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New Zealand Securities Commission |
Last Updated: 16 November 2014
Regulatory Guide: FAA 01.2 [September
2010]
QFE ADVISER BUSINESS STATEMENT
GUIDE
Securities Commission New Zealand
Level 8, Unisys House
56 The Terrace
P O Box 1179
WELLINGTON 6011
Email seccom@seccom.govt.nz
Website www.seccom.govt.nz
September 2010
ISBN 978-0-478-36508-5 (print) ISBN 978-0-478-36509-2
(pdf)
CONTENTS
INTRODUCTION .................................................................................................. 4
What is this guide for?
.......................................................................................
4
BECOMING A QFE .............................................................................................. 5
What is a QFE? ................................................................................................. 5
Does my business have to become a QFE? ..................................................... 5
What’s for and against becoming a QFE? ......................................................... 6
How does my business become a QFE? .......................................................... 7
What is an ABS? ............................................................................................... 7
How do I prepare an ABS?................................................................................ 8
How should my ABS address changes to the Act? ........................................... 9
How will QFEs be regulated? .......................................................................... 12
What happens next?
.......................................................................................
13
PREPARING PART 1 OF YOUR ABS: YOUR ADVISER BUSINESS .............. 14
Overview of Part 1 ........................................................................................... 14
Structure.......................................................................................................... 15
Products and services ..................................................................................... 17
Customer types ............................................................................................... 18
Advisers .......................................................................................................... 19
Delivery channels for products and services
................................................... 20
PREPARING PART 2 OF YOUR ABS: GOVERNANCE AND COMPLIANCE ARRANGEMENTS ............................................................................................. 21
An overview of Part 2 ...................................................................................... 21
The “if not, why not” analysis........................................................................... 23
People, Processes, Professionalism ............................................................... 24
PEOPLE: Recruitment..................................................................................... 26
PEOPLE: Knowledge, skills and competence ................................................. 27
PEOPLE: Supervision ..................................................................................... 29
PEOPLE: Performance management.............................................................. 30
PEOPLE: Reward............................................................................................ 31
PROCESSES: Marketing ................................................................................ 32
PROCESSES: Information for customers ....................................................... 33
PROCESSES: Suitability................................................................................. 35
PROCESSES: Servicing ................................................................................. 37
PROCESSES: Complaints and compensation ................................................ 38
PROCESSES: Operations............................................................................... 39
PROCESSES: Record keeping ....................................................................... 40
PROFESSIONALISM: Governance................................................................. 41
PROFESSIONALISM: Culture......................................................................... 43
PROFESSIONALISM: Compliance
.................................................................
45
INTRODUCTION
The Financial Advisers Act (the Act) comes fully into force on 1 July 2011.
It sets new professional standards for financial advisers
and gives the
Securities Commission power to regulate people and entities who give financial
advice. The Commission will also regulate
some businesses that employ or engage
financial advisers, and these businesses will be known as Qualifying Financial
Entities (QFEs).
What is this guide for?
It’s to help you decide if you want your business to become a QFE and,
if so, how to go about applying for QFE status by preparing
an Adviser Business
Statement (ABS) which a QFE will need on an ongoing basis.
This second edition of the QFE Adviser Business Statement Guide reflects changes made to the Act on 30 June 2010 and how the ABS should address these (see page 9). It covers partner entities, nominated representatives and associated entities. In addition to reading this guide you should consider sections
63 to 76 of the amended Act which apply to QFEs.
Authorised financial advisers will also have to prepare an ABS, but this
guide is just for entities. Advisers should refer to the
Commission’s
separate AFA Adviser Business Statement Guide. This can be downloaded
at the Commission’s website
www.seccom.govt.nz/afa
We welcome any suggestions for later versions of this guide.
BECOMING A QFE
What is a QFE?
The aim of the Act is to encourage public confidence in the professionalism
and integrity of financial advisers. It therefore
focuses on the
professionalism of individuals. As an efficient way of achieving this
objective, financial adviser businesses
that have many advisers may
choose to become a Qualifying Financial Entity (QFE). A QFE takes on
responsibility for ensuring
the professionalism of its advisers.
To become a QFE, an entity must satisfy the Commission that it has the
capacity to:
• Take responsibility for its financial advisers’
conduct – we call this “frontline compliance
responsibility” because the Commission will then rely on the QFE to ensure
its advisers comply with the Act.
• Maintain policies and procedures to ensure adequate consumer
protection for retail clients.
• Comply with the terms and conditions of its QFE status and
its other obligations under the Act (related to its financial
adviser
services).
As long as a business that engages advisers invests in appropriate compliance
infrastructure, processes and people, and creates a
consumer protection culture,
becoming a QFE can offer efficiency and cost-reduction advantages. The
business and its advisers
will benefit from streamlined registration,
disclosure, disputes resolution arrangements and regulatory monitoring.
However, a QFE will derive no streamlining relief from conduct obligations.
QFE and non-QFE advisers doing similar work must adhere
to similar standards of
professionalism and competence.
Does my business have to become a QFE?
No, it doesn’t. Financial adviser businesses may choose whether or not
to apply for QFE status. Any entity may choose to become
a QFE based on its own
assessment of the benefits and responsibilities. We expect that most advisory
businesses will not become QFEs.
An entity that is not a QFE can continue to conduct its financial adviser
business, employ advisers and offer services to advisers.
Its financial advisers
will need to be individually registered and may also need to be authorised,
depending on the financial adviser
services that they provide. A business which
is not a QFE can help its advisers comply with their obligations under the
Act.
