The Financial Markets Authority (FMA) is being accused of bowing to banks’ interests as it attempts to give more people access to KiwiSaver advice.
The regulator has updated its 2013 guidance on KiwiSaver sales and advice to clarify what advice financial firms and advisers can provide their customers.
The idea behind the update is to specify exactly what’s considered “personalised” and “class” advice under the law, to prevent firms and advisers from disengaging with their clients on KiwiSaver in fear of unintentionally providing more advice than they’re qualified to.
Providers had told the FMA its previous guidance was too restrictive, so some were opting to provide no advice rather than risk providing the wrong level of advice.
Given KiwiSaver is a key part of New Zealanders’ financial futures, and for some people it’s their first and only investment, the FMA believes it’s “critical that KiwiSaver members get the help they need to make good decisions”.
It recognises the fact its guidance will have to change once the Financial Advisers Act review is complete, but believes it’s important to take the opportunity to “act now and get a better result for KiwiSaver members” in the meantime.
However critics say the FMA’s move to encourage providers to give more KiwiSaver advice could see the public given bad advice by the likes of bank tellers who don’t have the right expertise.
They also maintain it undermines the work of Authorised Financial Advisers (the most qualified type of advisers) and gives banks more power to encourage customers to join their KiwiSaver schemes.
A closer look at the FMA’s guidance
Under the Financial Advisers Act, only Authorised Financial Advisers (AFAs) can provide personalised advice.
Qualifying Financial Entity (QFE) advisers can provide personalised advice about the products the entity they work for sells.
Meanwhile Registered Financial Advisers (RFAs) can only provide class advice.
The FMA says its guidance “updates and clarifies our view of the different types of advice, so advisers can be more confident they are within the rules. We pay special attention to explaining class advice, because much of what customers want and need to know about KiwiSaver is class advice.”
Accordingly, the FMA says: “Class advice includes making a recommendation or giving an opinion relevant to a class of people – meaning, ‘most people’ with certain characteristics. Therefore, you can take a person’s characteristics into account [for example; their age, whether they have bought their first house, whether they are comfortable with taking some risk and so on] and still be providing class advice and not personalised advice.”
“Personalised advice is given when the adviser takes into account the customer’s financial situation or goals. Their financial situation is mostly about their income and debt… the customer’s financial goals are how much income they would like to live on in retirement, and for how long.”
The FMA’s guidance expands on these definitions, providing detailed examples of class and personalised advice to ensure advisers are clear on how they’re different.
Against this backdrop it says it wants providers to help their clients understand how KiwiSaver works, choose a contribution rate, identify the right fund for them and select the correct tax rate for their investment.
The flipside of the coin - quality compromised
However the FMA’s move isn’t welcome by all - particularly AFA firms.
Auckland Financial NZ Limited, in its submission made through the FMA’s consultation process for the guidance note, says:
“No funds based information relating to suitability should ever be discussed with an individual by a non-qualified person. It is dangerous to think that the ability for RFAs to give an opinion to an individual is better because it is ‘an’ opinion, rather than none. This is in fact already going on, I await the outcome when funds are not performing as well as they have, with some trepidation.”
New Zealand Funds Management Limited has a similar view. It says:
“In our view, advice on choosing a KiwiSaver scheme and the right KiwiSaver fund to invest in, especially when it takes into account personal characteristics, should not be treated differently from advice on other investment structures. These are important long-term decisions that require carefully considered advice.
“It is, therefore, critical that the individuals providing Fund Class Advice have sound investment knowledge and experience…”
It also maintains the FMA’s guidance “sets the stage” for non-AFAs to slip into the personalised advice zone.
“There are several reasons for this, including that the non-AFA individuals providing the Fund Class Advice may not be sufficiently trained on the difference between class and personalised advice, that incentives can lead to ‘pushing the envelope’, and that it is easy for conversations to become personal in nature (e.g. “so you think I should invest in the growth fund given my situation?”)."
