KiwiSaver sales practices are under closer scrutiny by the new financial services sector regulator following several complaints about who and how KiwiSaver schemes and funds are sold to the investing public.
The Financial Markets Authority yesterday issued a draft guidance note on its interpretation of the new Financial Advisors Act and how it applies to Registered Advisors (RAs) Qualified Financial Entities (QFEs) and Authorised Financial Advisors (AFAs) involved with selling KiwiSaver. The Authority is soliciting public feedback no later than July 16.
The draft note was issued on the basis of confusion and complaints among investors and distributors about who can say what about KiwiSaver given the constraints of the new Financial Advisors Act.
Under the Act, all three types of financial advisors are permitted to sell KiwiSaver product however there are nuances in terms of the depth of information that can be imparted to new and existing KiwiSaver investors. Only authorised financial advisors are allowed to give personalised advice on KiwiSaver in terms of how the retirement savings scheme applies to their personal financial situation and which fund and or provider might be best suited to an individual.
RAs and QFEs can give "class advice" which constitutes as general information related to a particular provider and their product. They are permitted to do so provided they make the appropriate disclosures. Critics maintain the disclosure rules effectively allow to the RAs and QFEs to bend the rules.
Sue Brown, the FMA's head of primary regulatory operations, said the authority was aware there were inconsistencies in standards and practises in the market. She said the guidance note is intended to resolve ambiguities.
“We recognise that an important objective of KiwiSaver is to make it easy for New Zealanders to save for their future. In developing our guidance, we have considered the need for potential investors to have access to information about KiwiSaver schemes, and to advice which is provided with skill, care and diligence.”
Brown said the guidance note explains what factors the FMA will take into account in considering whether advice is given on KiwiSaver and, if so, whether the advice is a class or personalised service.
Types of service are as follows:
- 'no advice'- (also sometimes referred to as 'information only'). For example opinions about a class of products or the procedure for buying a product. FMA considers that there are limited circumstances in which a person presenting a particular KiwiSaver scheme to a client will not be considered to have provided an advice service (either class or personalised).
- class advice - advice that is generic to an audience, for example, advice in a brochure or seminar. The client's reasonable expectations of the service are a key factor in determining whether advice is personalised. FMA considers that advice provided on a one-to-one basis where a small number of questions are answered by the client to ascertain a risk profile allocating a customer to one of a small number of pre-determined classes of person may be class advice. Beyond this, applying the factors in the guidance note, FMA is likely to conclude the advice service is personalised.
- personalised advice - advice that is tailored to the client, taking into account the client's situation or goals. For example, analysing a client's retirement goals and recommending a particular investment portfolio to match these goals. Personalised advice about KiwiSaver does not necessarily require the same level of analysis of all of the client's circumstances as an investment planning service. The analysis could focus on information relevant only to the particular KiwiSaver scheme's suitability for the client.
Examples of questions and complaints about KiwiSaver distribution.
Q: Can a registered financial adviser (RFA) advise on KiwiSaver?
I'm writing to you as I believe that there is what may only be described as a "disconnect" in the AFA advice structure and I am hopeful that you will be able to assist me understanding the current regime. I am an RFA that works with lower income earners who are generally excluded from receiving competent financial advice - our main area is life insurance and related products but we have, up until the regulatory changes, been able to advise and assist members with enrolling to Kiwisaver.
There are few advisers who will drive out to South Auckland to assist with a Kiwisaver application to earn, say, $40 and this leaves the potential member getting no advice or completing the enrolment without guidance or worse still, not at all.
I was shocked to find out that I can no longer advise on KiwiSaver until I complete my AFA status - not something that I will ever use to assist my clients with budgeting or completing a KiwiSaver application form.
A: An RFA can provide a 'no advice' service, including assistance with filling out application forms. An RFA can provide clients with class advice (which is generic to a type of customer). Only an AFA can provide personalised advice (tailored to the individual's circumstances) on particular KiwiSaver schemes.
