Introduction to licensing
The Financial Services Legislation Amendment Act (FSLAA) requires Financial Advisers to be covered by a Financial Advice Provider (FAP) licence moving forward. While the change for an AFA is largely administrative, there is a lot for RFAs to consider. Under the new regime, they will need to adhere to a higher level of professional conduct and will also be held responsible for the advice they deliver, or that which is delivered on their behalf.
Financial advisers who are planning to provide a financial advice service to their own clients moving forward will need to either seek their own licence, or become an authorised body under a licence held by a third party.
Financial advisers providing advice to another company’s clients, for example as an employee, are not considered to be in the business of providing a financial advice service, and will therefore not need to make a licensing decision as they’ll be covered by their employer’s licence.
This article will be most helpful in guiding financial advisers who are currently registered (RFA) or authorised (AFA) under the existing regime. Upcoming change to regulation provides a unique opportunity for mortgage and insurance advisers to secure the independence of their businesses and improve the quality and consistency of advice they deliver to their clients.
Do you need to be licensed?
Under the new regime, the definitions of financial advice are changing to clarify who is ultimately responsible for the advice being delivered. For an in-depth read of the changes the FSLAA is introducing, you can read this article.
- A ‘financial advice provider’ is a person or company that provides a financial advice service.
- A ‘financial advice service’ is the service of giving regulated financial advice, i.e. mortgage or insurance advice.
- A ‘Financial adviser’ is a person who is registered in relation to providing a financial advice service, but does not include a ‘financial advice provider’.
A person provides a financial advice service in one of two ways:
- By engaging others to give regulated financial advice to their clients on their behalf
- On their own accord to their own clients
You will need to be licensed or be authorised by a licence if you or your company plans on being a financial advice provider and providing a financial advice service as detailed above.
If you are an employee of a firm and are engaged to give regulated financial advice on their behalf, you may still be deemed to be a Financial Adviser, but that doesn’t mean you’ll need to hold a licence. In this case, you will most likely covered by the licence held by your employer as a financial advice provider.
Pathways to licensing
As a financial advice provider, you’ll either need to licence or become an authorised body underneath a licence. While the new regime has been designed to be deliberately flexible, which route an adviser takes is still to be seen.
There is no straightforward answer as to whether or not you should hold your own licence. A large portion of the decision comes down to whether or not you’re wanting to take responsibility for the advice you deliver. If you’re applying for your own licence, ultimately you’ll be responsible for the advice you deliver. In the situation where a financial advice provider elects you to be an authorised body under their licence, liability will be shared between you and the licence holder. This means you’re likely to lose some level of control over your processes and decision making.
Advantages to holding your own licence
There are a number of distinct advantages to holding your own licence.
Flexibility to run your business your way
Holding your own licence gives you the flexibility to control your own processes and differentiate your offering. You’re more likely to have flexibility over your brand and the way you deal with clients, which will make it easier to stand out against your competition.
Clear ownership over your clients
As a licence holder, it will be easier to create clarity over the ownership of clients. Falling under the licence of another financial advice provider as an authorised body could possibly create contention over the ownership of clients. The new legislation uses a number of clear examples to identify responsibility for advice, which also refers to client ownership. If you plan on falling under the license of another financial advice provider, you will need to make sure any agreement between you and the financial advice provider clearly states who owns the clients you work with.
Reinforces the value of your business
Holding your own financial advice provider licence will make it much more straightforward when it comes time to exit your business. You will not be beholden to terms set by the ultimate licence holder.
Providing structure to scale
If you are willing to maintain your own licence you may find it easier to scale your business in the future. While there will be more of a burden on the licence holder, there will also be the opportunity to leverage your processes to bring other advisers into your business. If you do not hold a licence, you may not have control over these processes.
Disadvantages to holding your own licence
Ultimate responsibility for advice delivered
If you decide to hold a licence, you’ll be held to account for the actions of everyone covered by your licence. This means you could be civilly liable for the actions of your staff or subcontracted advisers.
Will need to maintain your licence
Ongoing maintenance of your licence will take time and add extra cost to your business. The burden of maintaining a licence for a financial advice provider is likely to scale as the business scales. If you’re a one man band, it should be a lot more straightforward and cost effective than if you have 10 advisers sitting beneath your licence. For example, a larger business might need to employ a compliance manager, while an individual adviser could look to outsource this work, or manage it themselves without too much hassle.
How business structure influences your licensing decision
Whether or not you should hold your own licence is largely influenced by the type of business structure you operate. The new legislation is drafted to provide advisers with ultimate flexibility, so by no means is this the only way you could move forward. The scenarios below should provide you with a useful guide to understand licensing in a range of different contexts. How you ultimately apply this knowledge to your business will be up to you.
Independent financial adviser
You are a sole operator, and run an advice business underneath your own brand. You’ve built up a loyal client base, who know you and trust you. The flexibility you have to maintain your own systems and deliver advice by your own methodology is important to you.
When it comes to licensing, your options will be to:
- Apply for your own licence
- Become an authorised body under another licence provided by your aggregator
If you’re currently operating under your own brand and processes, the closest to the status quo will be for you to apply for and maintain your own licence moving forward. Managing your own licence will give you ultimate responsibility and flexibility to control the future direction of your business.