What’s for and against becoming a QFE?
You will have to weigh the streamlining benefits against the responsibilities
and costs.
As a QFE, your business will have to ensure it fulfils all of its commitments
under the Act, and its terms and conditions. Failing
to do so may result in one
of a range of regulatory actions by the Commission.
QFE benefits vary depending on the product category on which advice is given,
whether the product is issued or promoted by the QFE
group or a third party, and
whether your business is providing an investment planning service.
Benefits are limited for QFEs engaging only Authorised Financial Advisers
(ie, those advising on category one products issued by
third parties or
providing investment planning services). The Act requires these advisers to be
individually registered and authorised
even if they work for a QFE.
On the other hand, QFE status may substantially benefit businesses engaging
many advisers who do not have to be individually authorised.
Not only do these
advisers not need individual registration, their QFE’s disclosure
statement can cover them rather than each
adviser having to supply a separate
statement.
For corporate groups, the Act allows flexibility in QFE structure, the
advisers that a QFE can take responsibility for and the products
or services
that its advisers can provide without being individually registered and
authorised. The choice of which entity or entities
should be a QFE depends on
where effective control over compliance is located. In applying for QFE status,
we will expect an entity
to demonstrate that it has effective control over its
advisers and – in respect of category 1 products – significant
control over the issuing or promotion of these products.
A QFE can nominate any individual adviser as its nominated representative and
will take responsibility for advisers in any associated
entities. The QFE will
have frontline compliance responsibility for these advisers and demonstrate that
it has effective control
over their conduct.
For information about fees and levies for AFAs and QFEs, see ‘What does
authorisation cost?’ in the Frequently Asked
Questions on the
Commission’s website at www.seccom.govt.nz
How does my business become a QFE?
To become a QFE a business must:
|
|
REQUIRED BY
|
|
Prepare and submit the ABS to the Commission for review
|
Preferably by 1 October 2010
Accepted until 1 December
|
|
Address any queries arising from the Commission’s ABS
review
|
As required
|
|
Get written confirmation from the Commission that enquiries are concluded
before applying for QFE status
|
28 February 2011
|
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Register online at the Financial Services Providers Register www.fspr.govt.nz and formally apply for QFE
status. (Fees are payable and a short questionnaire must be completed.)
|
31 March 2011
|
The Commission will check that your ABS includes the expected information.
In addition to any queries, Commission staff may interview
senior management,
eg, the director of the financial adviser force, and conduct on-site
visits.
What is an ABS?
All businesses applying for QFE status must prepare an Adviser Business
Statement (ABS). This describes your adviser business (Part
1) and the
governance and compliance arrangements that ensure that the business and its
advisers operate professionally (Part 2).
Your ABS will be the Commission’s key source of information, allowing
us to assess your entity’s capacity to take responsibility
for the conduct
of its financial advisers, whether it can be granted QFE status, what terms and
conditions to impose on the QFE,
and how to structure its ongoing
monitoring.
In particular, your ABS will:
• Describe how your business takes frontline compliance
responsibility for its advisers’ professional conduct and
competence
and ensures retail clients receive adequate consumer protection.
• Compare (in Part 2) your own conduct and compliance standards for
QFE advisers on category 1 products with those
of the AFA Code of
Professional Conduct (‘the Code’), and, if they are not the same,
explain why not. The Act allows
a QFE to set its own standards of adviser
conduct and competence. Using the Code as a benchmark allows the Commission to
ensure that
advisers in QFEs meet similar standards of
professionalism
to other advisers and to assess an entity’s capacity to take
responsibility for its advisers’ conduct.
• Be a “living document” – QFE status will oblige
you to keep the ABS up to date and reflect changes as
your business
evolves.
• Be approved and maintained by the relevant governing body –
usually your board of directors.
• Remain an internal document – you do not need to make it
public unless you choose to.
How do I prepare an ABS?
The ABS requirements have been designed so you can structure and write your
ABS in a form that suits your own business needs. This
flexibility means that
the ABS can serve not only as a QFE compliance document, but also may be used to
assist with your internal
governance and management processes, if you want it
to. By documenting your business model, and governance and compliance
arrangements,
the ABS will ensure that your business can comply with the Act and
that your advisers can operate professionally in an appropriately
controlled
environment.
The length and complexity of an ABS will vary according to your business and
the extent to which your policies and procedures are
already documented
elsewhere. It should be comprehensive enough to help your governing body
review and oversee its adviser
business. Note that detailed procedures should
be covered in separate manuals, which the ABS can cross-reference.
You may divide your ABS into sections representing your business’s
operational structure, but the sections or the whole document
must clearly
identify two parts:
• Part 1 describes your adviser business and, at least, must
contain the information detailed in Preparing Part 1 of Your ABS. It
provides context for Part 2.
• Part 2 describes your governance and compliance arrangements.
It must explain how your business will take frontline
compliance responsibility for the professional conduct and
competence of
all its advisers in all of their adviser services. It must explain how
consumer protection is addressed. Preparing Part 2 of Your ABS sets out
key principles you must address.
You should ensure that your ABS conveys your business culture, particularly
how you ensure professionalism and consumer
protection are embedded
in governance and adviser activities. It must articulate how you
propose maintaining capacity
for adviser frontline compliance
responsibility.