Class advice may be provided where a small number of questions are answered by the client to ascertain a risk profile, which allocates the client to one of a small number of pre-determined classes. An RFA needs to be careful when persuading a customer to join a KiwiSaver scheme not to go beyond class advice. Beyond a small number of standard questions, FMA may conclude that the advice service is personalised. Please see sections A and B and C of the draft guidance note for the factors FMA will take into account when considering whether advice is given and the type of advice.
Q: Can an RFA give class advice for KiwiSaver?
I need to know if FMA wants me to continue to help people join KiwiSaver or not.
Is the correct answer:
a) Never, only an AFA can give advice on a cat 1 product
b) Yes - clients have the option to limit the financial advice they receive. RFAs can provide class advice so long as they have the knowledge and competence to do so and apply an adequate level of care, diligence and skill. The client needs to be aware that the advice doesn't take into account their own personal financial situation and they will need an AFA if they want that level of advice.
A: An RFA can provide class advice. Only an AFA can provide personalised advice on particular KiwiSaver schemes. The basis on which the advice is provided is one factor that FMA will take into account, i.e. the representations made by the adviser, but will not be determinative on its own. Please see sections B and C of the draft guidance note for other factors FMA will take into account when considering the type of advice given.
Q: Can RFAs advertise discussions about using KiwiSaver for a first home deposit?
I have a concern about RFAs (mortgage brokers) advertising the use of KiwiSaver to get a first home deposit. Some brokers are running seminars on this. Mortgage brokers have not become AFAs and my concern is that first home buyers will be ignorant as to the benefits of maintaining a savings habit, compounding returns and dollar cost averaging over the long term. Can you let me know what you think please.
A: An RFA can provide class advice (which is generic to a type of customer, including to an audience in a seminar) about KiwiSaver. Only an AFA can provide personalised advice (tailored to the individual's circumstances) on particular KiwiSaver schemes.
An RFA needs to be careful when advertising, to ensure that the RFA is not holding themselves out as providing investment advice. See our comments on our website. An RFA needs to be careful when providing class advice not to also provide personalised advice. Please see section C of the draft guidance note for the factors FMA will take into account when considering whether personalised advice is given.
Q: Is using a risk calculator providing advice?
I have received a disclosure statement from an adviser stating that 'I can provide you with factual information about superannuation products including KiwiSaver.' My initial reading was that the adviser was informing me that they were not giving me advice however from further enquiry the adviser can assist me with completing an online investment risk calculator which will direct me to various KiwiSaver funds depending on how I answer the questions. Isn't this just another way of providing me with advice?
A: An adviser may provide information and rely on the customer's own completion of the calculator in an investment statement. (The risk calculator in an investment statement will be covered by the requirements governing investment statements.) Alternatively, the adviser might provide class advice by providing opinions on how to complete the risk calculator or using their own risk calculator.
In considering which service has been provided, FMA will take into account any disclosure and the complexity of risk profiling questionnaires, with a number of other factors. Please see sections B and C of the draft guidance note for other factors FMA will consider.
Q: My client was inappropriately transferred to another scheme
I have a client with a KiwiSaver plan and me as her adviser. While visiting the local bank recently she was advised to transfer her KiwiSaver to them. When asked which KiwiSaver she was a member of, the bank representative said that she had never heard of it. She transferred to the Bank's plan and is now in the incorrect fund. After advice from me she plans to transfer back. What is FMA's stance on this?
A: When considering whether advice has been given, FMA will take into account whether the customer has an existing KiwiSaver scheme and has been persuaded to change scheme. Please see sections B and C of the draft guidance note.
Where advice has been given, it must be given with skill, care and diligence. FMA can take action where this is not the case.
See our comments about product replacement advice.
Q: A seller is paying people to join KiwiSaver without providing any information
FMA received a call from a person who was making a complaint about an un-registered salesperson approaching beneficiaries and offering $10 for her kids to sign up to KiwiSaver.
A: When considering whether advice has been given, FMA will take into account a number of factors. Please see sections A and B and C of the draft guidance note. Where advice has been given, it must be given with skill, care and diligence.
If advice has not been given, FMA will consider whether the conduct meets the requirements of the Securities Act and Securities Markets Act.