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New Zealand Securities Commission |
Last Updated: 15 November 2014
STAFF PAPER ON
REGULATING AND SUPERVISING FINANCIAL ADVISERS
New Zealand Securities Commission
18 June 2009
ABOUT THIS PAPER
.........................................................................................................................................
3
MAKING A SUBMISSION
.................................................................................................................................
3
REGULATING FINANCIAL ADVISERS
........................................................................................................
4
OVERVIEW OF THE REGULATORY FRAMEWORK .................................................................................................. 4
REGISTRATION OF FINANCIAL ADVISER EMPLOYERS OR PRINCIPALS .................................................................. 5
FINANCIAL PLANNING SERVICES
.........................................................................................................................
5
REGISTRATION AS A FINANCIAL SERVICE PROVIDER
.......................................................................
6
SUPERVISING FINANCIAL ADVISERS
........................................................................................................
7
SUPERVISION AND THE PURPOSE OF THE ACT ..................................................................................................... 7
The sound delivery of financial advice.......................................................................................................... 7
The efficient delivery of financial advice ...................................................................................................... 7
Professionalism and integrity of financial advisers ...................................................................................... 7
HOW THE COMMISSION WILL SUPERVISE FINANCIAL ADVISERS
..........................................................................
8
COMPLAINTS AND ENFORCEMENT
...........................................................................................................
9
COMPLAINTS ABOUT FINANCIAL ADVISERS ........................................................................................................ 9
GENERAL ENFORCEMENT POWERS ...................................................................................................................... 9
ENFORCEMENT POWERS SPECIFIC TO AFAS...................................................................................................... 10
Breaches of the code of professional conduct ............................................................................................. 10
ENFORCEMENT POWERS SPECIFIC TO QFES
......................................................................................................
11
AUTHORISED FINANCIAL
ADVISERS.......................................................................................................
11
AFAS – GENERAL COMMENTS .......................................................................................................................... 11
BECOMING AN AUTHORISED FINANCIAL ADVISER
.............................................................................................
12
QUALIFYING FINANCIAL ENTITIES
.........................................................................................................
12
QFES – GENERAL COMMENTS ........................................................................................................................... 12
WHO AND WHAT A QFE IS RESPONSIBLE FOR ................................................................................................... 13
Agents of a QFE .......................................................................................................................................... 14
AFAs who are employees or agents of a QFE............................................................................................. 15
WHO MIGHT APPLY TO BE A QFE? .................................................................................................................... 16
BECOMING A QFE ............................................................................................................................................ 17
COMPETENCE AND STANDARDS OF PROFESSIONAL CONDUCT FOR QFE ADVISERS ........................................... 18
DISCLOSURE BY QFES ...................................................................................................................................... 19
Disclosure by wholesale financial advisers and research financial advisers
............................................. 19
About this paper
1. This paper is a Securities Commission staff paper and represents
the preliminary thinking of Commission staff on how the
Commission might
regulate and supervise financial advisers under the Financial Advisers Act 2008.
We seek comments from financial
advisers and their employers, consumers, and
other interested parties before finalising recommendations to Members of the
Commission.
2. While this paper outlines the regulation and supervision
of financial advisers generally, it has a particular
focus on the principles
underpinning the supervision of advisers under the Act, and on Qualifying
Financial Entities (“QFEs”).
The Act itself is concerned with the
occupational regulation of individual financial advisers, with individual
advisers being supervised
either directly by the Commission or indirectly
through QFEs. Because QFEs will be responsible for a significant number of
financial
advisers, their frontline compliance role and the effective
supervision of QFEs by the Commission will be central to the effective
implementation of the Act.
3. In this paper we also discuss a number of QFE-related issues for
Authorised Financial Advisers (“AFAs”). We
will be developing more
detailed proposals in relation to AFAs once the code of professional conduct is
in place (noting also that
the code committee to be set up under the Act will be
consulting on the draft code).
4. We anticipate being in a position to consider applications for QFE
status by the last quarter of 2009, and from potential
AFAs by mid 2010. We
expect the Act to be fully in force by the end of 2010.
5. The views expressed in this paper represent preliminary thinking
of Commission staff and do not bind the Commission. They
are made for the
purpose of promoting discussion and public understanding of the Act and are
without prejudice to any policy the
Commission may adopt or any enforcement
action the Commission may take in particular circumstances. The Act’s
application is
likely to depend on a range of factors specific to each
individual or entity. If you are unsure whether the Financial Advisers Act
will
affect you, or if you are unsure of the legal consequences of becoming a QFE, we
encourage you to seek legal advice. Nothing
in this paper should be construed or
relied upon as legal advice.