Diagram: Preparing an ABS
Act requirements
Business model
Part 1
Identified
Impact areas
Allocated
Processes
Compliance assurance
responsibilities Controls
Management information
Part 2
Governance
It’s important that Part 2 sets out how you propose checking, eg,
through management information, supervision and audit,
that your business
and its advisers are operating according to your policies and procedures and
conforming to the standards set
out in your ABS.
You can prepare and submit your ABS before all of your processes and controls
are fully implemented, provided that this is clear in
your
document.
How should my ABS address changes to the Act?
Requirements for applications
The Act (s65(3)) requires an application for QFE status to set out the
procedures that the applicant has for:
• training employees and nominated representatives
• setting standards for employees and nominated
representatives
• monitoring those standards.
A QFE must also have procedures to ensure adequate consumer protection for
retail clients (s66(1c)). Where an applicant’s QFE
advisers will provide
services relating to category 1 products, the protection must be assessed
against the standard provided by
AFAs (s66(2)), taking into account the scope of
services provided.
Applicants should address these requirements within the relevant sections in Part
2 of the ABS document. Entities whose QFE advisers will sell
category 1 products must include an ‘if not, why not’
analysis
against the Code (see page
23). Entities are expected to maintain appropriate procedures in these areas
on an ongoing basis.
Responsibility of a QFE for its advisers
A QFE is responsible for ensuring the compliance of:
• the QFE group, its employees and nominated representatives (including
AFAs) with the QFE’s terms and conditions (s76(1b))
A QFE must ensure that employees and nominated representatives who need to be
authorised are AFAs (s76e). Primary responsibility
for compliance with the
minimum standards of professional conduct in the Code and the AFA’s
individual terms and conditions
lies with the AFA. However, the QFE
must have procedures for training its AFAs, setting appropriate standards
for
them and monitoring compliance with those standards (s65(3)). It must
also ensure that retail clients serviced by its AFAs receive
adequate consumer
protection (s66(1)c(iii)).
Class and wholesale services
The Act now allows entities to provide class services to retail clients and
to provide financial adviser services to wholesale
clients. The Act requires
the Commission to consider a potential QFE’s capacity to comply with its
obligations under the
Act (other than in respect of broker services). Key
obligations include the following requirements:
• to exercise care, diligence and skill in providing the service
(s33)
• not to engage in misleading or deceptive conduct or advertising
(s34-35)
• for wholesale services, to only accept certificates from
eligible investors if there is no reason to believe that the
certificate is
incorrect and the client has been advised of the consequences (s5E).
The ABS should therefore address any class and wholesale services
provided.
ABS for partner entities
The Act allows a number of entities to become a QFE together. These partner
entities have joint responsibility for the QFE’s
obligations and
liabilities.
Partner entities should prepare one ABS document to demonstrate that they
jointly have the capacity to take responsibility for
the financial advisers of
the QFE.
The structure of the ABS should suit the business and governance needs of the
partner entities. For example, it can include separate
sections for each
partner entity or address topics once in a common section.
Nominated representatives and associated entities
The ABS should address the whole business that the QFE will be responsible
for, including that of nominated representatives and advisers
in associated
entities.
A QFE may nominate individuals as nominated representatives. The QFE takes
responsibility for its nominated representatives. An adviser
may not be the
nominated representative of two or more entities unless the entities are
related. The Adviser section in Part 1 of
the ABS can propose an efficient
mechanism for nominating and recording nominated representatives. The Commission
will consider including
this in the QFE’s terms and conditions. A QFE must
be able to provide the Commission with a list of its nominated representatives
whenever reasonably required and periodically as set out in its terms and
conditions. The QFE must also notify the Commission if
it terminates an
adviser’s nominated representative status.
A prospective QFE may apply to have associated entities. A QFE takes
responsibility for any advisers in an associated entity and
its advisers are
able to provide advice or a discretionary investment management service in
relation to any category 1 products of
the associated entity without being
individually registered and authorised. The prospective QFE should include a
list of any proposed
associated entities with the relevant information in the
Structure section under Part 1 of the ABS.
The Commission’s consideration of each associated entity will
include:
• the entity’s financial service provider status
(s67(4))
• the ‘closeness’ of the responsibility for the
advice and for the product – how the prospective QFE’s
relationship
with the associated entity allows the QFE to take responsibility for the advice.
The application must state how each
entity is connected to the QFE
• the impact of including the entity’s products within the
QFE group, eg, on the number of QFE advisers
• the QFE’s capacity to be responsible for the advisers in
the entity.
The Commission may publish guidance on its expectations for
associated entities.
QFE group name
If a QFE will consist of partner entities or will include associated
entities, the Structure section in Part 1 of the ABS must suggest
a name for the
QFE group for approval by the Commission. Transparency to consumers is a key
consideration. In general, the Commission
expects the QFE group name to
be:
• a trading name already used by the QFE or a substantial portion of the
QFE group, followed by ‘QFE Group’.
How will QFEs be regulated?
The Commission will use a range of information – including the ABS,
periodic reports and notifications from QFEs about their
activities, market
intelligence and complaints – to focus its monitoring on QFEs at
higher risk of serious non- compliance
with the Act.
The ABS review and licensing process is important, but we will place emphasis
on our ongoing regulatory relationship with QFEs. We
will determine the extent
of ongoing QFE regulation and monitoring by taking account of:
• what the ABS says about organisational culture and the QFE’s
approach to professionalism
• the thoroughness of its approach to compliance procedures
• the nature, scale and extent of the QFE’s business, and the
impact in its market
• the degree to which third parties verify, certify or
accredit a QFE’s compliance with the procedures
and standards
fundamental to adviser professionalism.