Over 40 percent of financial advice businesses are single adviser businesses. The FMA and Government have stressed the importance of providing flexible options for small independent adviser businesses. The FMA challenged themselves to make sure licensing wouldn’t be overly onerous for independent advisers, which is reflected in their licensing fee structure, which scales based on number of advisers covered by a particular licence.
Trail does not recommend falling under the license of an aggregator or association for an individual adviser business. You will lose a lot of control over your processes and capacity to deliver advice your way. Financial advice providers who hold licences on behalf of a large number of advisers will be under a higher level of scrutiny by the FMA than an individual adviser will receive. Because of this, the aggregator will most likely dictate to you the exact processes you need to follow. They are also likely to move you onto a commission split model, or increase the fees you are being charged.
Independent financial advice business employing/contracting multiple advisers
You’ve been running a successful advice business for a number of years, and have a loyal client base, which is serviced by you and a number of employees/contractors within your business.
When it comes to licensing, you have two decisions to make.
Do I hold my own licence or become an authorised body on the licence held by my aggregator?
Firstly, you need to decide whether or not you would like to hold your own licence. Usually financial advisers work with a business like yours to benefit from your brand, processes, capacity to generate leads, and streamlined admin support. If you would like to maintain processes and continue with business as usual, having a licence could be useful.
How should the financial advisers who work with me be referenced in my licencing decision?
You also have to decide whether or not you want to hold a licence on behalf of the advisers who work with you. If they are employed directly by you to give regulated financial advice on your behalf, you will most likely want to include them in your licence application. If you do this you’ll need to have systems and processes in place to ensure the quality of advice they deliver, as you will ultimately be responsible for the advice.
However, if you’re contracting advisers and don’t currently have much control or oversight over their advice, you may want them to maintain their own licences. There may be a slight increase in licencing costs, but it is an outcome worth considering to isolate your business from the responsibility of the advice delivered by a third party you don’t have the processes in place to directly control.
Financial adviser who owns or is a member of a franchised advice business/model
You’ve committed to your franchise/branded model to get access to strategic, marketing, process, and admin support. Your customers know and love your brand and the unique benefits of working with your business.
Trail expects franchisors and branded business models to be very prescriptive in the way they handle upcoming changes to regulation and compliance. While there’s still a lot to be finalised, we expect businesses such as New Zealand Home Loans, Loanmarket, Mike Pero Mortgages, Prosper, and Share NZ to apply for their own licences as a head franchisor.
While the head franchisor holds a licence, they will ask you to either:
- become a financial advice provider and be an authorised body on their licence
- Or become a financial adviser falling under their licence.
Both of the scenarios above involve the head group taking responsibility for the advice you are giving. Because of this, you’ll most likely have to follow their processes or face potentially being asked to leave.
Financial adviser employed by a financial advice business
It is most likely your employer will apply for a financial advice provider licence. You will be providing financial advice to your employer’s clients on behalf of your employer. Therefore they will be providing a financial advice service and will need to be licensed. You will not need to be licensed or be an authorised body under another’s licence. Rather, you’ll be covered by your employer’s licence as a financial adviser.
Financial adviser contracted by a financial advice business
The financial advice business you work for may or may not want to hold a licence that covers the advice you deliver. This will depend a lot on the terms of your contract with the financial advice business, and the nature of your existing relationship. If you are providing advice to the businesses client’s you will most likely fall under their licence. If you are currently operating your own business underneath their brand, you may be considered an independent operator. In this case, the company you work with might ask you to become an authorised body under their licence (shared responsibility) or ask you to maintain full responsibility for your own licence separately. The updated legislation provides for either of these structures as long as all legislative requirements are met.
The reason why you’re working as part of a structured business is to benefit from marketing, process, admin support, and compliance support. If this is the case it’s highly likely you’ll also want your head business to help you with your compliance, audit, and licensing. This is a discussion worth having with your head business sooner rather than later.
Competing industry licensing opinions
Depending on who you speak to, you’ll get a different opinion as to whether or not you should be looking to apply for a licence or become an authorised body under another’s licence. It’s important to understand why people in different positions would encourage you one way or another. Incentives play a big part in driving recommendations. For example, if you speak to an independent compliance consultancy, they might tell you to manage your own licence, knowing you’re more likely to become a prospect of theirs for outsourced auditing work. Likewise, in order to justify their fee, an aggregator might encourage you to fall under their licence. While this might sound like a good idea at first, it will come with a loss of business autonomy, potentially impact ownership of your clients, and also add an extra unforeseen layer of cost to your business through higher fees or split commission models.
Trail was founded on a number of core principles, one of which is to help advisers remain independent. Our client is the adviser, and everything we build is to reinforce the value of an independent business. Generally speaking, my opinion is that maintaining your own licence is the right step to take. There are a few exceptions, but this is the most likely way for you to retain the independence and reinforce the value of your business. With the right partners this should be possible, without adding layers of complexity and cost.
Applying for a Licence
If you have decided that you would like to apply for a licence, you can read more about how to do this here.
Moving forward, an adviser must decide if they will hold their own FAP licence, or if they will decide to work under another’s. There are advantages and disadvantages of each decision:
- More business flexibility
- Clear client ownership
- Reinforces business value
- Provides structure to scale
- Ultimate responsibility for advice delivered
- Need to maintain your licence
There is no one correct for what an advice business should do. Ultimately, you’ll need to decide what the best decision is for your business based on the way your business is set up and the processes that you follow.