Making a submission
6. Submissions should be sent to the Commission by 5.30pm on Thursday 30 July
2009.
Email: faa.consultation@seccom.govt.nz
Post: Regulating and Supervising Financial Advisers Discussion
Securities Commission
PO Box 1179
Wellington
Facsimile: (04) 472 8076
7. Submissions will be subject to the Official Information Act 1982.
We may also make them available on our website, for example,
and draw attention
to them in any further
reports. If you would like us to withhold any commercially sensitive,
confidential or proprietary information included in your submission
please say
so in your response. Any request to have information withheld will be considered
in accordance with the Official Information
Act.
Regulating Financial Advisers
Overview of the regulatory framework
8. The Financial Advisers Act is concerned with the
occupational regulation of individual financial advisers and
will impact those
whose business involves:
(a) giving financial advice – making recommendations or
giving opinions or guidance – in relation to acquiring
or disposing of
investments, insurance, or credit contracts;
(b) making investment transactions – the receipt, handling,
payment or investment of money or other property on behalf
of another person
– in relation to acquiring or disposing of investments, insurance, or
credit contracts; or
(c) providing a financial planning service.
9. The impact of the Act depends upon the type of financial adviser
service, the products it relates to, and whether an adviser
is an employee or
agent of a QFE.
10. Financial advice, financial advisers, and the QFE regime are
defined by reference to financial products, which the Act divides
into two
categories:
(a) Category 1 (higher risk or more complex products) –
securities (other than those listed as category 2), 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.
11. Generally, an individual who advises on or undertakes investment
transactions in respect of category 1 products, or who
provides a financial
planning service, will need to be authorised by the Securities
Commission and registered on the financial service providers
register. And, again generally, an individual who advises on or undertakes
investment transactions
in respect of category 2 products will need to be
registered on the financial service providers register.
12. The main exceptions to the registration and authorisation requirements
are that:
(a) an individual who is an employee or agent of a QFE may, in the
course of a QFE’s business, advise on or undertake
investment transactions
in respect of category 2 products without being registered; and
(b) an individual who is an employee of a QFE may, in the course of the
QFE’s business, advise on or undertake investment
transactions in
respect of
category 1 products of which the QFE is the issuer without being registered
or authorised.
13. Financial advisers not covered by a QFE are subject to
conduct and disclosure obligations and are personally
liable in respect of
them. AFAs are subject to more obligations than those who are merely registered
and, in particular, are subject
to the code of professional conduct to be
established under the Act. The disciplinary committee to be set up under the Act
will be
responsible for disciplining AFAs for breaches of the code.
14. Financial advisers covered by a QFE are still personally subject to
a number of conduct obligations under the Act but are
not personally liable for
any contravention. Instead the QFE is responsible for ensuring its advisers
comply with their obligations
and is itself subject to related conduct and
disclosure obligations (for which it is liable). This gives QFEs a frontline
compliance
role.
15. A QFE’s obligation to ensure its advisers comply with their
obligations applies in respect of all financial advisers who are
employees or agents of the QFE, including those who are AFAs. However, AFAs
employed by a QFE remain personally
liable in respect of their conduct and
disclosure obligations.
16. A QFE is responsible for ensuring that all its advisers
who are required to be authorised are authorised; and the QFE rather
than the individual is liable if they are not.
17. All advisers, including those who are registered but not authorised
and a QFE’s advisers, are bound by the fundamental
conduct obligation to
exercise the care, diligence, and skill that a reasonable financial adviser
would exercise in the same circumstances,
taking into account the nature and
requirements of the financial adviser’s client and the nature of the
service performed for
the client.
Registration of financial adviser employers or principals
18. Any person (the “business owner”) who employs or
engages someone as an employee or agent to perform a financial
adviser service
in the course of its business for its client or clients must be registered on
the financial service providers’
register, irrespective of whether it is a
QFE. If the financial adviser service is provided to the public then to be
registered the
business owner will need to belong to an approved dispute
resolution scheme. Employees will not be required to separately belong
to an
approved dispute resolution scheme (even if they are required to be separately
registered, for example AFAs employed by a registered
financial service
provider). However, this does not apply to agents, who must belong to an
approved dispute resolution scheme individually.