The Commission will tailor its regulatory approach to each QFE, and the
industry as a whole, according to the extent to which the
QFE, and the industry,
are prepared to voluntarily adopt high standards of professionalism. If QFEs
impose rigorous standards on
themselves we will be able to scale back the
intensity of regulatory monitoring. Your ABS will give your QFE an early
opportunity
to take the lead by willingly embracing professional
standards.
Agreed better-practice benchmarks are important here. We want to work with
industry to develop standards that set benchmarks across
the national adviser
profession. Industry-developed standards and appropriate approaches to ensure
conformance with them give industry
certainty and consistency, and facilitate
the giving of professional advice.
What happens next?
Prospective QFEs should prepare their ABS now. Entities should submit their
ABS for review by the Commission by sending
both a hard copy and an
electronic version to the Securities Commission for the attention of the
Financial Advisers team.
You will receive written confirmation when the Commission has sufficient
information and its enquiries are complete. You can then
go online to make an
application for QFE status at www.fspr.govt.nz
You are strongly encouraged to submit your ABS to the Commission for review
by 1 October 2010 but we will accept submissions until
1 December 2010. This
should allow sufficient time to address any queries that may arise.
You will need to have your QFE status confirmed in time for your advisers to
know whether they will need to register individually
by 31 March 2011. Acting
sooner rather than later will help to ensure that your entity is ready when the
Financial Advisers Act comes
into force.
Some conduct obligations under the Act will apply to all financial advisers from 1
December 2010. Obligations on a QFE will apply to that entity from the time
its QFE status becomes effective (after 1 December 2010),
with the exception of
disclosure obligations which will apply from 1 July 2011.
Questions and further information
Helpful information about QFEs including a QFE “Get Ready”
Checklist can be found on the Commission’s website at
www.seccom.govt.nz/qfe. Also see the
Frequently Asked Questions on our website.
If you have questions about preparing your QFE ABS, please contact the
Securities Commission by emailing QFEenquiries@seccom.govt.nz. The following sites may provide further useful information: www.seccom.govt.nz/afa – Securities Commission information for AFAs www.financialadvisercode.govt.nz – Draft Code of Professional Conduct for AFAs
www.afacompetence.org.nz
– ETITO information on competence standards and assessment
www.fspr.govt.nz – the Financial
Service Providers Register
www.consumeraffairs.govt.nz/for-business
– information on dispute resolution schemes
PREPARING PART 1 OF YOUR ABS: YOUR ADVISER BUSINESS
Overview of Part 1
Part 1 must describe your entity’s adviser business and provide context for
Part 2.
Part 1 must address the principles and contain the expected
information outlined in this section.
You may decide on the form and structure of your ABS, but a good ABS
will:
• Focus on business relevant to the Act’s objectives:
sound delivery of financial adviser services, adequate
consumer protection and
the management of conflicts of interest.
• Focus on personalised services to retail clients, but include
any class services and services to wholesale clients.
• Address all financial adviser services for which your entity
intends taking responsibility, including the activities of
partner and
associated entities and nominated representatives.
• Give enough specific information to allow us to assess
your entity’s potential impact in its markets.
• Give supporting quantitative information to show the relative
importance of various business areas.
Complying with the following suggestions will minimise Commission
queries:
• Write your ABS in a way that helps your governing body review
– and the Commission understand – your
business from the
perspective of complying with the Act.
• Keep ABS material to a high level, where possible, so it is useful
as a governance document.
• Involve your business managers in preparing your ABS. Make sure
it’s sponsored by senior management and your governing
body, and that the
latter approves it. Note in your ABS who has approved it.
• Include any changes to the business that are in progress or
planned.
• Describe any assumptions your ABS makes where expected changes to
the Code, or other law, might create uncertainty.
• If exact quantitative information is unavailable, give the closest
information you can. Information should be the latest
available (include its
date) and, if for a period, should ideally cover a year (state the period it
covers). You may use forecast
information, particularly if changes are
expected.
Pages 15 to 20 provide a guide to the content of Part
1.
Structure
Principle
Your ABS should:
• explain your QFE’s structure and key internal and external
relationships
• explain any entity-level conflicts of interest.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• whether the QFE expects to appoint nominated representatives, and
the nature of any significant groups of nominated representatives
(such as
where a large number have one employer)
• entity-level arrangements that might give rise to conflicts or
pressure on advisers (such as commissions the entity
receives from
third-party suppliers, fee structures and group relationships).
Expected information for QFE groups
For joint QFEs or QFE groups your ABS should also include, where
relevant:
• the name of any proposed associated entity, together with:
o how the entity is connected to the QFE (s65)
o where the proposed entity is based
• the name proposed for the QFE group (s69, see page 12).
Suggested information
The following may help your ABS explain the QFE’s structure:
• describe the entity’s organisational structure, including the
location of key managers and other roles, and focus
on responsibilities
for activities covered by the Financial Advisers Act
• describe the relationship between the entity and any group entities
and holding companies relevant to its financial adviser
service (such as issuers
or employers of nominated representatives), plus the regulator of these
entities, if any
• describe any outsourcing significant to understanding your
financial adviser services (such as call centres).
Products and services
Principle
Your ABS should:
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an analysis of the business between personalised services to retail
clients, class services and services to wholesale
clients. An
analysis of personalised retail services by high-level product types or
classes, noting categories 1 and 2 product
business separately
• a brief explanation of any unusual or complex retail product types,
such as those with embedded derivatives or swaps.
