Opinion: Amanda Morrall wades her way through a regulatory minefield of information in KiwiSaver and finds out why you should care more about your retirement fund

Opinion: Amanda Morrall wades her way through a regulatory minefield of information in KiwiSaver and finds out why you should care more about your retirement fund

By Amanda Morrall

On Monday, the Financial Markets Authority issued something called a guidance note around the sale and distribution of KiwiSaver.

The 28-page document spells out who, under the new regulation, can say what to whom about KiwiSaver and clarifies the respective qualifications of registered financial advisors (RAs), authorised financial advisors (AFAs) and Qualified Financial Entities (QFEs) where KiwiSaver is concerned. It's mainly for the benefit of the providers, who can't say they haven't been officially warned about how they're going about business. However, it's really you and I and the other two million KiwiSavers out there who ought to care most.

First some boring background. Bear with me.

The FMA's intervention on this matter followed several complaints from the industry about ambiguities, oddities and irregularities around the sale of KiwiSaver funds. You'll recall the newly established regulator also had its feathers ruffled when a rather dubious KiwiSaver salesman was caught selling schemes (cash in hand) on behalf of SuperLife outside a WINZ office. In case you missed the drama you can read about the juicy details here.

The incident signalled, rather spectacularly, a bug in the system.  

Although the Financial Advisor's Act (which came into full effect last July) lays down firm rules around what RAs can and can't do, and similarly what AFAs and QFEs can and can't do, the elasticity of the legislation meant that all three could dabble in the KiwiSaver sales space - within specified limits. 

The guidance note attempts to reconcile what might otherwise be construed to be totally incongruous policies. 

Allow me to explain:

KiwiSaver (because it is an investment product) is defined as a "category one product." Crudely put, category one products are riskier more complex financial products that require bigger brains and more training to sell and give advice on. As such, they are mainly the domain of authorised financial advisors, who theoretically meet these requirements.

By the book, Registered Advisors are restricted to "category two type" products because they are ostensibly simpler. Under a creative architectural restructuring of the rules they can also deal in category one products as well.

But back to the basics...

In case you weren't already aware of the difference, RAs and AFAs are both required to be registered on the Financial Services Providers Registry as well as belong to a disputes resolution scheme. The former is a safeguard for the public and a way to keep track of the practitioners in the industry who previously were uncharted by officials.

The main thing separating RAs from AFAs (see the FMA's website for details) is that RAs, while having minimum standards relating to exercising skill, due diligence and disclosure, do not have to sit exams or face the same level of scrutiny AFAs do to become credentialed. The FMA also adopts a more stringent monitoring and surveillance program on AFAs compared to RAs.

Where bank tellers, mortgage brokers etc fit in

If you've been following the plot you'll undoubtedly have a WTF moment and question why if KiwiSaver is a considered to be a category one product, bank tellers, mortgage brokers and others working for Qualified Financial Entities (banks and other bigger outfits who are required to meet certain minimum standards but who are given the benefit of the doubt that they are putting suitably qualified staff in the right positions) are able to deal with KiwiSaver.

That's because irrespective of the fact that KiwiSaver is considered a category one product, the rules are such that if the information provided relating to KiwiSaver is framed in such a way that it can be regarded as "class advice" then it doesn't matter if that individual dispensing it is an AFA, RA or QFE.

Class service is defined as anything that is not personalised service. Think brochures, seminar and Internet material. Information on the upcoming initial public offering of Mighty River Power will fall under "class advice", which is why bank tellers will be able push prospectuses at the front counter to potential Mighty River Power shareholders. I'll save that rant for another day...

In theory, the class advice clause that allows for a wider distribution of information beyond share brokers and AFAs is not a bad thing given if it stimulates public interest. The danger of course is that in the absence of professional advice, investors could be indirectly steered into an investment that either doesn't make sense for them personally or is plain bad.

Allowing RAs and QFEs (not all of them have the same qualifications) to deal with KiwiSaver in the context of it being "class advice" just opens up a whole can of worms and headaches for the FMA. This wasn't a problem for the industry (which has been able to push through the bureaucracy by creative interpretation of the rules) until Monday really when the FMA decided to lay down the law.

 The FMA's guidance note was meant to dispel some of the confusion and the paradoxes by articulating more the lines between class advice and personalised advice with a view to protecting the public.

According to the New Zealand Bankers' Association, the FMA has simply made matters worse.

From its perspective, the guidance note and the new parameters around KiwiSaver sales practises is not only administratively burdensome for providers but also bad news for potential investors.

Kirk Hope, the Banker's Association's chief executive, argues that by limiting who can provide information about KiwiSaver, the FMA will effectively make it harder for consumers to make informed decisions.  He says it could also force people to have to pay for using specialist advisers. The guidance note states that if anything remotely resembling personalised advice escapes from the mouth of an RA or QFE representative than they (and by extension the issuing KiwiSaver providers) will have committed a breach.

I appreciate that this tougher application of the rules could exact a cost on providers but I don't have too much sympathy for them. Sure, they'll have to go to some trouble either upskilling their frontline staff or changing the way they do business but you know whatever cost they incur will simply be passed back on to the hapless KiwiSaver member in the form of higher fees.

Fund managers escape the long arm of the FMA

On the other hand, it's hard not to want to throw a rotten tomato at the FMA for not being more rigorous from the start on this matter although to be fair the KiwiSaver cart was put before the regulatory horse so to speak.

Further, despite its intention to restore the public's confidence and protect them, in many respect the new rules have caused more confusion. How many investors in New Zealand honestly know the difference between an AFA, an RA and QFE let alone why the individuals making really big calls on money (ie. fund managers) have escaped the long arm of the FMA altogether?

Let's face it, a first time investor who has their first ever discussion about KiwiSaver with someone at a bank, or at mortgage broker's office or over the phone with a call-centre is going to assume that individual they are engaging with knows a good deal more about KiwiSaver than they do. It's what that individual doesn't say, arguably more than what they do say during the discussion, that could hurt the KiwiSaver member most.

Even if the hapless RA or QFE admits they can't give personalised advice and sticks to the "script" that allows them to enrol a member without reviewing the important issues around this investment product, it seems imprudent that they should be put in this position in the first place given the KiwiSaver landscape is such a complex one.

I'm not confident the 28-page rule book put out by the FMA is going to fix the bug in the system. With more than 34 providers out there pushing 200 plus KiwiSaver funds through various channels, the monitoring and enforcement of sales and distributions practises is nothing short of a nightmare for them. How many providers can they realistically mystery shop given how big the market is?

My solution?

Look after your own interests.

Get educated about the type of fund you are in, how it differs from other types of funds offered by both your provider and others, the returns you've had over the course of the investment, how good a job your provider has done to keep you apprised of all this and review your purposes for being in it in the first place. There is heaps of material available free of charge and resources you can draw on here at interest.co.nz and elsewhere.

And if all of this is too hard, too confusing, and too time consuming, then bite the bullet and book an appointment with an authorised financial advisor who comes highly recommended, who has experience and whom you can trust.

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