The new Financial Services Legislation Amendment Act (FSLAA) regime outlines a number of duties that will need to be followed by financial advice providers and anyone acting on their behalf, which could affect the advice you deliver. You can read an overview of the changes that are being made here.
The government Financial Advice Code Working Group has purposefully written the FSLAA and Code of Conduct to be more principles based rather than prescriptive like some other legislation. it in a way that is open to interpretation. The benefit of this is that it is flexible in the way you can apply it to your business. The downside is that there often is no black and white answer as to how to practically provide advice. If you’re ever in doubt about how to implement the FSLAA and Code of Conduct, ask yourself ‘am I putting my clients first and treating them fairly?’. It’s not about what you can do to meet a minimum standard, but rather what you should do to ensure good customer outcomes.
The new legislation dictates you will need to:
- meet standards of competence, knowledge, and skill
- ensure clients understand the nature and scope of advice
- give priority to clients’ interests
- exercise care, diligence, and skill
- comply with code of conduct
- make prescribed information available
- not make false or misleading statements and omissions
- ensure those who give advice on your behalf comply with the legislation
The new code of conduct will set standards of competence, conduct and client-care for the whole financial advice industry. The code was published in May 2019, and there will be at least nine months before it comes into force, enabling people to make any changes that they need to comply with it.
1. You will need to meet standards of competence, knowledge, and skill
In order to meet the standards of competency, knowledge, and skill, outlined in the Code you will need to:
- Meet the relevant standards outlined in the adviser Code of Conduct
- Meet eligibility criteria in relation to the giving of the advice
Specific reference to ‘competence, knowledge, and skill’ features in Part 2 of the financial advice code of conduct, which you can read in detail here.
If you are an individual you must have the New Zealand Certificate in Financial Services (Level 5) or the National Certificate in Financial Services (Financial Advice) (Level 5) or be an authorised financial adviser immediately before the commencement of the code.
If you are a company, you must only give financial advice only through individuals who can demonstrate the standard, and have procedures, systems and expertise that together mean that the entity has the capabilities equivalent to those of an individual who alone has achieved the general qualification outcomes.
The key thing to understand with regard to the code, is that level 5 sets the minimum standard. Your ongoing personal development is going to be just as important in ensuring you’re able to deliver ‘good customer outcomes’.
2. You will need to ensure clients understand the nature and scope of advice
You will need to take reasonable steps to ensure your client understands the nature and scope of the advice being given, including any limitations on the nature and scope of the advice.
3. You will need to give priority to client’s interests
Conflicts of interest often arise between a financial adviser and their client. In the event of a conflict of interest, you will need to give priority to the client’s interests by taking all reasonable steps to ensure the advice is not materially influenced by your own interests.
This should stop advisers from recommending one product that might advance their own interest (for example by earning them a commission) over another that would better serve the client’s interest.
However, this does not mean you would have to consider every product on the market when making recommendations. You should be able to provide advice on a single product, provided you discuss this with the client and discloses and manages any conflicts of interest.
4. You will need to exercise care, diligence, and skill
You must exercise the care, diligence, and skill that would be exercised by one of your ‘prudent’ peers in the same circumstances.
5. You will need to comply with the code of conduct
The code contains the minimum standards of professional conduct that must be demonstrated by all persons who give regulated financial advice. The Code has now been approved, but it is not yet in force. The standards included in the Code are:
- Treat clients fairly and act in their interests
- Act with integrity
- Take reasonable steps to ensure that the client understands the financial advice
- Give financial advice that is suitable for the client
- Protect client information
- Have general competence, knowledge, and skill
- Keep competence, knowledge, and skill up-to-date
- Have particular competence, knowledge, and skill for designing an investment plan
- Have particular competence, knowledge, and skill for product advice
The code of conduct is about maintaining the professionalism of the industry. It is not about telling you how to do things, but rather the principles you should apply to your business to guide good customer outcomes. It is not a rule book, but signposts to guide your business to do the right thing by your clients.
For a full breakdown of the Adviser Code of Conduct and its implications, please read here.
6. You will need to make prescribed information available
A person giving regulated financial advice must be willing and able to make prescribed information available when required to do so by the regulations.
While regulations are yet to be finalised, the practical implication is that Financial Advice Providers may need to make the following types of information available to their clients:
- Material interests
- Relationships and associations
- Type of advice being delivered
- Dispute resolution arrangements
- Other matters relevant to the performance of the service
- Any breaches of the law by the adviser, or any open complaints about the adviser in the public domain that could be considered significant
You can read more about disclosure here.
7. You must not make false or misleading statements and omissions
Financial Advisers must not make information available to clients if it contains information that is false, misleading, or likely to mislead, and if the information is materially adverse from the point of view of the client.
8. Others giving advice on your behalf must also comply with these duties
A financial advice provider that engages another person to give regulated financial advice must take all reasonable steps to ensure they comply with the previous steps described.
When will the FSLAA come into effect?
The new regime is not expected to begin before April 2020. There’s a lot to get done before the new regime starts, so it pays to get on the front foot. Below are some key timeframes you’ll want to be aware of.
What is the ‘Transitional Period?’
It’s important to understand what happens during the transitional period. New duties and the ‘Code of Conduct’ for financial advice will be in force from the beginning of this period, but you’ll have a couple of concessions at your disposal to make the transition easier. There will be a competency safe harbour, which will give you time to get any required training completed. It’s important to note that this is a competency exemption, not a conduct exemption.
You will need to have completed the following prior to the transitional period:
- Financial Advice Providers must hold a transitional licence.
- Financial Advisers must be engaged by a Financial Advice Provider.
- Financial Advice Providers and Financial Advisers must be registered on the Financial Service Providers Register.
If you’re unsure whether you should hold your own FAP licence or work under another’s, this article can help you decide.
There are eight standards that will need to be met by advisers that focuses them on good customer outcomes, and defers them away from doing only the bare minimum. These are:
- Meet standards of competence, knowledge and skill
- Ensure clients understand the nature and scope of advice
- Give priority to client’s interests
- Exercise care, diligence and skill
- Need to comply with the code of conduct
- Make prescribed information available
- Must not make false or misleading statements and omissions
- Make sure others giving advice on your behalf comply with these
These standards under the new regime ensure that advisers are putting their clients first and treating them fairly.