By Jenée Tibshraeny
Financial advisers will keep being shouted trips to Rio and paid hundreds of millions of dollars in commissions each year, but they will have to start putting more of their cards on the table.
The government has acted on the signals it has been sending, confirming it doesn’t plan to ban or cap commissions paid to advisers. Yet it has made decent progress in revealing how it wants advisers to be more transparent, and financial advice to be more accessible.
Having received hundreds of public submissions on its review of the Financial Advisers Act (FFA) over the past 18 months, the Ministry of Business, Innovation and Employment (MBIE) has released a ‘factsheet’ and 'final report' revealing what it would like the new legislation to look like.
It plans to simplify things for consumers by doing away with the current Authorised Financial Adviser (AFA), Registered Financial Adviser (RFA) and Qualified Financial Entity (QFE) classifications; replacing them with ‘financial advisers’ and ‘agents’.
All advisers to be on equal footing when it comes to disclosure
In removing these distinctions, it will require all advisers to meet higher standards of disclosure, similar to that only our most qualified category of advisers (AFAs) currently have to meet.
MBIE explains: “Disclosure will be simplified and shortened to include core information about the scope of service, remuneration (including commissions) and competence, and would be available in user- friendly formats.
“In addition a client-care obligation will also be introduced, requiring advisers and agents to ensure that consumers are aware of the limitations of their advice, such as how many products and how many providers they have considered.”
Currently, only AFAs have to disclose how they’re paid, while QFE advisers have to disclose this if they’re asked and RFAs can keep quiet on the matter.
The problem is, people aren’t often aware what their advisers are obliged to disclose. Furthermore, the advice they receive risks being skewed by the incentives their advisers receive from those whose products they sell.
A Financial Markets Authority (FMA) report on ‘churn’ released last month found there are at least 200 advisers likely to be encouraging their clients to change life insurers, even if it isn’t in their best interests, so they can earn up-front commissions of up to 200% of their clients’ annual premiums, or soft commissions like overseas trips.
Meanwhile, a New Zealand Institute of Economic Research report found the country’s 14 main life insurers collectively pay a whopping $431 million a year in commissions.
‘The Government’s not generally in the business of setting prices’
Yet speaking to Interest.co.nz, the Minister of Commerce and Consumer Affairs Paul Goldsmith explains he isn’t keen on capping - let alone banning - commissions, as has been done in Australia and the UK.
“The Government’s not generally in the business of setting prices, which is effectively what you’d be doing. Our instinct really is to say to people they can organise things as they like, but we’re interested in full disclosure. People can make a judgement on whether they think it’s reasonable or not,” he says.
“This is an area which has been changing over the last few years internationally. We’ll keep watching it - who’s to say where it leads long-term.”
How much disclosure is enough?
Yet more specific details around what disclosure requirements will actually look like, are yet to be ironed out.
The Minister can’t confirm whether advisers will be able to get away with telling their clients something along the lines of: ‘Half of my income generally comes from commissions’. Or if they’ll have to be much more prescriptive by saying: ‘If I sell 10 life insurance products from company X, I will get to go to Vegas, and if you buy this product from company Y, I will get commission worth 200% of your first year’s premium’.
Goldsmith says: “It’s always a balancing act and that’s what we’ve got to arrive at. My expectation is there will be a reasonably high level of disclosure around commissions. You’ll have to balance that against the desire not to run to multitudes of pages that nobody reads.”
He suggests one way of avoiding this could be to have the providers of financial products disclose the details of the soft commissions they pay in an annual register; “the basic idea being that sunlight is the best means of dealing with these sorts of practices”.
Another upshot of simplifying the regime is that there will be a universal obligation on all those providing financial advice to put the interests of the consumer first. Currently only AFAs (of which there are 1800 in New Zealand, but only around 1000 practising) have this obligation.
MBIE explains: “All advisers and agents have limitations on the services they can provide. For example, some [like bank employees] only provide advice on one or two providers’ products.
“In putting the interests of the consumer first they would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis.
“In all cases, advisers and agents must put the consumers’ interests ahead of their own regardless of the differing financial incentives offered by providers.
“The consumer first obligation will be supported by FMA monitoring and enforcement, where any breaches of the obligation could be penalised. The FMA would continue its surveillance activities, such as setting reporting requirements for advisers.”
‘Financial advisers’ and ‘agents’ to replace AFAs, RFAs and QFEs
Explaining the nuts and bolts of proposed new categories of advisers, MBIE says:
“To improve consumer understanding, anyone providing financial advice will now be known as either a ‘financial adviser’ or an ‘agent’. Financial advisers will be individually accountable for complying with the legislative and Code [of Conduct] obligations whereas financial advice firms will be accountable for their agents."
In other words, AFAs and RFAs are likely to fall into the ‘financial adviser’ category, while QFE advisers (who work for banks for example) will fall into the ‘agent’ category.
MBIE says: “While there will be no legislative difference in the services financial advisers or agents could provide, in practice, agents will only be able to provide advice services where their firm has sufficient processes and controls in place such that the FMA is satisfied it is appropriate for the firm (and not the individual) to hold accountability. It is therefore likely that, in practice, the services offered by an agent would be limited when compared to those offered by an adviser.”
So the confusing 'Category 1' (complex) and 'Category 2' (simple) product differentiations that different types of advisers can advise on will be removed, as will distinctions between ‘class’ and ‘personalised’ advice.
"Advisers won't be restricted from providing consumers with the advice they want and need when they have the competence to provide it," MBIE says.
“All advisers (not just a sub-set) will be held to common competence and conduct requirements to ensure that they are competent to provide advice and to put the consumer’s interests first.”
Goldsmith can’t be definitive on whether advisers will need to retrain
Goldsmith can’t confirm whether this means RFAs (of which there are around 6400 in New Zealand) will need to retrain or upskill to meet common standards of competency.
He says the main thing is that they meet the requirements of a Code of Conduct, which is yet to be developed and will include standards of competency, knowledge and skill that apply to particular parts of the industry.
“For example, life insurance advisers could be required to demonstrate knowledge of life insurance products and skill in managing replacement business,” MBIE says.
Asked whether the change will exacerbate the adviser shortage we’re suffering from, Goldsmith says:
“My expectation is that will be reasonably pragmatic and there will be transition measures in place. The purpose of all this is to try to increase Kiwis’ access to financial advice and to remove barriers getting in the way of financial advice… The goal is not to remove potential sources of financial advice.”
Door opened for robo-advice
MBIE would also like to see a path for robo-advice platforms established.
“Online advice (known as robo-advice) is emerging abroad and has the ability to provide consumers with a convenient, more affordable means of accessing financial advice.
“Firms wishing to provide advice through robo-advice platforms will need to obtain a licence from the FMA.
“Robo-advice will need to meet the same standards as a person providing advice; however the means of meeting these standards will differ. For example, while a financial adviser may be required to demonstrate competence through having passed a qualification, a robo-advice platform may have to demonstrate equivalent quality through algorithm and scenario testing.”
Goldsmith says: “When you think of the average person in their early 20s - not everyone wants to sit down and have a half an hour conversation with an adviser. They want to go to an app, type in their details and get some guidance from that.
“We’re trying to achieve a situation where more New Zealanders are accessing and engaging with financial advice. The reality is that at the moment, there’s not a huge amount going on.”
From here, the government will release an exposure draft of the new legislation for consultation. It aims to introduce a Bill to the House by the end of the year.