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Staff Paper On Authorised Financial Adviser Competence. Discussion document [2009] NZSecCom 3 (20 April 2009)
Last Updated: 15 November 2014
Ref: 420-000 /
#110002
STAFF PAPER ON
AUTHORISED FINANCIAL ADVISER COMPETENCE
20 April 2009
Introduction
- The
purpose of this paper is to outline current developments and possible approaches
in relation to standards of competence for authorised
financial advisers
(“AFAs”) under the Financial Advisers Act 2008 (“the
Act”). It has been prepared by Securities
Commission staff to inform not
only the Commission itself (i.e. the Commission in its capacity as a statutory
decision maker) and
the Commissioner for Financial Advisers, but also the Code
Committee, financial advisers and their employers, consumers, education
providers and other interested parties. In turn we seek comments to help provide
a more complete picture of current developments
and possible
approaches.
- To
the extent that views are expressed in this paper they represent the preliminary
thinking of Commission staff rather than the settled
view of the
Commission.
- Much
of this paper is descriptive – setting the scene for a discussion. First
we give an outline of how the Act relates to the
competence of AFAs. Within that
outline we
draw attention to the various distinct roles of the
Commission, the Commissioner, and the Code Committee. We then go on to outline
the National Qualifications
Framework and the development of unit standards of competence for financial
advisers. The last section of this paper is the beginning
of the substantive
discussion on a competence framework for AFAs under the Act.
- The
intention is for this paper to lay the groundwork for consultation processes and
decision making in relation to competence matters.
In particular, we are keen to
ensure that, ahead of the Code Committee’s consultation process on the
competence standards to
be specified in the Code, there is a good level of
understanding of the National Qualifications Framework.
- We
are keen to fully understand and assess the financial and other implications of
the possible approaches set out in this paper.
We ask you to comment on costs,
benefits and any other impacts (for example the effects on competition or on
trans-Tasman business
efficiency). We are seeking both quantitative and
qualitative information. We encourage you to describe any alternative approach
you think would achieve the Act’s objectives. We are keen to hear from you
on any other issues you consider important.
6. Submissions should be sent to the Commission by 5.30pm on 29 May
2009.
Email: faa.consultation@seccom.govt.nz
Post: AFA Competence Discussion
Securities Commission
PO Box 1179
Wellington
Facsimile: (04) 472 8076
7. Submissions will be shared with the Code Committee.
- Submissions
will be subject to the Official Information Act 1982. We may also make them
available, for example on our website, and
draw attention to them in any
further
report. If you would like us to withhold any commercially sensitive,
confidential or proprietary information included in your submission
please state
this in your response. Any request to have information withheld will be
considered in accordance with the Official Information
Act.
Authorised financial advisers and competence
- In
this section we outline how the Act relates to the competence of AFAs and
discuss the competence-related roles of the Code Committee,
the Commission and
the Commissioner for Financial Advisers.
Competence
- The
purpose of the Act is to promote the sound and efficient delivery of financial
advice, and to encourage public confidence in the
professionalism and integrity
of financial advisers, by:
(a) requiring disclosure by financial advisers,
(b) requiring the competence of financial advisers, and
(c) ensuring that financial advisers are held accountable for any financial
advice that they give and there are incentives for financial
advisers to manage
appropriately conflicts of interest.
- Competence
is therefore central to the Act. However, the impact of the Act depends upon the
type of financial adviser service being
performed, and whether an adviser is an
employee or agent of a “Qualifying Financial Entity”. This paper is
concerned
with competence as it relates to AFAs.
Authorised Financial Advisers
12. The Act divides financial products into two categories:
(a) Category 1 (higher risk or more complex products) – securities,
real estate, and futures contracts.
(b) Category 2 (lower risk or less complex products) – call debt
securities, bank term deposits, insurance products (other than
life insurance
issued after 31
December 2008), and consumer credit contracts.
- In
general, advisers who give advice on or undertake investment transactions in
respect of category 1 products, and all people who
provide financial planning
services, will need to be authorised by the Securities Commission. The exception
to
that is an employee of a Qualifying Financial Entity (QFE)
advising on or undertaking investment transactions in respect of category
1
products issued by the QFE will not need to be authorised.
The Commission
- To
obtain authorisation, a person must satisfy the Commission that, amongst other
things, he or she meets levels of competence, knowledge
and skills set out in
the Code of Professional Conduct for AFAs.
15. The Commission itself is therefore a key stakeholder in the development
of the Code.
The competence framework established in the Code will have a direct bearing
on what the Commission will need to do to determine applications
for
authorisation and on the efficiency of the Commission’s ongoing
supervision of AFAs.
The Code Committee and the Code of Professional Conduct
- Responsibility
for preparing the Code falls to the Code Committee. Amongst other things, the
Code must provide for minimum standards
of competence, knowledge and skills for
AFAs. The Code must also provide for continuing professional training for AFAs,
including
specification of minimum requirements that an AFA must meet for the
purpose of continuing professional training.