Suggested information
The following may help your ABS describe the QFE’s products and
services:
• the proportion of the business providing financial adviser
services
• the proportion of the business represented by investment
planning services and by discretionary investment management
services
• the product split by type showing those issued by the
entity, partner entities, each proposed associate entity,
companies the entity
effectively controls, and others
• a description of the type of class services provided
• an outline of any services which are regarded as information or
guidance only
• whether the entity and its advisers handle client money or
property, and in what circumstances.
Customer types
Principle
Your ABS should:
Suggested information
The following may help your ABS describe the QFE’s customer
types:
Advisers
Principle
Your ABS should:
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• the number of advisers providing services to retail clients who
will be a) authorised financial advisers b) advisers in
relation to category 1
products who do not have to be authorised, and c) category 2 advisers
• the number of a) employee advisers in the QFE (or each partner entity), b)
in each associated entity and c) nominated representatives
• the number of nominated representatives who will also be nominated
representatives of another QFE and the name of
that related body
corporate (s74(2)).
If the entity wishes to propose an efficient way of nominating
representatives for the Commission to consider for inclusion in
the
QFE’s terms and conditions (s74(1)(b)):
• the proposed nomination mechanism and the controls operated over
it.
Suggested information
The following may help your ABS profile the QFE’s advisers:
• the adviser split according to their service or product ranges
(such as where an entity has distinct sales forces or advisers
operating in
different departments and markets; explain which deal with retail customers and
whether these adviser groups provide
products from one provider, choose from a
product panel or have an unrestricted product choice)
• the number of advisers providing investment planning services and
the number providing discretionary investment management
services
• the national geographical spread of adviser locations
• the method used to ensure that nominated representatives are not
also nominated representatives of an unrelated QFE (s74(2)).
Delivery channels for products and services
Principle
Your ABS should:
• show how much advice your entity provides through what
channels.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
Suggested information
The following may help your ABS describe the QFE’s business
channels:
• the split of volumes/advisers by channel
PREPARING PART 2 OF YOUR ABS: GOVERNANCE AND COMPLIANCE
ARRANGEMENTS
An overview of Part 2
Part 2 must describe your entity’s governance and compliance
arrangements. It should explain how the business will:
• take frontline compliance responsibility for advisers’
professional conduct and competence, particularly in relation
to personalised
advice to retail clients
• maintain procedures to ensure that retail clients have adequate
consumer protection
• fulfil its obligations under the Act and its terms and
conditions.
In addition, Part 2 should specifically set out the procedures that the entity has
(s65(3)) for:
• training employees and nominated representatives
• setting standards for employees and nominated representatives
• monitoring those standards.
Part 2 must address the compliance principles and include the
expected information and the ‘if not, why not’ analysis
set out in this section.
You may decide on the form and structure of your ABS, but a good ABS
will:
• Clearly focus on regulatory risk related to compliance with the Act.
Management of other risks is important for businesses but is not
necessarily relevant to demonstrating the entity’s
capacity to be a
QFE.
Complying with the following suggestions will minimise Commission
queries:
• Provide an overview of compliance infrastructure, processes and
people, and describe any reliance on third parties.
• Focus on personalised services to retail clients, but include
any class services and services to wholesale clients.
• Address all financial adviser services for which your entity
intends taking responsibility, including the activities of
partner and
associated entities and nominated representatives.
• Explain how adviser professionalism and consumer
protection is embedded in the QFE’s overall governance
and
culture.
• Explain how your arrangements take account of the nature, scale
and complexity of your services and your structure (including
any QFE group and
nominated representatives).
• Set out how you propose to check your business and your advisers
are operating according to plan and conforming to the standards
set out in your
ABS.
• If processes have not been fully implemented yet, your ABS should
say so. Distinguish gaps from areas where processes are
acceptable, but
improvements are being made. Point out where processes are new. One approach is
to set out a “Path to Compliance”
that indicates how long
implementation will take and how you propose to monitor it.
• Describe any assumptions made where there is uncertainty because
regulations under the Act or standard terms and conditions
for QFE disclosure
are not yet finalised.
The “if not, why not” analysis
The Act allows a QFE to set its own standards of conduct and competence for
advisers who are ‘QFE advisers’.
For personalised services in relation to category 1 products provided by QFE
advisers, the Act also requires the Commission to consider
whether clients will
receive consumer protection of a similar standard to that provided by advisers
who are subject to the Code
of Professional Conduct for AFAs, taking
into account the QFE advisers’ scope of products.
For such services, Part 2 of your ABS must include a comparison of your
business’s conduct and competence requirements with
those in the Code and
the Act. If they are not the same, it should fully explain the differences, any
compensating controls and why
you believe that a similar standard of protection
is achieved. We refer to this as the ‘if not, why not’
analysis.
For example, an analysis might be considered where:
For advisers on category 2 products, the Act does not refer to any
specific standards of competence or conduct (beyond the
obligations in the Act).
The ABS must still explain how the entity sets standards for these advisers and
maintains procedures to
ensure adequate consumer protection. The entity must
still be able to ensure that its advisers operate with care, diligence and
skill.