Financial planning services
19. The Act defines a financial planning service as one “that
analyses an individual’s current financial situation,
identifies his or
her financial goals, and develops financial options for realising those
goals.” Under the Act, only
an AFA may provide a financial
planning service.
20. What constitutes a financial planning service is therefore material
in determining whether an adviser will need to be authorised
by the Commission
(as opposed to merely being registered or operating under a QFE’s
designation). A financial planning service
could be interpreted as
including a basic needs analysis for a particular product or advice
combining, say, a credit
contract with an insurance product relating to the
credit contract. In our view, however, such an interpretation would catch too
wide a range of financial advisers, making the Act unnecessarily restrictive and
potentially undermining its objectives.
21. We therefore propose to interpret a financial planning service as
involving more than merely doing a basic needs analysis
for a particular
product or combining two products where one product is ancillary to the other
(such as life insurance taken
out at the same time as a loan to cover the
outstanding loan). We believe this is consistent with the intended application
of “financial
planning service” and allows product category 2
advisers and advisers covered by a QFE’s designation to give customers
a
professional level of service.
22. However, it is important to maintain the integrity of the boundary
between authorised and non-authorised advisers (and between
AFAs who are
authorised to provide financial planning services and those who are not). We
will therefore be monitoring how advisers
who are not authorised to provide
financial planning services actually provide their services.
Discussion Question
A Do you have any comments on the suggested approach to interpreting
“financial planning services”?
Registration as a financial service provider
(b) in the case of an individual or
entity providing financial services to the public, they are a member of an
approved dispute
resolution scheme or the reserve scheme; and
(c) in the case of an individual or entity providing or
offering to provide a licensed service – for
example, a financial
adviser service relating to a category 1 product or a financial planning
service – they are a licensed
provider.
or is
subject to a confiscation order under the Proceeds of Crime Act. An entity is
disqualified if it has a controlling owner, director
or senior manager who as an
individual is disqualified.
24. The Registrar of Companies has been appointed as the Registrar of
Financial Service Providers and will be providing
information in due
course about registration processes.
Supervising Financial Advisers
Supervision and the purpose of the Act
25. The overarching 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. In this section we explore what this purpose
means in the context of our approach to supervision.
The sound delivery of financial advice
26. Several factors contribute to the provision of sound financial
advice, including the adviser’s professionalism, and the degree of
care, diligence and skill they exercise. These are broad concepts
and we will
focus on three key attributes – competence, capacity, and conduct:
(a) Individual competence: The adviser must have the skills and
competence to do the job.
(b) Organisational capacity: The organisation’s capacity
must be sufficient to support the advice process; that is, there must be
adequate systems and
procedures in place. Any financial adviser business –
from a sole practitioner to a large institution – must have appropriate
organisational capacity.
(c) Conduct: The adviser’s conduct – especially in
interacting with and servicing the client – must comply with mandated
requirements
(for example the Code of Professional Conduct for AFAs) or should
otherwise follow best practice.
27. The required nature, scale and extent of these attributes
will depend on the circumstances, for example the
type of financial adviser
service being performed. The relative weightings of the attributes will also
vary according to the circumstances.
The efficient delivery of financial advice
28. The Act’s disclosure requirements and accountability
mechanisms underpin the efficient delivery of financial
advice across the
market and are central to the ongoing supervision of financial advisers.
29. The regulatory and supervisory framework must also accommodate
different ways of delivering financial advice to ensure business
models and
advice delivery methods are not unduly influenced by it. The framework should be
neutral across models and methods, unless
they raise particular issues to do
with the sound delivery of financial advice. This is particularly so in the
context of QFEs and
between QFEs and non-QFE financial adviser
businesses.
Professionalism and integrity of financial advisers
30. We envisage a more expansive supervisory framework than one that
focuses solely on advisers meeting core obligations.
Core obligations must
be supplemented by a culture of professionalism; this will ensure that
meeting those obligations is not
seen
as merely a matter of compliance but more as a matter of best practice in
providing a financial adviser service. This is at the heart
of increasing public
confidence in financial advisers.
31. Just as a culture of professionalism will enhance public
confidence, the degree of professionalism shown by an individual
adviser or
within a QFE will have a bearing on our assessment of the risk posed by that
adviser or QFE. A professional culture is
likely to reduce non-compliance with
the Act and, other things being equal, make it less likely that an individual
adviser or QFE
would be subjected to more targeted supervision.