17. The Act expressly requires the Code Committee to consult with
interested parties in preparing the draft Code. A key objective
of this paper is
to lay the groundwork for that consultation.
18. Members of the Code Committee are appointed by the Commissioner for
Financial Advisers. The Code Committee must have at
least 7 members and not more
than 11. One of those members must have consumer affairs knowledge and
experience, and the remaining
members must have industry knowledge and
experience. The Commissioner is not a member of the Code Committee.
- The
Code must be approved firstly by the Commissioner for Financial Advisers and
then by the Minister of Commerce.
Summary of roles and tasks
- The
following is a summary the roles and the sequence of tasks involved in putting
in place the Code and getting to the point where
financial advisers can be
authorised under the Act:
(a) The Minister of Commerce appoints a
Commissioner for Financial Advisers. (b) The Commissioner for Financial Advisers
appoints
members of the Code
Committee.
(c) The Code Committee prepares a draft Code in consultation with industry
and others.
(d) The Commissioner for Financial Advisers approves the draft Code (or
declines to approve it and refers it back to the Code Committee).
(e) The Minister of Commerce approves the draft Code (or declines to approve
it and refers it back to the Code Committee).
(f) The Code comes into force on the date notified by the Commissioner in
the
Gazette.
(g) The Commission processes (or completes the processing of) applications
for authorisation.
Competence framework
- Establishing
a competence framework is perhaps the most complex aspect of preparing the draft
Code. That complexity derives from a
number of factors including that the
competence framework needs to be –
(a) effective in establishing minimum levels of competence in practice,
(b) meaningful and credible in order to underpin consumer
confidence,
(c) flexible and adaptable in order to accommodate the diversity of
financial advisers, financial adviser services, and the
range of potentially
relevant qualifications and experience,
(d) cognisant and accommodating of international mutual recognition issues,
and
(e) workable and in proportion to the issues at hand to ensure that the right
balance is achieved between the regulatory impact and
the objectives of the
Act.
The Development of Competence Standards for Financial Advisers
The National Qualifications Framework
- The
National Qualifications Framework (“NQF”), administered by the New
Zealand Qualifications Authority (“NZQA”),
is designed to provide
nationally recognised standards and qualifications, and recognition and credit
for a wide range of knowledge
and skills. Unit standards of competence, and
national certificates and diplomas, are registered on the NQF.
- Tertiary
education organisations such as universities, polytechnics, and private training
establishments are able to seek accreditation
with NZQA for the delivery of
courses and programmes of training and assessment against the standards and
qualifications registered
on the NQF.
- Unit
standards of competence describe what a person needs to know or what they must
be able to perform. They provide the basis for
assessment, but they do not
specify the delivery of learning or training programmes. In essence, they are
definitions of outcome
– the standards of performance that a person must
reach in order to be objectively assessed as competent – rather than
course content.
- As
the established national framework for defining qualifications and standards of
competence, the NQF offers an opportunity to standardise
definitions of
competence for all financial advisers. The financial adviser profession covers a
large and varied group of people,
with vastly differing backgrounds in learning
and practical experience. The NQF enables objective articulation of measurable
competence
standards for the entire profession.
- Standardised
articulation of competence provides a fair and transparent way of assessing
people’s abilities, enhances certainty
(for advisers, employers,
educators
and regulators), and facilitates qualification portability across the
profession. It allows any education provider accredited to deliver
the standards
to compete to provide training and assessment services. It also allows
assessment to occur in the workplace by registered
workplace assessors. It
enables industry and the regulator to place reliance on the already
well-developed systems established in
the education system
for assessing competence and arranging the delivery of learning. It provides
demonstrable evidence to help support the international
recognition of New
Zealand advisers. Objective, industry-agreed standards will increase certainty
regarding acceptable levels of
professional skills and competence, contributing
to the reduction of compliance costs – and simplification of regulatory
monitoring
– for all categories of advisers.
- In
addition to adviser regulation, the NQF is also available for defining standards
for personal financial education. Personal financial
education – such as
financial literacy initiatives in schools – is generally set at lower
competence levels aimed at
“consumers”, while this paper is
concerned with competence for the “suppliers” of financial services.
However,
there are valuable system-wide advantages to using the NQF not only for
advisers’ professional competence but also for personal
financial
education. Not least of these is the creation of an environment where education
organisations are able to deliver a spectrum
finance related disciplines, to the
benefit of the entire community. Learning pathways in finance and related skills
can be developed
from high-school literacy levels all the way through to the
competence levels required for professional financial advisers.
Industry training
- The
Tertiary Education Commission (“TEC”) is the crown agency
responsible for leading the government’s relationship
with, and investment
in, the tertiary education sector. It promotes a tertiary education system that
is responsive to government
and stakeholder priorities.