A good way to do this for advisers on category 2 products may be to use the Code as a benchmark. QFEs might produce an ‘if not, why not’ analysis against the Code, focusing on the principles of the Code standards, rather than the detail of the application provisions. For example, some firms dealing only with category
2 products have indicated that their ABS will include a competence
analysis against the standards in the National Certificate in
Financial Services
(Financial Advice) (Level 5) relevant to their business, or those in National
Certificate in Financial Services
(Level 4).
The ‘if not, why not’ analysis should clearly address the
requirements of the Code. To assist entities, the guide to
Part 2 highlights
Code standards that may be relevant to each compliance principle. The Code
standards are based on the Draft Code
dated 19 August 2010.
Pages 24 to 46 provide a guide to the content of Part 2, under these
principles.
People, Processes, Professionalism
Principles underpinning QFE governance and compliance arrangements are
grouped under these three headings.
People
A QFE must ensure its advisers exercise appropriate care, diligence and
skill, and operate according to appropriate conduct and competence
standards.
The QFE’s governance and compliance arrangements should ensure:
Processes
A QFE’s processes should enhance professionalism, be appropriate to the
staff using them, and be well controlled and monitored.
The QFE’s governance and compliance arrangements should ensure:
• Record keeping: it retains appropriate, easily accessible
records.
Professionalism
A QFE ensures professionalism by means of an appropriate culture, compliance
assurance arrangements and good governance.
The QFE’s governance and compliance arrangements should ensure:
PEOPLE: Recruitment
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
• it recruits people with appropriate ethical behaviours and
skills.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
Guidelines for addressing the principle
• New advisers are assessed against the standard of knowledge, skills
and competence required for their proposed roles, and
their adviser
qualifications are checked.
• Employer, peer or client references are taken for new
advisers.
PEOPLE: Knowledge, skills and competence
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements of the Act are relevant to this principle. A QFE
must:
• ensure its advisers are registered and authorised, as necessary
(s76)
• keep an up-to-date list of its Authorised Financial Advisers
(s76)
• keep an up-to-date list of its nominated representatives
(s76).
Relevant minimum standards are set out in draft Code Standards 6 and 14
to 18.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an overview of training and standards for each group of adviser
roles
• the number of trainees, advisers and supervisors in each role
Expected information on competence: “if not, why not”
analysis
For QFE advisers on category 1 products, your ABS must compare the
entity’s own competence requirements with those of the Code
of
Professional Conduct for AFAs. Where these differ, it should fully explain why
the entity’s requirements are more appropriate.
If your entity has not had enough time to educate advisers to the desired
level, your ABS should explain the compensating controls
(such as greater
supervision) that you have in place, until they reach that competence
standard.
Guidelines for addressing the principle
• Every adviser role carries a set standard of skills,
knowledge and competence that, where applicable, takes account
of the
comparison to the Code requirements. Usually, standards will be achieved
through a training programme, assessed to
ensure it has delivered the
required level.
• Individual advisers’ training and support needs must
be assessed, recorded and addressed, and their progress
monitored.
• New advisers must meet a set standard to become fully fledged advisers.
The standard takes account of the comparison to the Code requirements, where
applicable, and assessment determines whether advisers
have reached the required
level.
• Advisers are trained and supported to ensure they understand their
obligations under the Act.
• Advisers are trained on relevant new products or processes and, in
the case of significant changes, assessed to ensure they
have achieved the
expected standard and learning goals.
• Controls ensure that advisers only provide services
within their competence
• Standards are in place for continuing professional
development that, where necessary, takes account of the comparison
to the Code
requirements, and compliance with these standards is monitored.
PEOPLE: Supervision
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements of the Act are relevant to this principle:
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an explanation of your approach to supervision.
Guidelines for addressing the principle
• Appropriate criteria are in place for acceptance as a
supervisor.
• Supervisors have the appropriate level of skills,
knowledge and competence for the role and receive
initial and ongoing
training and support.
• Supervision properly covers the financial adviser service,
targets risk areas (eg, particular advisers or products)
and is suitably
regular.
• Supervision processes are clearly set out, including ways of
dealing with particular issues, and supervisors are clear about
their
role.
• Any supervision result trends are identified and appropriate action
taken, such as changes to adviser training.
• Supervisors are also monitored and managed to ensure they
exercise care, diligence and skill.
Supervision is a key control over adviser behaviour and ensures they operate
in accord with processes. Supervisors themselves (including
their recruitment,
training and reward) are as important as supervisor processes.
PEOPLE: Performance management
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an explanation of your approach to identifying underperforming
advisers
• the proportion of advisers who are underperforming in terms of
advice quality or compliance
• the approach to investigation of potential breaches of the
adviser standards and the actions that may be taken
against advisers (for QFE
advisers on category 1 products, compare the actions to those that might be
taken against an AFA)
• the number of disciplinary cases relating to advice quality or
compliance.
Guidelines for addressing the principle
• Advisers who do not meet required standards or deliver the right
customer protection or acceptable customer outcomes are
identified.
• Customer feedback and complaints information are part
of the identification process.
• Reasons for poor performance are considered, a plan and timetable
drawn up to address the problem, and adviser progress
monitored.
• Appropriate measures are implemented, where necessary, to protect
customers from underperforming advisers.
• Disciplinary action is taken on unacceptable behaviour or
insufficient progress in reaching an acceptable standard.
• The QFE co-operates with the Commission on any investigation of a
complaint about a current or past adviser, and with the
Disciplinary Committee
on any proceeding and any resulting action the Commission takes.
The focus of the ABS should be on any under-performance by advisers in the
areas of professionalism and compliance.