How the Commission will supervise financial advisers
32. All AFAs and QFEs will be subject to supervision, in the first
instance through their applications to become AFAs and QFEs,
and through the
need to periodically apply for the renewal of authorisation or QFE status. In
some circumstances – in addition
to any information that applicants
provide in their application – assessment or renewal may include onsite
inspections and
interviews by Commission staff.
33. Applicants for renewal will be reassessed against the then current eligibility criteria.
For an AFA’s authorisation to be renewed, the Commission must also be
satisfied that the AFA has complied with the minimum professional
standards set
out in the code which will include requirements relating to continuing
professional training.
34. QFEs are also required to provide the Commission with an annual report on Financial
Adviser Act matters.
35. We are establishing a framework for the systematic
oversight of all advisers, including registered (but not authorised)
financial advisers, commensurate with the obligations imposed on those advisers
and the risks posed to consumers. The effective oversight
of registered (but not
authorised) financial advisers is a crucial part of the wider regulatory
framework, particularly in terms
of maintaining the integrity of the boundary
between authorised and non-authorised advisers.
36. Similarly, to maintain the integrity of the wider regulatory
framework put in place by the Act, our oversight will extend
to monitoring for
unregistered financial advisers and other illegal advice activity.
37. These across-the-board activities are likely to be supplemented by
a more targeted supervisory programme where we will follow
up with particular
individual advisers or QFEs if we have identified them as posing a higher risk
of non compliance or where particular
concerns have been identified.
38. Intelligence we receive from complaints made by consumers and
investors about adviser conduct or from other sources may
also direct our
supervisory attention to specific individual advisers (including AFAs, advisers
who are registered but not authorised,
and QFE advisers) and QFEs.
39. Targeted supervision is likely to include onsite inspections and
interviews in addition to requiring written information.
40. From time to time we may also carry out issue-specific supervision
projects (as opposed to those targeting individual advisers
or QFEs), such as a
general review of disclosure obligation compliance.
41. We anticipate dealing with many issues primarily through constructive dialogue.
However, an unremedied issue may be dealt with by imposing additional terms
and conditions on an AFA or a QFE or by taking other enforcement
action. In some
circumstances it may be more appropriate to proceed straight to enforcement.
Also, if the Commission receives a complaint
about the conduct of an AFA, which
in its opinion amounts to a breach of the code of professional conduct, then it
must refer the
complaint to the code disciplinary committee.
Discussion Question
B Do you have any comments we should take into account as we further
develop the approach – outlined in summary above
– for supervising
financial advisers?
Complaints and Enforcement
Complaints about financial advisers
42. Anyone may complain to the Commission about the conduct of a financial adviser.
The Act also expressly provides that the Commissioner for Financial Advisers
may initiate a complaint. A complaint may lead to
increased supervisory
attention or enforcement action.
General enforcement powers
43. If the Commission has reason to believe that a financial adviser is
in breach of a disclosure or conduct obligation it may
give the adviser a
direction in relation to remedying that breach. Failure to comply with a
direction is an offence.
44. The Commission may also exercise its powers under the Securities
Act in performing its functions under the Financial Advisers
Act. Those powers
include:
(a) requiring documents to be provided for inspection;
(b) summonsing witnesses and receiving evidence in relation to any matter
before the Commission; and
(c) accepting an enforceable
undertaking.2
suffered loss injury or damage as a
result of the breach; or other consequential relief.
45. The Financial Advisers Act also includes offences relating to the
failure to comply with conduct and disclosure obligations
and the registration
and authorisation requirements.
Enforcement powers specific to AFAs
46. The Commission has the following enforcement powers in relation to
AFAs:
(a) If it is satisfied that an AFA is no longer eligible to
be authorised, has breached the Act or regulations
(other than in relation to
breaches of the code which are dealt with by the disciplinary committee),
breached a term or condition
of authorisation, is subject to a recommendation by
the disciplinary committee to cancel or suspend authorisation or to cancel
authorisation
and debar the adviser from reapplying for a specified period, or
has failed to pay a fee or levy as required by the Act or regulations,
the
Commission may:
(i) cancel the AFA’s authorisation;
(ii) cancel the AFA’s authorisation and debar him or her from
reapplying for a specified time;
(iii) suspend the AFA’s authorisation for a specified time or until he
or she does any thing that the Commission may specify;
or
(iv) amend the AFA’s terms and conditions.
