Cover of MBIE consultation paper

The start of the new financial advice regime

(Note Refer to Main elements of the new regime for financial advice which supercedes this article.)

MBIEs latest consultation paper on the proposed new financial advice regime, and the associated financial services legislation amendment bill, has been released. It follows on from the work done last year, taking into account the submissions that were received and clarifying some of the uncertainties around how advisers will operate going forwards.

Strategi is currently working to fully digest the content and assess the implications and will produce more detailed comments in due course. In the interim, we wanted to bring you a quick summary of the key points and dates. Please refer to the MBIE documents for more complete information:

Factsheet: A New Financial Advice Regime
Consultation Paper - New Financial Advice Regime
Financial Services Legislation Amendment Bill (Draft for consultation)

Key points for advisers

Anyone providing financial advice:

  • Must put the interest of the client first
  • Must only provide advice when competent to do so
  • Will be subject to a Code of Conduct which will set specific standards of knowledge, competence and skill
  • Will need to operate under a licence granted by the FMA
  • Will be subject to more meaningful disclosure requirements ensuring clients receive core information such as remuneration (including commissions) at the time most relevant to their decision making, and incorporating a client-care obligation.

Terminology under the new regime will be simplified:

New regime Old regime
Financial advice providers
Financial advisers
Nominated representatives (previously financial advice representatives)
AFA
RFA
QFE
Financial advice product Category 1 and Category 2 products
Financial advice service Class and personalised advice
Anyone providing any DIMS will need to operate under a FMC Act DIMS licence Personalised DIMS could be provided without a FMC Act DIMS licence

Financial advice providers, advisers and representatives

Anyone providing a financial advice service to retail clients will need to be operating under a licence. Licensing will be required at the firm level.

A financial advice provider is any licensed entity that provides a financial advice service. A financial advice provider may give financial advice itself, or engage financial advisers and/or financial representatives to give advice on its behalf.

Financial advisers will be individually accountable for complying with their legislative and Code obligations.

Licensed firms will be responsible for their representatives plus have some responsibility for their financial advisers. A single licence may cover multiple entities to provide a financial advice service – those entities are known as ‘authorised bodies.’

Financial advice representatives may have conditions imposed on their licence that state which types of financial advice they may provide.

Diagram of the relationship between a financial advice provider, adviser and a representative.
The relationship between a financial advice provider, adviser and a representative. From page 18 of the MBIE consultation paper.

Duties of persons providing financial advice

These duties are very similar to those already prescribed for AFAs in the existing Code of Conduct.

  • Advice must not be given as part of a retail service unless relevant competency standards are met
  • The nature and scope of the advice must be agreed with the client and reasonable steps must be taken to ensure the client understands any limitations on the nature and scope of advice
  • Client’s interests must be put first in giving advice, or doing anything in relation to advice – the client’s interest must be the primary motivation for the advice
  • Must exercise care diligence and skill of a prudent adviser
  • Comply with standards of ethical behaviour, conduct and client care required by the new code of conduct
  • Must provide the prescribed information to clients at the prescribed time and in the prescribed manner.

Additional duties are imposed on a provider when advice is given on their behalf

  • These duties are in addition to those that apply to financial advice providers when giving advice directly.

Providers must:

  • Ensure that financial advisers and representatives comply with the duties applicable
  • Have clear and effective processes, controls and limitations for representatives
  • Not provide inappropriate payments or other incentives

New Code of Conduct

A new Code of Conduct, applicable to all financial advice will apply from August 2018. It will contain minimum standards for:

  • General competence, knowledge and skills that apply to all persons giving financial advice;
  • Particular competence knowledge and skills that apply in respect of different types of financial advice, financial advice products, or other circumstances;
  • Ethical behaviour; and
  • Conduct and client care.

The new Code will include optional methods for demonstrating minimum standards of competence – for example a provider may run in-house training courses and provide other support/controls to demonstrate to the regulator that their advice meets minimum standards of competence.

Planned key dates and key steps

Date
2017/2018 Bill passed and regulations made
August 2018 New Code of Conduct approved and published
February 2019 New regime commences. Anyone providing financial advice will need to be engaged by a firm with a transitional licence. Existing participants now have two years to meet new minimum competence and skill requirements
February 2021 All industry participants must operate under a full licence

MBIE has produced a diagram explaining the key steps in the transition process.

We will bring you further updates on the changes, the potential impact on how you operate and the business decisions you need to start thinking about. In the meantime please call or contact us with any questions and we will assist where possible.