New Zealand Funds Management also says it expects the guidance will over time lead to a further reduction of AFAs in New Zealand, as they will reconsider whether their authorisation is worth maintaining.
AMP comments: "Given the wider scope now envisaged under the “class advice” umbrella, there is a risk that many advisers will switch much of their existing “personalised advice” on financial products to class advice."
Banks given free pass
The AFA firm Foresight Financial Planning says the FMA’s guidance “makes it easier for banks to do whatever they want”.
Its submission writer suggests the FMA “properly regulate the banks in this area although I understand that the FMA does not have the resources to do this”.
Glynns Financial Services, agrees. Asked by the FMA whether its new guidance note meets its purpose of making it easier to offer advice around KiwiSaver, the financial advice firm says:
“This depends which advisers you are talking about? Does it make it easier for AFAs? No, we already offer personalised advice with proper checks and risk profiles. Does it make it easier for RFAs, bank tellers and other financial services firms/banks? Absolutely!
“This must be music to the ears of the banks' CEOs. They can now increase the number of KiwiSaver switches they can perform without the interruption of the government regulator breathing down their necks!
“We already have instances of clients being transferred to banks and other providers with comments such as ‘you can see your KiwiSaver online’ or ‘we will give you a set of steak knives with it!’
“I have had one mortgage client told that she HAS to implement new life insurance, income protection and transfer her KiwiSaver in order to get a discounted interest rate and cashback! How is this acting in the best interests of the client?
“If the FMA is serious about implementing sound regulatory policy to safeguard clients’ investments, they are going about it the wrong way! More scrutiny of advice is needed - not less!
“Why is the FMA hell bent on dumbing down this profession and industry. We should be raising standards not reducing them. Everyone forgets 2008 and the Global Financial Crisis, where all this bad advice came home to roost and Kiwi mums and dads paid the price.”
Banks: flexibility is key
The banks don’t flag any of these concerns in their submissions to the FMA. Rather, the New Zealand Bankers’ Association (NZBA) has gone the other way, highlighting the need for “flexibility”.
It says: “NZBA submits that the Guidance Note should retain its current level of flexibility in recognition of the fact that sales conversations can evolve differently. NZBA would not like to see further prescriptive steps or ‘checklists’ added as a result of consultation, which will not necessarily further the objective of providing simple or better advice to consumers.”
ANZ goes on to highlight its concerns about the timing of the release of the FMA’s guidance.
“ANZ reiterates its preference for FMA to reschedule its completion of the review of the Guidance in order coincide with the impending changes to the Financial Advisers Act 2008 (FAA), as ANZ anticipates it will require extensive amendment due to the removal of the class/personalised advice distinction under pending changes to that Act.
“ANZ considers that it may necessitate KiwiSaver providers and distributors to amend processes and practices to meet the requirements. It is then likely the same parties will be required to undertake substantive changes to those processes to align with changes stemming from the FAA.”
BT Funds Management, which manages Westpac's KiwiSaver scheme also makes the point:
"Overall the message to "be in" KiwiSaver is a good one. However, it should not be over simplified. In some circumstances an investor may be better off not joining KiwiSaver. For example, an investor who belongs to certain workplace superannuation schemes (including those provided by the Government)."
Large fund managers and KiwiSaver providers see pros and cons
Across the remaining submissions the FMA has received, support for its guidance is mixed (it received 20 submissions altogether).
Fisher Funds says: "The challenge our industry has is to make advice more accessible to over 2.6m KiwiSaver members and this guidance note is another step in the right direction. Quality of advice has not been an issue to date and we don’t believe this will change as a result of the revised guidance note."
Milford Asset Management however sides largely with ANZ around the bad timing of the guidance, and says it won't change its business model. It also believes trying to explain to clients the difference between class and personalised advice will only confuse them.
Mercer NZ says the guidance will "enable more advisers to provide advice or, at least, more useful information regarding KiwiSaver. This outcome benefits all stakeholders in the industry".