(b) If the Commission has reason to believe an AFA is in breach of the
terms and conditions of the AFA’s authorisation,
it may give the AFA a
direction in relation to remedying that breach. Failure to comply with a
direction is an offence under the
Act.
(c) The Commissioner for Financial Advisers may initiate a complaint
about an AFA for the Commission to investigate and, as
appropriate, take
enforcement action or refer the matter to the code disciplinary
committee.
Breaches of the code of professional conduct
47. The disciplinary committee to be set up under the Financial
Advisers Act will be responsible for disciplining AFAs for breaches
of the code
of professional conduct. If the Commission receives a complaint about the
conduct of an AFA, which in its opinion amounts
to a breach of the code of
professional conduct, it must refer the complaint to the disciplinary committee.
If the disciplinary committee
is satisfied that an AFA has breached the code it
may:
(a) recommend the Commission cancel the AFA’s authorisation; (b) recommend the Commission—
(i) cancel the AFA’s authorisation; and
(ii) debar the AFA for a specified time from applying to be
re-authorised;
(c) recommend that the Commission suspend the AFA’s authorisation
for no more than 12 months or until he or she meets
specified conditions
relating to the authorisation (but, in any case, not for more than 12
months);
(d) censure the AFA;
(e) order that the AFA, for up to 3 years, may only perform a financial
adviser service subject to conditions relating to employment,
supervision, or as
otherwise specified in the order;
(f) order the AFA undertake training specified in the order; (g) order the AFA must pay a fine not exceeding $10,000.
Enforcement powers specific to QFEs
48. The Commission has the following enforcement powers in relation to
QFEs:
(a) If it is satisfied that a QFE is no longer eligible for
QFE status, or has breached the Act or regulations,
breached a QFE term or
condition, failed to comply with a direction given to it by the Commission under
the Act, or failed to pay
a fee or levy as required by the Act or regulations,
it may:
(i) cancel the QFE’s status as a QFE;
(ii) cancel the QFE’s status as a QFE and debar it from reapplying for
a specified time;
(iii) suspend the QFE’s status as a QFE for a specified time or until
the entity does any thing that the Commission may specify;
(iv) amend the QFE’s terms and conditions; (v) impose a fine of up to $50,000; or
(vi) censure the QFE.
(b) If the Commission has reason to believe that a QFE is in breach of
a disclosure or conduct obligation it may give the QFE
a direction in relation
to remedying that breach. Failure to comply with a direction is an offence under
the Act.
Authorised Financial Advisers
AFAs – general comments
49. An individual who gives financial advice or makes investment
transactions in relation to category 1 products (except for
category 1 products
issued by a QFE which is that person’s employer ) or who provides a
financial planning service must be
authorised by the Commission. An AFA may also
be an employee or agent of a QFE and we discuss the possible implication of that
in
the section below on QFEs.
50. As noted above, AFAs are subject to a more extensive range of
obligations than those who are merely registered. In particular,
they are
subject to the code of professional conduct to be established under the Act. The
disciplinary committee to be set up under
the Act will be responsible for
disciplining AFAs for breaches of the code.
Becoming an authorised financial adviser
(i) the applicant is registered or is entitled to be
registered as an authorised financial adviser once authorised by the
Commission;3
(ii) the applicant is of good character;
(iii) the applicant meets the levels of competency, knowledge, and skills
specified in the code for an authorised financial adviser;
and
(iv) the applicant is not debarred from applying for authorisation;
and
(b) the Commission is not aware, after due enquiry, that the applicant
has been convicted by a court in New Zealand or elsewhere
of an offence
punishable by imprisonment for a term of 6 months or more, or if the Commission
is aware that the applicant has been
convicted of such an offence, it is
satisfied that the offence does not reflect adversely on the applicant’s
fitness to act
as an authorised financial adviser.
52. We will be developing specific guidelines detailing the application
process and setting out what will be needed to support
an application.
53. Applicants whose applications are declined have a right of appeal to the District
Court.
54. An AFA will be authorised for a specified time in
relation to one or more of: performing a financial adviser
service in
relation to a category 1 product; making an investment transaction in relation
to a category 1 product; or providing a
financial planning service. An
authorisation may also be subject to terms and conditions.
Qualifying Financial Entities
QFEs – general comments
55. The QFE regime was included in the Act to avoid imposing what might
otherwise be excessive compliance costs and requirements
on firms with large
numbers of advisers. In effect, the QFE regime is a means for the efficient
regulation of individual advisers.
