How to Establish an Effective Compliance Management System for the Financial Services Legislation Amendment Act

Managing your ongoing compliance

Once you have set up your financial advice provider business, managing your ongoing compliance with New Zealand Financial Services Legislation Amendment Act will be an important step in operating this. The extent to which your processes will need to be documented depends a lot on the nature of the advice you deliver and the complexity and size of your business.

The information contained in this article is a guide that can be applied to a financial advice provider with any number of advisers. While formalising your processes is important, the level of detail expected of a financial advice provider will scale based on the size and complexity of its operations.

Using a compliance management system and an outsourced compliance company such as Strategi is a great strategy for meeting your legislative obligations. Strategi are likely to help you implement a strategy for managing your compliance obligations in line with the needs of your business.

What is a compliance management system?

A compliance management system (CMS) is how a financial advice provider:

  1. Learns about its compliance responsibilities
  2. Ensures that employees understand these responsibilities
  3. Ensures that requirements are incorporated into business processes
  4. Reviews operations to ensure responsibilities are carried out and requirements are met
  5. Takes corrective action and updates materials as necessary

Why is a CMS important?

A well executed CMS will help a financial advice provider manage the risks associated with delivering a financial advice service. It will help you keep your processes up to date and comply with your licence obligations.

A CMS will help you manage changes to:

  1. The financial products offered by your business
  2. Your obligations to comply with financial services legislation
  3. The size and nature of your business operations

Noncompliance with the FSLAA may result in litigation, monetary penalties, and other formal enforcement by the FMA, such as loss of licence. It’s important you’re managing your compliance properly moving forward.

How to establish an effective Compliance Management System:

An effective CMS should have three interdependent elements:

  1. Director oversight
  2. Compliance assurance program
  3. Compliance reviews

1. Director oversight

The Board of Directors is ultimately responsible for developing and administering a CMS that ensures compliance with New Zealand’s financial services legislation.

Directors of a financial advice provider can demonstrate a commitment to maintaining an effective CMS by:

  • Demonstrating clear expectations about compliance within their business
  • Demonstrating clear expectations about compliance with third party providers
  • Adopting clear policy statements
  • Appointing or outsourcing a ‘compliance officer’ with authority and accountability
  • Allocating resources to compliance functions commensurate with the level and size and complexity of the firm’s operations
  • Conducting periodic compliance reviews
  • Providing for recurrent reports by the compliance officer to the Board

Compliance Officer

The first step the Directors of a financial advice provider business should take in providing for the administration of the compliance assurance program is the designation of a compliance officer. In most cases, it is recommended a smaller advice business outsources their compliance officer designation to a third-party provider, such as Strategi. The main reason for this is to reduce the cost and complexity with managing compliance in-house.

A compliance officer’s duties include ensuring that a financial advice provider:

  • Develops compliance policies and procedures
  • Ensure management and employees receive proper training in consumer protection laws and regulations
  • Reviews policies and procedures for compliance with applicable laws and regulations and the financial advice provider’s stated policies and procedures
  • Assesses emerging issues or potential liabilities
  • Provides proper responses to consumer complaints
  • Reports compliance activities and review findings to the Board
  • Ensures corrective action

Outsourced Authority

Your outsourced compliance officer should have sufficient authority and independence. They should have access to all areas of the financial advice provider’s operations and be in a position to effect corrective action when issues arise.

2. Your formal compliance assurance program

A financial advice provider should generally establish a formal, written compliance assurance program. If you’re an individual adviser this may only need to be a few pages in length. In addition to being a planned and organized effort to guide the financial advice provider’s compliance activities, a written program represents an essential source document that will serve as a training and reference tool for any financial advisers covered by your licence. A well planned, implemented, and maintained compliance assurance program will prevent or reduce regulatory violations, provide cost efficiencies, and is a requirement financial advice providers will need to address moving forward.

A sound compliance assurance program includes the following components:

  • Policies and procedures
  • Training
  • Monitoring
  • Consumer complaints & disputes resolution process
  • Obligations register
  • Risk register
  • Compliance assurance plan

Policies and Procedures

Policies and Procedures should:

  • Include goals and procedures for meeting those goals (Which are drawn from legislative requirements)
  • Include all the information needed for financial advisers to produce statement of advice documentation
  • Be reviewed and updated as the financial advice provider’s business and regulatory environment changes

Training

Proper training for Directors and Staff is essential to maintaining an effective compliance assurance program. While minimum educational standards are covered in the code, you may also wish to form policies around continuing professional development for your financial advisers.

An effective compliance training program is frequently updated with current, complete, and accurate information on:

  • Products and services and business operations of the financial advice provider
  • Consumer protection laws and regulations, internal policies and procedures for handling these

Monitoring

Monitoring is a proactive approach by the financial advice provider to identify procedural or training weaknesses in an effort to preclude regulatory violations.

Financial advice providers that include an outsourced compliance officer in the planning, development, and implementation of business propositions increase the likelihood of success of its compliance monitoring function.

An effective monitoring system includes regularly scheduled reviews of:

  • Disclosures and calculations for various product advice
  • Document filing and retention procedures
  • Posted notices, marketing literature, and advertising
  • Consumer protection laws and regulations
  • Third-party service provider operations
  • Internal compliance communication systems that provide updates and revisions of the applicable laws and regulations to management and staff

Consumer Complaints & Disputes Resolution Process

  • A financial advice provider should promptly handle consumer complaints.
  • Procedures should be established for addressing complaints, and individuals handling them should be designated and known to everyone in your business
  • A compliance officer should be aware of complaints received and act to ensure a timely resolution.
  • Complaint trends should be evaluated to identify systematic compliance problems.

3. Compliance reviews

A compliance review is an independent review of a financial advice provider’s compliance with consumer protection laws and regulations and adherence to internal policies and procedures. The review helps Directors ensure ongoing compliance and identify compliance risk conditions. It complements your internal monitoring system. Directors should determine the scope of a review , and the frequency with which reviews are conducted.

Regardless of whether reviews are conducted by financial advice provider personnel or by an outsourced provider, the review findings should be reported directly to the business Directors.

A written compliance review report should include:

  • Scope of the review (locations, financial advice types, and third-party relationships reviewed)
  • Deficiencies or modifications identified
  • Number of client files sampled by type of advice
  • Descriptions of, or suggestions for, corrective actions and time frames for correction

Your next steps

Understanding your responsibilities as a financial advice provider in the new regime is critical. However, it’s equally important to apply the legislation to your business in a manner that addresses the government’s core mandate of producing ‘good customer outcomes’. Doing so will set you up for future success.

Partnering with the right providers will make this period of significant change easy for your business to navigate. Trail’s software has been designed from day-one to aid advisers in proving their compliance within the new regime. The software has been subject to an external technology assurance review undertaken by Strategi, New Zealand’s leading financial services compliance consultancy.

Trail is partnered with a number of service providers within the industry, including aggregators, marketers, compliance consultants, and is uniquely positioned to help advise you on navigating change within your business.

We’d love to hear from you and discuss how we can support the growth of your business.