29. The TEC, together with industry, invest in Industry Training
Organisations (“ITOs”).
Each ITO has a legislated role to play in developing the industry training
system for the industries under its coverage. ITOs are
established pursuant to
the Industry Training Act as the mechanism for setting industry skill standards,
providing skill and training
needs leadership, and developing arrangements to
deliver industry training.
- ETITO
(www.etito.co.nz) is the ITO for the
financial services industry. As such it is responsible for developing unit
standards for the financial services
industry generally and, more specifically,
for financial advisers. ETITO has worked with the financial services industry
since 2002.
Its coverage of the industry as the ITO for financial services was
gazetted by the Minister of Education in 2007.
- In
conjunction with the financial services industry, and in parallel to the
development of the Act, ETITO has been developing competence
standards for
financial advisers using the National Qualifications Framework.
- Securities
Commission staff have been engaging with ETITO to ensure that the Commission is
included as a stakeholder in the development
of a framework for financial
adviser competence standards, competence assessment and training, and to ensure
that Commission staff
are well placed to inform the Commission itself (i.e.
the
Commission in its capacity as a statutory decision maker), the Commissioner
for Financial Advisers, the Code Committee, financial
advisers and their
employers, consumers, education providers and other interested parties.
National qualifications – and their component competence standards
– for financial advisers
- To
date, ETITO has finalised two National Certificate qualifications: the National
Certificate in Financial Services (Level 4) and
the National Certificate in
Financial Services (Financial Advice) (Level 5).
- These
qualifications, developed by ETITO and its finance industry consultative
committee, have focused on “baseline” competence:
the skills that a
financial adviser should have as a minimum. Competence standards for specialised
classes of financial advice activities
have not yet been
written.
- Most
relevantly for AFA competence, in March 2009, the National Certificate in
Financial Services (Financial Advice) (Level 5) was
registered by NZQA on the
NQF, following extensive development coordinated by ETITO. It can be found at www.nzqa.govt.nz. The Level 5 National
Certificate would be the equivalent of a “driving test”: it would
provide an indication that a person
meets the theoretical and practical
competence standards appropriate for operating on the financial advice
“road network”
but not necessarily confirmation that they have the
skills and knowledge for certain higher-level specialised advice
activities.
- The
Level 5 National Certificate is intended for advisers – operating without
direct supervision and outside a rigid “template”
work process
– who:
(a) Give personalised and specific advice based on needs analysis of a wide
range of data,
(b) Determine appropriate methods, make recommendations and lead the client,
based on this analysis,
(c) Have full responsibility for the nature, quantity and quality of
outcomes, (d) Possess a broad knowledge base with
substantial depth in
some areas,
(e) Work for the client,
(f) May specialise in investment advice, insurance advice or do
both.
- The
Level 5 National Certificate is set at a level that we anticipate would assist
in obtaining international and trans-Tasman mutual
recognition of financial
adviser training.
- Now
that the Level 5 National Certificate has been registered, any accredited
training provider is able to develop programmes of training
and assessment for
– or that incorporate – the Level 5 Financial Advice unit
standards.
- Ideally
ETITO, industry and educators will collaborate to progressively develop
additional standards – at, below and above Level
5 – providing a
common currency for articulating a wide range of financial advice competence
requirements. In
July 2008 ETITO registered the (lower) Level 4 National Certificate, which we
expect industry may find of use in helping to articulate
requirements for some
categories of employees and agents of QFEs.
Discussion of possible approaches
Existing qualifications that can be substantiated
- We
envisage that the Code Committee, in providing for standards of competence, will
take into account existing qualifications in the
financial advice
sector.
- Where
an existing qualification has a well-evidenced record of combining structured
theoretical learning and assessment, together with robust and transparent
assessment of practical competence in the workplace, and has been
followed by a substantiated programme of continuing profession training
(“CPT”), the Code Committee will need to consider whether to
recognise that in the Code as the requisite standard for a particular
class of
adviser.
- [DISCUSSION
POINT A] What qualifications do you consider would potentially meet those
criteria (theoretical, practical, CPT)? For each qualification you
list, please
describe the type of financial advice activity for which it is suitable. Is
the
qualification you name the only one suitable for that type
of financial advice activity?
Universal use of NQF
- We
consider the case to be compelling for using the NQF to define standards of
adviser competence in a generic and measurable form,
in light of the factors set
out under “Competence framework” above. If the Code Committee agrees
and adopts the NQF to
define standards of adviser competence, we propose to
liaise with ETITO, industry and educators to work towards defining existing
qualifications using NQF standards. It would mean that over time any accredited
education provider could compete to deliver the requisite
training. It would
facilitate the fair and objective recognition of a large range of New Zealand
and overseas qualifications.