56. The Financial Advisers Act is concerned with the
occupational regulation of individual financial advisers. An
adviser will be
supervised either directly by the
3 Note, however, that to be an AFA a person needs to be registered and have been authorised by the
Commission.
Commission or, where a QFE is responsible for the adviser, indirectly through
the QFE with the QFE assuming a frontline compliance
role under the supervision
of the Commission.
57. QFE status is granted by the Commission if, amongst other things,
it is satisfied that the entity can and will ensure
that its advisers
meet and maintain appropriate standards. In this regard it is important to
note that the same standards
should be met and maintained by advisers performing
similar roles, regardless of whether or not a QFE is responsible for them. The
key point of difference is that, whereas a “non- QFE” adviser will
be individually accountable under the Act, a QFE sits
between its advisers and
the Commission and is responsible for ensuring that its advisers meet and
maintain appropriate standards.
The QFE is then accountable to the Commission.
AFAs employed by a QFE will also remain individually accountable. This
is
illustrated as follows:
Securities Commission
Registered entity
Not a QFE
QFE
Stand alone advisers
Employee or agent advisers
Non-AFA employees or nominated agent advisers
AFA employees or nominated agent AFAs
Stand alone advisers are directly supervised
Figure 1
Advisers who are employees or agents of an entity which is not a QFE are directly supervised
QFE is directly supervised.
QFE takes front-line responsibility for all
employees and nominated agents
AFAs who are employees or nominated agents are also directly supervised
Who and what a QFE is responsible for
58. In the context of the overarching purpose of the Act, a QFE is
responsible for the sound delivery of financial advice by
its financial
advisers, and encouraging public confidence in the professionalism and integrity
of its financial advisers.
59. More specifically, a QFE is responsible for:
(a) ensuring that its advisers comply with their financial adviser obligations
(which may be in addition to an AFA’s individual responsibility); and
(b) the advice given by its financial advisers (which may be in addition to an
AFA’s individual responsibility).
Agents of a QFE
60. A QFE’s advisers might be employees or agents of the QFE. It
is clear who an entity’s employees are, but less
clear who its agents are
for the purposes of the QFE regime. Agents could potentially include:
(a) contractors;
(b) employees of related companies;
(c) franchisees and their employees; and
(d) stand alone product distributors.
61. In our view, it is consistent with the purposes and scope of the
QFE regime for the agents covered by the QFE’s designation
to extend to
(and be limited to) those who the QFE has accepted responsibility for.
62. We note that part of a QFEs annual reporting obligation under the
Act is to list those who, as agents of the QFE, were financial
advisers in that
reporting year. It also seems desirable from a supervisory and enforcement
perspective (and from a liability management
perspective) for there to be a more
active or forward-looking list of those who, as agents of a QFE, are financial
advisers.
63. We therefore propose that as a standard QFE term and condition the
entity will be required to establish and maintain a list
of agents it has
assumed responsibility for (“nominated agents”). This may also have
to be supplemented by a further
standard term and condition requiring QFEs to
ensure that any agent who sells their products but who they are not
responsible
for does not hold themselves out as being a nominated agent
of the QFE.
Discussion Questions
C Do you think this approach, centred on the concept of
responsibility, creates any difficulties for QFEs?
D Do you have any suggestions for alternative ways of delivering more
certainty about which agents a QFE is responsible for
under the Act?
E Do you agree that there should be a standard QFE term and condition
that the entity establish and maintain a list of agents
it has assumed
responsibility for?
F Should the QFE be required to publish the list of agents it is responsible
for?
AFAs who are employees or agents of a QFE
64. QFE employees, and agents who a QFE is responsible for, (in either case a “QFE
adviser”) will need to be separately authorised in the following
circumstances:
(a) the QFE adviser is an agent who gives advice on or makes
investment transactions in relation to category 1 products
issued by the QFE
(noting that employees in this circumstance do not need to be
authorised);
(b) the QFE adviser gives advice on or makes investment transactions in
relation to category 1 products that are not issued
by the QFE, which we have
broken down into the following groups:
(i) products the QFE is responsible for and which are issued or
provided by an entity the QFE exercises effective control over;
(ii) products the QFE is responsible for but which are issued or
provided by an unrelated third party (for example, white-labelled
products issued or provided by a third party which are sold as QFE-branded
products);
(iii) products issued or provided by unrelated third parties but which the
QFE has approved; and
(iv) products the QFE is not responsible for and which are selected at
the sole discretion of the employee or agent; or
(c) the QFE adviser provides a financial planning service.
