next 12 months.
For additional information please contact David Greenslade at Strategi.