PEOPLE: Reward
Reward covers a range of ways to influence behaviour, including remuneration,
monetary and non-monetary incentives, and promotion
and preferment.
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an explanation of how key reward structures address
compliance and quality issues
• an explanation of the balance of salary and bonus/commission in
retail adviser remuneration – for an average adviser
and for the most
successful adviser.
Guidelines for addressing the principle
• Reward structures incentivise professionalism.
• Advisers do not depend on volume-based bonuses to earn a living
wage.
PROCESSES: Marketing
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
• it does not mislead or confuse customers or engage in deceptive
conduct.
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• a QFE, a member of a QFE group or an adviser must
refrain from advertising a financial adviser service in a
misleading, deceptive
or confusing way (s35 and s48)
• a QFE, a member of a QFE group or an adviser must refrain from any
conduct in relation to a financial adviser service
that is misleading,
deceptive or confusing (s34 and s47)
• advertisements must not be misleading, deceptive or confusing (s34
and s48).
• the minimum standards in draft Code Standard 3.
Guidelines for addressing the principle
• An entity must not use its QFE status as a marketing tool or imply
its QFE status represents Securities Commission approval
of the entity
or its advice.
• An appropriate approval process exists for marketing and
customer-facing materials to ensure compliance.
• Any marketing materials which constitute a class service to retail
clients are identified and appropriately approved.
• Staff preparing marketing materials are aware of the requirements
and understand the approval process.
• Records are kept of marketing materials and approval
received.
PROCESSES: Information for customers
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• the minimum standards in draft Code Standards 3, 6, 7, 9 and
10.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
Guidelines for addressing the principle
• Processes and training help advisers comply with disclosure
requirements of the Act (s21-31) and regulations, including
requirements for
format, content and timing.
• Information is not misleading, deceptive or confusing and is up to date
(whether the Act requires it or not).
• The customer is given information when they need it and in a
suitable format (written or oral) including during the sale
or advice process
and, if appropriate, during ongoing servicing, or proactively if it
changes.
• Information provided covers matters relevant to the individual
customer, in language and at a level of detail the customer
can
understand.
• Potential adviser conflicts are identified and disclosed,
managed or avoided.
Information needs depend on customers’ individual circumstances
and the products proposed. Regulations will
cover some elements
of customer information, but customer needs go beyond regulations. Information
also helps customers form
realistic expectations.
PROCESSES: Suitability
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• Financial advisers must exercise care, diligence and skill
(s33)
• the minimum standards in draft Code Standards 6 and 8.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• an explanation of your approach to ensuring advice is suitable for
retail customers, including any differences in the approach
of various adviser
groups in the QFE. Specifically address how you deal with suitability in the
context of an investment planning
service, a discretionary investment management
service, affordability of credit (responsible lending) and insurance
exclusions.
Guidelines for addressing the principle
• Enough information is collected to understand customer requirements
(within the scope of the service being provided).
• Advice has a reasonable basis and is supported by analysis.
• Advice is appropriately explained and recorded.
• Processes allow for situations when advice should not be
given or a referral should be made, and the culture
supports both
options.
• Processes ensure only appropriate classification of
customers as wholesale customers, including any ‘eligible
customers’.
• Processes ensure only appropriate identification of services
as class services to retail clients.
• Controls ensure that the class service is appropriate to the intended
class.
• A QFE operating a sales process that only gives customers
information or guidance (and is, therefore, unregulated) ensures
process design
is appropriately approved, staff are trained on its acceptable limits so they do
not offer financial advice, and staff
are monitored to ensure they adhere to
this process and its limits.
PROCESSES: Servicing
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• the minimum standards in draft Code Standards 6 and 9.
Guidelines for addressing the principle
• Where the adviser or QFE is responsible for implementing the
agreed advice, that is done accurately and promptly.
• Where a discretionary investment management service is provided,
this is carried out in accordance with the authority given
by the
client.
• Appropriate adviser resources and processes exist for
responding to customer enquiries and advising on variations
or renewals of
existing products.
• Processes are in place to deliver on any promises made to customers
about future services.
• A customer is given any necessary information and timely assistance
if he/she decides to change their adviser.
PROCESSES: Complaints and compensation
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirement is relevant to this principle:
• the minimum standards in draft Code Standard 11.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• your entity’s definition of complaint and an
explanation of its internal complaints process, including whether this is
independent
• the number of complaints received and upheld in the last
12 months together with any “hot spots”
and actions taken
• the percentage of complaint decisions overturned by any Ombudsman
or dispute resolution scheme
• any arrangements in place to ensure the entity can pay customer
compensation, if awarded, such as capital, professional
indemnity
insurance or allocated funds.
Guidelines for addressing the principle
• Internal processes comply with dispute resolution scheme
requirements.
• Independent investigation processes for complaints exists, if
possible.
• The quality and timeliness of complaints handling are
monitored.
• Complaint information, both internal and from dispute resolution
schemes, is analysed to identify any information, training
and process
improvements required and any necessary action is taken.
• Complaints information is used to improve adviser performance,
preferably at an individual level.
• The QFE co-operates, as far as possible, with other entities to
resolve customer complaints.
• The QFE co-operates with the dispute resolution scheme or the
Commission in the investigation of complaints.
PROCESSES: Operations
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
• it has robust compliance arrangements, including those relying on IT
systems or outsourcing.
