My second submission in relation to the future Code of Conduct for Financial Advice services

Sonnie Bailey

30 April 2018

Below is my second submission to the Code Working Group in relation to the proposed Code of Conduct for Financial Advice Services that will apply to all “financial advisers” in New Zealand. To read my first submission and to get more context, read my original post from earlier this month

The upcoming Code of Professional Conduct for Financial Advice Services

Thank you for the opportunity to make a submission in relation to the upcoming Code of Professional Conduct for Financial Advice Services. 

I made a submission to the Code Working Group dated 18 April 2018.

My earlier submission was written just as the recent round of public hearings of Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were beginning.

These hearings have vindicated many of the comments in my original submission.

I am making a second submission to reiterate my comments that the proposed competence standards for providing “financial planning” services will compromise availability of advice and add unnecessary compliance costs, with no countervailing benefits to Kiwis. 

I also wish to make some additional points. 

The definition of “financial planning” in the Consultation Paper is arbitrary and contrasts with the legislative intent of the Financial Services Legislation Amendment Bill

The Financial Services Legislation Amendment Bill will remove the distinction between “class” and “personalised” advice services, which is currently a significant distinction in the Financial Advisers Act

I believe this change is in recognition of the fact that this is a relatively arbitrary distinction. It’s virtually impossible to consider advice in such a binary fashion. There are many shades of grey between these two different types of advice.

Using the Code to introduce a new distinction between “product advice” and “financial planning” introduces a similar binary distinction into the regulatory landscape. This seems to be in contrast to the legislative intent of the Bill, which is aimed at removing these arbitrary types of distinction with many shades of grey.

The consultation paper, when talking about “product advice”, acknowledges that “As the advice situation becomes more complex, more variables must be assimilated in order to give the advice and an understanding of the client’s broader financial situation becomes necessary”. Soon after, in the context of “financial planning”, it says “The design of a financial plan typically involves the consideration of many variables”.

When does a service stop being product advice and start being a financial planning service? How many variables need to be considered before a service moves from being “product advice” to “financial planning”?

The answer is: there are many shades of grey, and it will depend on the circumstances.

For example, if a client talks to an adviser about what to do with a $200,000 inheritance they have just received, will the adviser be able to recommend that they invest the fund in the growth option within an investment product they are affiliated with and consider this as “product advice”? Or will the adviser need to consider the client’s broader circumstances, needs, and objectives (including asset position, income/expenditure, cash flow needs, family situation, retirement expectations, risk tolerance, and the like) to provide appropriate advice, in which case can it escape being a “financial planning” service? 

Creating this arbitrary distinction will result in individuals and organisations contorting themselves as they try to get to the edge of “product advice”, without stepping over the line towards “financial planning”. I know this will happen, because I’ve seen it happen first-hand.

Adding this unnecessary distinction adds another costly level of friction to advice processes, and an unnecessary layer of costly regulation. It would be better for resources to be dedicated to enforcing whether advice meets appropriate standards for clients, rather than whether an adviser provides “product advice” or “financial planning” services and consequently whether the necessary competency standards were met.

This is especially if these competency standards can be met “in aggregate” by larger organisations, and the processes, controls and limitations of these organisations need to be considered – which brings me to my next point.

The Code refers to meeting standards “in aggregate” on many occasions. This should be made clearer and more transparent.

The Consultation Paper refers to the Financial Adviser Provider and any Financial Adviser or Nominated Representative meeting minimum standards “in aggregate”.  

At the very least, the Code should be transparent and make it clear what it means when it talks about standards being met “in aggregate”. This should be worded in a way so that a lay consumer can understand what this means – not just people well-versed in the industry, such as executives of larger firms, lawyers, compliance professionals, and regulators.

If this means that individuals working on behalf of larger institutions do not need to meet these minimum requirements because these larger institutions have “the processes, controls and limitations in place to ensure that… the financial advice meets the standard”, many lay people would think this is a shift into dangerous territory. 

I understand that there are shades of grey, but if a large law, accounting, or engineering firm could employ people without qualifications to provide regulated services, on the basis the firm can self-assess whether they have the appropriate processes, controls and limitations, this would be a step away from professionalisation, rather than a step towards it.

I predict some serious issues resulting from this self-assessment will occur with this in the future, as the processes, controls, and limitations that are “documented and regularly reviewed for effectiveness” turn out, in some (or many) organisations to be insufficient – a recurring theme of Australia’s Royal Commission. 

Allowing competence to be demonstrated “in aggregate” could be seen as a backdoor for larger institutions to use “advisers” who provide sales spiels masquerading as advice, while imposing burdensome barriers to entry on smaller businesses which are likely to be structured in a way where client interests are more aligned with their own.

As I mentioned in my earlier submission, institutional and commercial pressures can make it difficult for advisers to provide client-focused, high quality advice. The Royal Commission is providing good examples of this.

There is a risk that the ability for larger businesses to rely on meeting competency standards “in aggregate” could result in worse client outcomes. At the very least, the Code should make this allowance clearer and more transparent. 

There are enough changes being made to protect consumers

Many regulatory changes are coming which will protect Kiwis receiving financial advice services. I exhort the Code Working Group not to add unnecessary barriers to entry to providing “financial planning” services. I ask the Code Working Group to consider removing the arbitrary distinction between “product advice” and “financial planning”, and the associated higher competency standards for financial planning. 

If, after all of the other changes have been implemented (and hopefully enforced appropriately), there will always be an opportunity to increase these standards in the future. 

In the meantime, it’s my belief that if the Code Working Group imposes these higher requirements, the Code will compromise the availability of high quality, client-focused advice, and add unnecessary compliance costs. There will not be any countervailing benefits to Kiwis – and in fact, I predict we will see worse advice outcomes. 

Yours sincerely

Sonnie Bailey

LLB BCom MEntr DipFincPlan AFA

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