- We
acknowledge that NQF standardisation of all financial advice qualifications
would be likely to take several years to complete.
Accordingly, we would
recommend a transitional approach, where some existing qualifications (that meet
the criteria above
– theoretical, practical, CPT) are listed
in the Code as being the interim standards of competence for certain specialised
classes
of financial advice activities.
45. [DISCUSSION POINT B] Do you agree with the introduction,
progressively, of
NQF definitions for all adviser qualifications?
Two-step approach for existing advisers without substantiated
qualifications
- If
the NQF is adopted to define standards of adviser competence, we envisage there
will need to be a two-step approach for existing
advisers wishing to become
AFAs, if they either do not possess formal qualifications or have some
qualifications but do not meet
the criteria above (theoretical, practical,
CPT).
Step 1
- First,
we anticipate that in carrying out its obligation to ensure an AFA applicant
meets the levels of competence, knowledge and
skills specified in the Code, the
Commission would require some evidence of the applicant’s current
competence.
- In
the absence of other independent evidence of current competence, an assessment
of “baseline” competence would be a
valid alternative. We envisage
that this could be developed as a universally administered assessment system,
focusing on assessing
the core competence that every adviser should have. It
would not extend to cover specialist subject areas for which some AFAs would
have no need.
- We
envisage that such an assessment system could be administered under
ETITO’s supervision. Assessment methods necessarily must
be appropriate
for the competence being assessed, so the assessment system would probably
comprise a test or examination to assess
theoretical competence plus, for
example, a requirement for applicants to submit a portfolio of evidence to
demonstrate practical
competence in the workplace.
50. [DISCUSSION POINT C] Do you support the concept of a
baseline standard? Do you support the proposal to assess applicants against the
baseline standard?
Do you consider Level 5 to be an appropriate baseline
standard for AFAs?
Step 2
- Second,
we anticipate that for AFA applicants wishing to undertake specialised classes
of financial advice activities, some confirmation
of theoretical and practical
competence (relevant to those activities) may be required in addition to the
generic baseline assessment.
- The
effect of this two-step approach is that a universal, generic baseline
assessment will be applied, plus “top-up” theoretical
and/or
practical requirements depending on the class of work the adviser will be doing.
As the baseline assessment provides evidence
of current competence,
substantiation of the “top-up” can be proportionately
relaxed.
Bridging periods for existing advisers
- The
Act anticipates that to be authorised, all existing advisers will need to
satisfy the Commission that they currently meet the
level of competence
specified in the Code. Consequently there is no “deemed” or
automatic authorisation of existing advisers.
- However,
we are interested in your submissions regarding short bridging periods for
applicants who do not initially meet the standard
for authorisation as an AFA,
to enable them to continue practicing in their current field of work while they
further develop their
skills up to the requisite level.
- [DISCUSSION
POINT D] Should existing advisers whose baseline assessment is
unsuccessful be allowed to practice as AFAs for a short period to enable
them to further develop their skills? If so, what restrictions should
be imposed
(for example, work under supervision)? How many months do you consider
reasonable?
- [DISCUSSION
POINT E] Should existing advisers who successfully pass baseline
assessment, but do not meet the requisite “top-up” requirements
for a particular class of work, be allowed to practice as AFAs in
that class for
a short period while they develop the additional skills? If so, what
restrictions should be imposed? How many months
do you consider
reasonable?
Other financial advisers
- Codified
competence standards will be mandated only for AFAs, not for other
advisers.
- QFEs
are required to satisfy the Commission that they have the capacity to ensure
their adviser staff and agents exercise reasonable
care, diligence and skill. We
plan to explore with potential QFEs how they may voluntarily use NQF standards
(with assistance from
ETITO) to map the training and competence arrangements
currently used in their businesses. Our objectives here are to standardise
skill
levels, make training provision more competitive and accessible, promote
portability of qualifications, reduce compliance costs
and simplify regulation.
We anticipate that this mapping exercise could be undertaken by QFEs
incrementally over the next two to
three years.
- Similarly,
we will encourage professional associations representing Category 2 advisers to
collaborate with ETITO in the progressive
development of NQF standards suitable
for their members.
60. [DISCUSSION POINT F] We are interested in your views on the use of
NQF
standards more broadly than for only AFAs.
Culture of professionalism
- Our
regulatory approach to adviser skills and competence envisages a framework more
expansive than mandated requirements, where core
obligations are supplemented by
a culture of professionalism. Rules alone are not enough:
incentives
that encourage professional responsibility are essential
if the financial adviser industry is to earn public confidence in its
members’
competence and integrity.
- [DISCUSSION
POINT G] We are interested in your ideas for regulatory or other strategies
to help promote a culture of professionalism across the adviser
industry.
- We
look forward to receiving submissions on the discussion points above and on any
other matters you wish to raise in relation to
AFA
competence.
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