Financial Markets Authority finds promising initial response from financial advice providers towards new regime but says there are some ‘gaps’ that could affect customer outcomes

The Financial Markets Authority (FMA) says it’s generally encouraged by the way licensed financial advice providers and advisors have taken on the new financial advice regime – but there are still some “gaps”.

A new report out of the market watchdog looks at how Financial Advice Providers (FAPs) have handled new rules and licensing requirements that fully took effect last year.

Michael Hewes, the FMA's director of deposit taking, insurance, and advice, says financial advice providers (FAPs) and advisers have adapted to the new rules, using them to improve client support and business resilience.

The report found financial advisers were focussed on making their clients’ interests a priority and made clients their top priority, with most advisers having good processes in place for replacement business advice, often including additional peer reviews. 

Most monitored FAPs also had easily accessible information on fees, about their complaints process and dispute resolution scheme (DRS). The report found advisers also regularly reviewed their disclosures to ensure they met requirements.

However, the FMA says it identified some “gaps” and if the gaps remain unchecked, Hewes says this “could escalate into poor outcomes for clients”. Some of the gaps were in advisers’ ability to demonstrate that advice given was in their clients’ interest.

“In some instances, the root cause of these gaps is complacency, where the FAP has taken a ‘tick-box’ approach to compliance instead of making an effort to fully understand the purpose of the new obligations,” he says.

Another area of concern was some advisors not taking reasonable steps to ensure clients actually understood their financial advice.

“When a client does not understand the advice they receive, this can result in poor decision making and lead to potential financial harm, particularly with insurance, investment and loan products,” the report said.

The Financial Services Legislation Amendment Act which was initially scheduled to be rolled out in 2020 but got delayed due to the pandemic, brought updated rules for financial service providers and markets in March 2021.

The FMA said the updated changes came fully into effect in March 2023 and aimed to simplify regulations, allow online financial advice, and set industry-wide standards for conduct and competence.

Among other things, the changes also removed regulatory boundaries around adviser classifications, the distinction between ‘class advice’ and ‘personalised advice’. It also addressed the ‘misuse’ of the financial service providers register by offshore entities, according to the FMA.

Hewes says the FMA had identified a small number of compliance gaps that had resulted in client harm.

“Where we identified serious client harm resulting from non-compliance, we have taken, and will continue to take, action proportionate to the level of misconduct, including intensive supervision and formal regulatory action where appropriate,” he says.

Next steps

The FMA says the financial advice sector is the most varied among the sectors it oversees and monitors, with advisers working from home offices to large companies all over the country.

These advisors provide advice directly through authorised bodies, financial advisers, and nominated representatives, as well as indirectly.

The FMA’s report is based on findings from 60 monitoring visits and examined a targeted sample of the financial advice sector between 15 March 2021 to 30 April 2024 – covering over 350,000 clients and a wide range of FAP sizes.

There are 1,466 licensed FAPs in NZ, and the FMA says they range from sole adviser businesses to entities with 500 or more advisers. 

“As the regime matures, we expect entities’ understanding of their regulatory obligations to mature and be reflected in their practices. Our approach to supervision will strongly reflect this expectation,” Hewes says.

“Our approach to supervision will reflect this: where we see conduct that has potential for serious client harm, our actions will increase in intensity and include the use of intensive supervision and formal regulatory tools where required.”