The Ministry of Business, Innovation and Employment (MBIE) has just released a report addressed to the Minister of Commerce and Consumer Affairs, including recommendations to change the regulations relating to financial advice in New Zealand.
The Government has agreed to amending the regime and the aim is for a Bill to be introduced by the end of this year (2016).
The changes are substantial, especially for a regime that has only been around for a few years. I applaud the MBIE for recommending the changes and the Government for agreeing to them. I'm quietly confident about what these changes represent.
In my view, the biggest change is that the changes will remove the current Authorised Financial Adviser (AFA), Registered Financial Adviser (RFA), and Qualifying Financial Entity (QFE) adviser designations. In their place, all advisers will be known as a "Financial Adviser" or an "Agent" of a "Financial Advice Firm".
This change might be anathema to some AFAs. It goes a long way to removing the distinction between an AFA and an RFA or QFE adviser. In some ways it appears to lower the bar for advisers who are currently AFAs while raising the bar for RFAs and QFE advisers. I've already seen some suggestions that such a change is very friendly to financial product issuers that see advisers as product distribution channels.
The key to me, however, is that all advisers - whether independent advisers or affiliated with a product issuer - will need to meet some important requirements. Specifically, they will:
- need to put the interests of the consumer first;
- be subject to a code of conduct;
- only be able to provide advice if competent to do so; and
- ensure clients are aware of the limitations of their advice.
Requiring advisers to satisfy these requirements levels the playing field and has the potential to put consumer outcomes first.
I say "has the potential" because the devil is in the details. To my mind, the most troubling passage I've seen in all the MBIE materials is the following:
some [Advisers and Agents will] only provide advice on one or two providers’ products. In putting the interests of the consumer first [the Adviser/Agent] would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis.
I would prefer to see the initial emphasis to be on whether the products are suitable, and only then the best product from the suite. This could indicate a troubling bias that might influence the legislation that gets drafted.
Or it might be a semantic issue I have with a single sentence. Because ultimately, I find it difficult to see how recommending the "best product... from their suite" is in the best interests of the client, if it is not suitable in the first place. If the product replaces a product already held by the client, it would also seem that the adviser will need to consider the relative merits of the recommended product with the product they are replacing. Also, the client needs to be made aware that the adviser only considers products from a limited range of issuers.
I am interested to see what follows. But I'm optimistic that these changes will be for the better for consumers and for the financial advice industry.
- The MBIE report
- The cabinet paper supporting the report
- MBIE fact sheet
- A Good Returns article discussing the changes
- A summary from Strategi