New rules governing financial services sector officially kick in today; Unregistered and unauthorised advisers dispensing money advice to be sanctioned

New rules governing financial services sector officially kick in today; Unregistered and unauthorised advisers dispensing money advice to be sanctioned

By Amanda Morrall

Today is being heralded as the dawn of a "new era of professionalism" for the financial services sector in New Zealand with legislative reforms governing advisers coming into full force and effect.

Financial Markets Authority chief executive Sean Hughes said the new rules, which set in place minimum standards for financial advisers as well put into place systems to track, monitor and hold operators more accountable, are "an important first step'' in building badly damaged investor confidence.

Hughes said the tighter regulatory framework would also set the tone for the maturation of New Zealand's investment market away from property towards alternative investment vehicles.

Relative to other developed nations, Hughes (a New Zealander who formerly worked for the Australian Securities and Investment Commission) said New Zealand was lagging. (See a Double Shot interview with Hughes here).

"What has struck me particularly is this lack of confidence but also information and knowledge about investing and we see improved standards of regulation around intermediaries such as financial advisers as one step along the path to improving that confidence.''

Clean up job

On a more basic level, Hughes said the new regulation was a clean up within the advisory sector itself.

"What we're saying is that just don't call yourself a financial adviser. Be a financial adviser and that implies some additional skill, care and diligence that you have to extend toward your clients. It's been a concern that until today anybody could set themselves up and call themselves an adviser but they had no overriding duty to put the client first.

"You just need to look at what happened with finance companies to realise either advisers were giving advise that they themselves didn't understand or they didn't understand the risks to which they were exposing their clients. Or they neither knew about or cared about their client's individual circumstances or they were being motivated by remuneration opportunities for themselves.''

Hughes said all those concerns were covered by aspects of the new legislation.

Under the new regime advisers fall into one of three categories: authorised financial advisers (AFA), registered advisers (RAs) and qualified financial entities (QFES).  (See numbers below).

All must now be registered on the Financial Service Providers Register, an online register where members of the public can go to see whether an advisor is in compliance and ensure they are what they claim to be.

Hughes said the rules should help to dispel fears about rogue advisers and "cowboys" working in the investment space.

See opinion piece by Susan Guthrie from Gareth Morgan Investments here on whether the changes will make any difference.)

'Too many cowboys'

“Many Kiwis make decisions that affect their financial future without getting any professional advice at all.  I think there’s been a perception there are too many cowboys out there. But now they can be a lot more confident about the professional standards and integrity of financial advisers,” said Hughes.

A key part of the regulation is that advisers can only recommend investments and products that suit their clients' situation and needs,  Hughes added.

“Importantly, they must explain the risks of an investment while they are also selling its benefits to ensure it suits their client’s circumstances. All of this advice must be in plain language they can easily understand.”

“The new regulations will make this easier. For instance, advisers giving investment advice must now use a standard disclosure document that shows whether they are being paid fees, commissions or other financial and non-financial benefits. This helps clients see if they may be favouring products that will net the adviser more money and rewards.”

Hughes said while the new regulatory framework would not remove the element of risk inherent with investment, it would go some way to protecting the public.

"We're not removing the level of risk in investment. What we're saying is this gives you additional comfort about taking those risks.''

'People are terrified of the stock market'

As an extension of the new regulation, Hughes hoped it would encourage both the advisory network and product providers to come up with a broader suite of products more attractive to investors so there is a good range of options to them.

"Because at the moment, there is still far too much a focus on property, term deposits and cash. People are terrified of the stock market, and they're terrified of any form of second-tier debenture type stock. So we need to improve the quality of the stock so that when financial advisers are giving advice there really is a worthwhile range of of products to offer to their clients.''

By the numbers:

Authorised Financial Advisers (AFA) - There are now nearly 1600 AFAs and more approvals are pending*. AFAs can advise on more complex investment products and can also offer investment management and planning services.

Registered Financial Advisers - A further 4000 professionals act as Registered Financial Advisers (RFAs). RFAs can provide advice on simpler products including insurances, term deposits and loans.

Qualifying Financial Entities (QFEs) - Alongside individual financial professionals, 63 companies have been registered as Qualifying Financial Entities. These include banks, insurance companies and friendly societies. Within these companies, over 20,000 employees are able to advise on financial products such as KiwiSaver, managed funds and insurance provided by their company.

For more information, the FMA recommends investors' ask their financial adviser for the FMA’s ‘Confidence comes from sound advice’ brochure, or browse the ‘Help Me Invest’ section of the FMA’s website

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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This feels like it has happened before after the 1987-1988 crash. New rules came in in the early 1990's heralded as fixing everything. I've followed fiundamentals, basics since then. Does the new act stop advisors from advising to invest in bubbles?? I doubt it. The labour government was clearly happy to get its share of the debt fuelled housing boom. I think I remember a yound newpaper reporter making ""unusual"" comemnts about the lack of fundamentals back in the 1990s


The crackdown should have happened at the product provider level and with the regulators. Under common law advisers always had to put their clients first. Unfortunately it appears that The Securities Commision was asleep at the wheel and let through all sorts of trash.

That Bluechip and their lawyer mates could get away almost scot free is a terrible indictment. IMHO this was the worst of all the "investments" that went wrong. I guess they had the right paperwork and stuff the results.

FMA seem to be interpreting professional as paperwork intensive. Apparently it is OK for doctors, lawyers, accountants, dentists, vets etc not to write a huge report that get signed off in 22 places every time they talk to a client but if an AFA advisor writes only brief notes or makes oral recommendations they are deep in it. The mantra is papertrail, paper trail, paper trail, report, report, report.

There also appears to be a mantra that everyone should be doing the same thing. If you deviate from what "research houses" suggest as far as asset allocation goes you need big balls.  If this regulation was in place 5 years ago those "deviant" advisers did not recommend investment in finance companies could have been harshly judged by the FMA adviser monitors. Similarly, according to some of the stories, advisers that are recommending clients overweight cash at the moment could get wolloped by FMA. This is because Morningstar and such the like have high allocations to International Equities. Somehow I doubt that FMA will compensate the clients if the adviser is forced to go against instinct and are forced to recommend to clients that they get out of cash and into shares.

It is interesting to see Australia looking at scaling back their "full financial plan" requirements as they realise the regulations have stopped so many people from getting advice.

Comparing an AFA to a health professional does no favours to anyone -  we are miles and miles behind them in the bike race.   Health professionals train for years to get to where they are and their documentation responsibilities are far more intense than you imply.  Fair enough - the stakes are high.   

I'm an AFA and from start to finish it took me less than a year (I had no exemptions), while also working full-time and having a two month break in the middle.   If I had done it intensively and taken the time off, I could have probably done it in a month.   While I am not a thicko, I am not academically gifted either.   

We still have a lot of ground to make up.  I would say that  AFAs have now broken away from the grubby, bad-tempered peloton inhabited by real estate agents, used car salesmen and (sorry) insurance brokers.    We can just make out some bottoms in the distance.  The accountants!   We might catch up with the accountants over the next few years.  But let's not get carried away just yet.   



 New Era??

Everything you read has a twist to it.

Still "buyer beware".

Who protects the elderly?