Guidelines for addressing the principle
• Where a significant part of the financial adviser service is
outsourced:
o due diligence, management and monitoring systems exist to deal
with compliance matters, including any changes, and action
is taken to
address any identified failings
o the QFE’s compliance assurance function has appropriate
access to carry out its monitoring role
o the Commission has appropriate access for carrying out
its regulatory function
o periodic reviews of outsourcing arrangements address compliance
performance.
PROCESSES: Record keeping
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
• it retains appropriate, easily accessible records.
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• provide an annual report to the Commission certifying compliance
with it obligations under the Act and its terms and conditions
and setting out
any breaches of which it is aware (s77).
• the minimum standards in draft Code Standards 12 and 13.
Guidelines for addressing the principle
• Records demonstrating compliance with requirements are made and
kept.
• Records are promptly accessible by management, compliance assurance
functions and the Commission.
• Records kept enable the QFE to fulfil its obligations for annual
and any periodic reporting to the Commission.
PROFESSIONALISM: Governance
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle. A QFE
must:
• monitor the standards set for employees and nominated representatives
(s65(3))
• ensure compliance by the QFE group with the Act and its
terms and conditions and by its QFE advisers with their
financial adviser
obligations (s76)
• maintain procedures to ensure adequate consumer protection for
retail customers (s66(1))
• provide an annual report to the Commission certifying compliance
with it obligations under the Act and its terms and conditions
and setting out
any breaches of which it is aware. The report must be signed by a principal
officer (s77).
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• a description of your reporting and governance framework, including
an explanation of the role and composition of the executive
body responsible for
overseeing professionalism and compliance
• an explanation of the ABS’s role in the financial
adviser service governance framework, which should
include how the ABS was
prepared, reviewed and approved, and senior business management’s
involvement
• the results of the latest framework review.
Guidelines for addressing the principle
• The governing body considers, at least annually, the adequacy and
robustness of processes and controls, compliance assurance
and governance
framework for encouraging adviser professionalism and ensuring Act
compliance.
• The governing body reviews, considers and approves the ABS at least
once a year.
• Where there is a QFE group, the QFE’s expectations for the
financial adviser services reporting and governance framework
are made clear to
the governing bodies of entities in the group.
The Commission expects the executive body chosen by the entity to
be responsible for professionalism and compliance will
include some senior
executives, such as those responsible for business lines associated with
financial advice, as well as relevant
legal, risk or compliance
representatives.
PROFESSIONALISM: Culture
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• a QFE, member of a QFE group or adviser must refrain from any
conduct to do with financial adviser services that is misleading
or deceptive or
is likely to mislead or deceive (s34 and s47)
• a QFE application must set out the procedures in place
for setting standards for employees and nominated representatives
(s65(3))
• financial advisers must exercise care, diligence and skill and must
not engage in misleading or deceptive conduct (s33 and
s34)
• the minimum standards of ethical behaviour in draft Code Standards 1 to
5.
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• any steps senior management has taken to sponsor and support an
appropriate culture (if the ABS does not address them elsewhere)
• the approach to managing the potential effect of any entity-level
conflicts of interest on advisers and their advice (such
as group product
provider relationships and entity-level commission arrangements).
Guidelines for addressing this principle:
• Management actively supports professionalism in their messages to
staff.
• Management monitors the culture in the QFE group and where there
are large groups of nominated representatives.
• Management moves quickly to address customer outcome issues.
• Management allows enough time and resources for training and
quality checking.
• Management is conscious of potential entity-level conflicts of
interest and takes steps to avoid or manage them, including
through disclosure
and segregation of duties.
• An independent whistle-blowing procedure operates. The QFE does
not restrict the ability of an AFA to report breaches
of the Act to
the Commission (under s45A).
• The QFE deals with the Commission openly and honestly, voluntarily
reporting any significant compliance issues.
PROFESSIONALISM: Compliance
Compliance principle
The QFE should have governance and compliance arrangements that
ensure:
Requirements of the Act and the Code
The following requirements are relevant to this principle:
• a QFE application must set out its procedures for monitoring the
standards set for employees and nominated representatives
(s65(3))
• a QFE must ensure compliance by the QFE group with its terms and
conditions and by its QFE advisers with their financial
adviser obligations
(s76).
Expected information
We expect your ABS to address this principle by covering, where
relevant:
• a description of the entity’s approach to testing, including
any risk-based approach
• a description of the expected work plan and its governance
oversight, along with resources allocated to it, including
the number of staff,
skills and experience
• an explanation of how the approach allows findings to be
independent, along with how and to whom findings are reported and
any necessary
actions determined and tracked.
Guidelines for addressing the principle
• Challenging and testing address the design and operation of
processes, controls and management information, and also consider
the outcome
for the customer.
• A risk-based approach is taken to compliance assurance.
• A plan is approved by the governing body and its progress
monitored.
• Significant findings are reported to the governing body and
remedial action is followed up, including any action necessary
for
customers.
• Compliance assurance has sufficient resources with the necessary
skills and experience to carry out assurance work.
• The compliance assurance structure and plan take account of the
complexities of any QFE group or nominated representative
arrangements.
• Compliance assurance is, as far as possible, independent
of line managers responsible for the process and controls
being
assured.
Assurance is likely to go beyond the day-to-day controls operated by managers
directly responsible for key processes to include more
in-depth and independent
periodic challenges, such as arrangements for separate compliance monitoring
teams, internal audits or the
commissioning of specific external work.
Entities may wish to refer to the New Zealand Standard on Compliance
Programmes (NZS/AS 3806:2006).
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