NEWS

FADC finds against AFA in Code of Conduct case

The Financial Advisers Disciplinary Committee (FADC) has published its decision regarding a case brought by the FMA. The case relates to alleged breaches of the Code of Professional Conduct for Authorised Financial Advisers.

It says that "this is a case about breaches of the Code". It is not about the integrity of the financial adviser. "There is no suggestion that she has improperly benefited at the expense of her clients, or that any client has been disadvantaged."

"But, the provisions of the Code are fundamental and adherence to them is always required."

The financial adviser still has interim name suppression, but the decision says she registered as an AFA on the FSPR in 2011. She offers a range of services including financial advice, financial planning, investments, mortgage broking, KiwiSaver, retirement planning, residential property management and personal and small business tax advice (as a tax agent) through her business. She trades under three businesses, one of which is registered on the FSPR from 2011 as an employer or principal of a financial adviser and/or Qualifying Financial Entity.

After an unrelated complaint in January 2018, the FMA took an interest in the AFA, which culminated in a monitoring visit to the premises in May 2019, and a desk based review in July 2019. As a result of these two visits, the FMA began an investigation on August 23, 2019.

The investigation found that the AFA breached standards 12 and 15 of the Code, which relate to keeping information about personalised services for retail clients, and the requirement to have an adequate knowledge of Code, Act and laws.

The court briefing says that "The breaches are established in respect of three clients, whose identities are permanently suppressed; it consists of the adviser having failed:

a. to record in writing adequate information about a personalised service provided to a retail client

b. to demonstrate adequate knowledge of the relevant legislative obligations which result from the term ‘personalised service’."

There are three alleged breaches of Code standard 15, relating to financial advice, personalised services, and client relationship management. In regard to these the court concluded that "The Respondent had a somewhat idiosyncratic approach to record keeping and generally did not respond to the requirements of the Code with sufficient rigour."

The picture of the proceedings that the documents paint is illustrated when the FADC documents state, "As the oral hearing progressed, and we were able to get beyond the avalanche of words, it became apparent that the Respondent was of the view that she was not providing financial advice by a personalised service unless and until she had received and documented the entire circumstances of a client.

"The Respondent’s records were less than straightforward. The task for us is whether in each of the individual circumstances which have been put under the microscope a personalised service was being provided on a sensible objective basis. The perception of the Respondent of what she was doing is not conclusive. The records which she is required to maintain must in and of themselves provide a comprehensive picture of the relationship and what was occurring. They are not merely for her benefit, but have a wider purpose under the Code."

The FADC reviewed four separate client files in which failure to establish adequate records was established.

No penalties have been handed down at this stage and the committee has asked for dispositions from the parties.

More on page 24, Adviser Code breach >

Industry shaken by NZI PI decision

One of the biggest stories of 2020 continues to develop into 2021, with the adviser industry as a whole watching closely as to the repercussions of NZI’s decision not to offer PI insurance to smaller FAPs.

When NZI, which is understood to have around 60% market share, said it will no longer cover financial advice firms with three or less advisers the transitional licensing numbers issued by the FMA showed that this decision was likely to affect the majority of the industry.

This made many advisers assume that the reality of the new regime may be more difficult than the picture that MBIE and the FMA had been selling, that all advisers would get a seat at the table, no matter the size of the FAP.

FMA director of market engagement, John Botica, said that although NZI is refusing to provide PI insurance to small FAPs comes as a surprise, he does not believe it is the end of the line for these advisers.

“To be honest it was a surprise. As part of our consultation period around PI insurance we spoke to a lot of the brokers and they did tell us at that point that they would continue providing cover for advisers. To then turn around and come to market with this is a change that I didn’t expect.”

Botica told ASSET that although the announcement was surprising he does not see it as heralding the doom of the single adviser FAP.

“Well run businesses that understand the psyche of their clients should not have any great levels of fear from these changes. There are no hurdles here that can’t be overcome.”

Although there has been a lot of fear in the industry around operating without PI, Botica says that under the previous regulations PI claims have not been a huge issue.

“In the past 10 years there have not been a significant number of PI claims. From what I can find out from most of those cases, advisers were actually able to pay out those claims themselves. So you didn’t really get many situations in which an advice business was not able to stand behind itself.”

Botica thinks that under the new regime we may see PI cover shrink further in importance.

“I feel very confident that the new regime has quite a few things built in to protect consumers. Reliance on PI cover in itself is minor in comparison to the other protections and benefits there are across financial advice.”

Regarding moving forward in these uncertain times, Botica believes that the advisers behind these smaller FAPs are smart enough to think their way through it.

“I encourage advisers to think quite widely. Think about who you are, how your businesses connect with your clients.

“When it comes down to it PI cover is only one factor of your business. They should be talking to their product providers that they engage with about what this means. “Take the bull by the horns.” While advisers struggled to realise what this means, the industry’s insurance experts said that this move had been on its way for a long time. One of these people was Steven Burgess, director of the Compliance Refinery. Burgess says that PI has been an area of scrutiny for insurers.

“In talking to PI providers, they have been telling us that the market is just changing, there just isn’t any appetite for PI any longer.”

Burgess believes that rising risk is causing many providers to consider exiting sections of the market, not just NZI whose announcement last week shook the industry.

“It’s my understanding that it's just not palatable to take on the level of risk that PI requires. It’s a sector of the market where risk is going up exponentially for those that insure.”

Although rising risk is an issue affecting the entire market in this period of global uncertainty, Burgess says that financial services are feeling the particular brunt of the levels of fines that face those in the industry who get something wrong.

Burgess says that advisers need to make sure they understand the complexity of the new regime.

“The thing is nobody goes out and purposefully writes bad business. It also could be down to luck, you could have an unmeritorious complaint that cost you $25,000. Advisers need to be thinking, ‘Can you float that kind of money?’ ‘Can your business sustain that?’ and ‘Can you manage that stress?’.

“The biggest thing that PI offers an adviser is that they [the insurer] defend the claim so that you don’t have to.

We live in an environment when all small business costs are going up. I think we tend to forget that advisers are businesses, even the smaller FAPs. So they have to assess their risks and determine if it is worthwhile.”

While many are concerned about the direction that the industry is heading in, Burgess wants to remind people that there is more to the shape of the industry than the regulator. “The regulators have made a space for small businesses to operate, but there are other things at play here that are going to determine how those businesses operate.

In terms of the industry’s reaction, Burgess is hopeful that smaller FAPs will find a way forward from this.

“The industry is going to come up with solutions here, it always does. Advisers will decide if they want to be advisers or if they want to run businesses, and go and find homes if they don’t want to do both. I think the industry is going to be fine.”

Burgess even believes that there is a clear path forward for advisers to retain PI insurance under the new regime.

“We suggested that the Government start up a fund to guarantee remediation of clients in financial services. Advisers would pay into that fund and settlements would come out of that. This is relatively common, we have seen this system be quite successful in Canada.”