By Rebecca Sellers*
The Financial Market Authority's just-released report on sales and advice indicates a tougher line on conduct and culture.
Ticking the boxes required to comply with the financial advice regime is no longer sufficient.
The FMA will be viewing sales and advice conduct through a new lens.
The financial advice regime was a child of the Global Financial Crisis. Although only in force for five years, the regime has not aged well. The lines between sales and advice are blurred. This lack of clarity increases costs for consumers, who can find compliance processes frustrating. Phoning the bank for knowledgeable guidance can mean a customer spends hours completing a needs assessment. Process is more important than conduct. Indeed the only conduct required could be summarised as “not negligent”: a financial adviser must, when providing financial advice, exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances.
This report shows that the FMA is moving on. “Not negligent” is not good enough – conduct is king. The FMA’s future focus is to work collaboratively with the sector to help participants improve their sales and advice systems and ensure those systems are aligned with the intentions of the new financial markets conduct regime. The FMA expects that the same care and attention is given to sales practices as is given to financial adviser services: to minimise the risk of customers being mis-sold financial products. All conduct associated with selling insurance or investments must meet the fair dealing requirements.
The focus on sales rather than advice is appropriate. KiwiSaver now accounts for more than $28 billion of New Zealander’s savings. The report reveals that when people buy KiwiSaver, they rarely receive financial advice that takes into account the investor's individual financial situation. For every 1000 sales or transfers of KiwiSaver products, only three sales were recorded as being sold with personalised advice. Most New Zealanders bought their KiwiSaver on the basis that “KiwiSaver is a good idea because it will help you save for your retirement”.
The FMA states that a key theme of the report is “putting customers’ interests first”. What does it mean to place the customer first? Clearly, the old adage of “buyer beware” is no longer appropriate for product providers, although increased financial literacy by consumers would help develop a mature market. Putting customers’ interests first and acting with integrity is a minimum standard of behaviour for Authorised Financial Advisers. QFE customers must have their interests put first where they receive personalised advice on a complex product.
Although product providers must deal fairly with a customer, there is no universal law that customer’ interests must come first. Regulation consists of hard and soft rules and the FMA’s expectations play a part in that matrix. Putting the interests of customers first demonstrates the conduct that the FMA want to see in the market. For each institution and product line, there will be a different answer to the question - what does it mean to put customers’ interests first?
The process of answering that question is part of developing a strong and healthy culture within an organisation – and a strong and healthy market. The FMA has an agenda to increase access to financial advice. The report emphasises that access to appropriate advice is important for more complex financial products such as derivatives and where customers are making instant decisions that will have long-term significance for them. Particularly for KiwiSaver, the FMA is concerned that consumers are not always receiving the support they require or desire. The FMA expects that when determining whether an information-only, class or personalised service will be provided for a KiwiSaver sale or transfer, the best interests of the customer must drive this assessment.
The FMA is not a lone voice calling for access to appropriate advice. In the UK, banning commissions has reduced access to advice. Last month, the UK Treasury and Financial Conduct Authority launched an investigation on how to improve consumers' access to quality and affordable financial advice. The study will examine the kind of financial advice that consumers want and whether there are gaps between what customers want and what they can access and afford.
The news that the FMA will be updating its “impractical” 2012 guidance on the sale and distribution of KiwiSaver and personalised advice is to be welcomed. However, in order to meet the standards of conduct expected by the regulator, organisations must develop a culture that is owned and understood from the boardroom to the call centre.
Everyone involved in sales and advice must be able to justify how they put the interests of customers first.
*Rebecca Sellers is special counsel - financial services leader at EY.