65. In all these circumstances, the QFE is responsible for its advisers
(even though they are AFAs) and has an interest in ensuring
that they are
competent and professional. It may therefore be appropriate for the Commission
to recognise that extra layer of responsibility
in the authorisation and
supervision processes. For example, it may be appropriate for the Commission to
rely on a QFE’s employment
or engagement processes to be satisfied that an
applicant for authorisation is of good character. Similarly, it may be
appropriate
for the Commission to place some reliance on the QFE’s
frontline compliance monitoring role.
66. Where an adviser can exercise wide discretion and more
reliance is put on the adviser’s professional
judgement, as opposed to
relying on the QFE and its control and capacity, there is less scope for
streamlining. Circumstances in
(b)(iv) and (c) above are in this category. In
contrast, the circumstances outlined in (a) and (b)(i) to (iii) bring the QFE
more
into the picture and present a quite different risk profile.
67. We therefore propose developing streamlined authorisation and
supervision for AFAs who are employees of a QFE or agents
a QFE is responsible
for based on:
(a) terms and conditions restricting the AFA’s area of practice
to the products that the QFE is responsible for (or a
subset of those products);
and
(b) terms and conditions requiring the QFE to take full
responsibility for nominated agents as if they were employees.
68. We note that this approach could be complemented by the
code of professional conduct for AFAs including specific
provisions for AFAs
who are employees or agents of QFEs. This would involve the Commission and
industry engaging with the code committee
in the development of the
code.
Discussion Question
G Do you agree that it is appropriate to streamline the authorisation and supervision of
AFAs in some or all of the circumstances discussed and in the manner
suggested?
Who might apply to be a QFE?
69. Just because a firm has employees or agents who are financial
advisers does not mean that it will necessarily make sense
for it to be a
QFE.
70. Large financial institutions are clearly within the intended scope of the QFE regime.
Smaller firms may be considering applying for QFE status too. Firms outside
the finance sector may also be contemplating whether to
apply for QFE status
– the impact of the Financial Advisers Act extends beyond the finance
sector to, for example, retailers
and motor vehicle dealers in relation to
consumer finance arrangements, and travel agents in relation to travel
insurance. It may
be relevant for those involved in point of sale distribution
of consumer finance to consider whether it is more appropriate for,
say, the
retailer to be the QFE in respect of its employees or for the product provider
to be the QFE in respect of the retailer’s
employees as agents of the
product provider.
71. Those contemplating QFE status will need to consider a number of
factors, including the costs and liability associated with
the regime and what
the practical efficiencies might be for the entity and its advisers in terms of
registration, authorisation and
supervision. Costs will include not only fees
and levies under the Act but also the business costs involved in establishing
and maintaining
the requirements to be a QFE. For an entity that does not
already have the practical and financial capacity to supervise
its own
advisers, the costs of meeting the requirements to become a QFE may be material.
Similarly, if a firm is more in the nature
of a group of individuals, with the
firm not in practice adding any extra layer of responsibility, there may not be
any practical
efficiencies to be gained through the QFE regime.
72. There may, however, be benefits to establishing and maintaining the
requirements to be a QFE, for example, centralising
the management of regulatory
risk which advisers face and any associated reputational risk their employer or
principal may face.
Discussion Question
H Do you have any comments relating to the scope of the QFE
framework, e.g. whether there should be any restrictions as to
the types of
businesses that may apply for QFE status and, if so, why?
Becoming a QFE
(b) it
is not debarred from applying for QFE status; and
(c) on the grant of QFE status and at all times while a QFE, it has the
capacity to, and will,—
(i) discharge its obligations under the Act; and
(ii) comply with the terms and conditions (if any) of the grant of QFE
status.
74. To become a QFE an entity must therefore satisfy the Commission
that it can and will ensure appropriate standards are met
and maintained. This
is largely a question of capacity – whether there are processes in place
to identify training needs and
to train and monitor employees and agents, and
sufficient resources applied to ensure that those processes are effective. This
amounts
to whether an entity has the practical and financial capacity to
supervise its own advisers. We envisage this involving an examination
of systems
and processes on the one hand and the culture of the entity on the
other.
75. A prospective QFE must be able to demonstrate that it has policies
and effective procedures to address and maintain the
following:
(a) competence of employees and agents; (b) conduct of employees and agents;
(c) capacity of organisational processes and arrangements; (d) compliance and risk management;
(e) compensation arrangements;
(f) culture, ethics and governance;
(g) communication with / disclosure to clients; (h) conflicts of interest management; and
(i) complaints management.
76. We will be developing guidelines detailing the application process
and setting out what we will require to support an application,
based on the
above matters.
4 Note, however, that to be a QFE an entity needs to be registered
and have been granted QFE status.
78. Applicants who are not granted QFE status have a right of appeal to the District
Court.
Discussion Questions
Competence and standards of professional conduct for QFE Advisers
79. The overarching purpose of the Act is underpinned in particular by
the obligation for individual advisers to exercise the
care, diligence, and
skill that a reasonable financial adviser would exercise in the same
circumstances, taking into account the
nature and requirements of the financial
adviser’s client and the nature of the service performed for the client. A
QFE will
be responsible for ensuring that its advisers comply with this
obligation. An important aspect of that will be ensuring that its
advisers are
competent.
80. The general obligation to exercise due care, diligence and skill is
objective (i.e. what the “reasonable” financial
adviser would do).
However, the steps a QFE takes with a view to its advisers meeting that
obligation are subjective and, ultimately,
only a court can rule on whether
those steps meet the standard. It is open to industry to develop a common
understanding of the standard
applied by the “reasonable” financial
adviser. A key aim of the QFE framework will be to work with industry to
establish
common standards that are consistent with the overarching purpose of
the Act.
81. As discussed in the recent Securities Commission Staff Paper on AFA
Competence (see www.seccom.govt.nz), the
National Qualifications Framework (NQF) now includes unit standards for
financial advisers. We plan to explore with potential
QFEs how they might
voluntarily map their training and competence arrangements to NQF standards. 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 incrementally undertaken by QFEs over the next two to
three
years.
Discussion Question
L Do you agree with the proposed policy of promoting the voluntary
adoption of standardised competence measures across QFEs?
Disclosure by QFEs
82. The Financial Advisers Act provides for regulations to prescribe
the disclosures to be made by financial advisers and QFEs.
For registered (but
not authorised) financial advisers and authorised financial advisers the
regulations may specify the form and
content of disclosure. The Ministry of
Economic Development (“MED”) convened an industry working group on
financial adviser
disclosure and will shortly issue a discussion document on the
content of the disclosure regulations.
83. For QFEs, the regulations may specify the form and some
content5 of disclosure, and may further provide for additional
disclosure requirements to be set out in a QFE’s terms and conditions.
To
the extent that any disclosure requirements are imposed through QFE terms and
conditions, we expect they will be consistent
with the approach taken in
the regulations to individual financial adviser disclosures (particularly to
facilitate comparability),
adjusted where necessary to reflect the nature and
context of the QFE’s business.
84. For example if a QFE is more in the nature of a small firm of
individual advisers then disclosure about the individual adviser
is likely to be
more relevant whereas for a large institution disclosure relating to the
institution may be more relevant.
Disclosure by wholesale financial advisers and research financial advisers
85. The Commission may also grant exemptions in relation to financial
adviser disclosure obligations if it is satisfied that
compliance costs would be
unreasonable or would not be justified by the benefits of compliance. Two areas
that are likely to be relevant
to QFEs here are advice to wholesale customers
and advice given by research staff for frontline advisers to use. This may apply
not
only to advisers covered by a QFE’s designation but also to AFAs
employed by a QFE. We note that advisers in these areas would
still need to
comply with their other financial adviser obligations but that alternative
disclosure requirement may be warranted.
Discussion Questions
M Further to any submissions you make on MED’s discussion
document, do you have any comments on QFE disclosure or on
disclosure exemptions
from the Commission?
N For specific adviser types (such as wholesale advisers) should
disclosure requirements differ from those for other advisers?
Should the answer
depend on whether the adviser is employed by a QFE? We are interested in
understanding any (financial and other)
costs or benefits of different
disclosure, and the practicality of implementation (for example, how a
wholesale environment/customer
can be clearly identified). Responses
that include a client/customer viewpoint would be particularly
helpful.
Discussion Question
5 QFE disclosure regulations may prescribe disclosure in relation to dispute resolution and whether the QFE provides any other licensed service. Further disclosure requirements may be set out in the QFE’s terms and conditions.
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