Regulation Focus 2021

It will no longer be enough to stick to the fundamentals outlined in the six-step financial advice process. The time has come to analyse each of those steps and determine how you can demonstrate the new Code of Professional Conduct for Financial Advice Services.

For example, you cannot demonstrate Code Standard 1 to “treat clients fairly” without understanding the client’s financial literacy and previous experience with the specific financial product(s) you are advising on. Be sure to identify any vulnerabilities that could be lurking beneath the surface and develop a strategy to manage them. Above all, be sure that you can document how you are putting the client’s interests first.

By delving deep into the client’s current situation and their risk tolerance, you will be able to demonstrate Code Standard 3 and “give financial advice that is suitable”. A common issue we see is where the adviser jumps straight to “solution mode” without spending enough time analysing the client’s existing circumstances against their goals and objectives. One adviser we visited in 2020 always calculates the client’s growth in their equity and plots this against their long-term goals.

In most of the adviser files we review, the actual financial advice given needs to be clearer. There is a big difference between providing product information and giving competent financial advice. It should be completely clear what the recommendations are and why they have been given. Too often, an adviser will recommend a new product provider but not demonstrate their analysis of existing cover and its strengths and weaknesses.

While you have been giving ample time and attention to the regime change over the last couple of years, the public at large will be blissfully unaware of the significant changes to financial advice legislation. We recommend that you develop a simple marketing plan to inform your existing clients about the changes. You will also want to include a brief update in any marketing materials aimed at potential clients, such as your website or other non-targeted advertising.

From March 15, 2021, anyone providing financial advice will have to meet the updated standards for competence, knowledge and skill as determined by the Code. While there is a two-year transitional period to obtain a full FAP licence and achieve the relevant qualifications (ie the NZ Certificate in Financial Services Level 5) or proof of equivalent qualifications, financial advisers must comply with all requirements of the new regime from day one.

All advisers should have a robust professional development plan (PDP) to ensure they are meeting their obligations under the new legislation, regulations and Code. Although you technically have two years to meet the new competency requirements, the “good conduct” obligations begin straight away. As such, failure to prioritise upskilling will certainly be putting your business (and your clients’ best interests) at risk.

The FMA will expect financial advisers to devote an appropriate amount of time to upskilling themselves such that they are compliant with the requirements of the new regime. Depending on your prior experience and qualifications, this could mean that you will have to set aside a significant amount of time for professional development in the coming months. In self-managing your professional development, it is vital that your PDP is sufficiently detailed and tailored to your business model whilst also being achievable in the time you have allotted.

Be sure to identify the best sources for professional development – in practice, this means that you should seek out sources that are reputable and suitably qualified. You will need to decide where best to spend your time, effort and money. We recommend using a variety of sources and formats to ensure that you are getting a broad view of industry best practices. If you find that you need help, we can offer you a PDP template and individual guidance to get you started.

Those of you who have been in the industry for a while will be familiar with the heightened regulatory scrutiny that can accompany significant legislative change. While it may be tempting to rest on your laurels during the two-year transition period, you should instead use this time to build a positive relationship with the FMA and ensure that your business is “regulator ready” at all times.

As a first step, make sure you are aware of all legally mandated notifications required of your business (eg notification of a material change). You should already have these recorded in your compliance obligations register, but we see many businesses who do not have a process for how those notifications should be made. Determine who will be responsible for the actual communication with the FMA as well as the internal reporting that needs to be completed both before and after the notification is made.

Conversely, how ready is your business to respond to a request from the FMA? Your business information should be in a format that can be quickly and easily accessed and provided to the regulator. The more complex your business structure is, the harder it may be to provide a timely and robust response.

Appropriate record-keeping is an area of interest to the regulator, so make sure that your business records are in order, backed-up and cyber-secure. Don’t forget to review your data privacy arrangements and make any necessary changes to comply with the Privacy Act 2020. The FMA is also focussing on cybersecurity, so educate yourself on the rise in cyber-crime and ensure that you always know where your data is held, stored and how it is being used.

Larger businesses can benefit from having their compliance function run a “mock FMA request” scenario to check response times and identify areas for improvement. These same principles will help you prepare for a monitoring engagement, whether it be onsite or desk-based.

Unlike previous market services licence applications, the FAP full licensing process will be completely electronic. Applicants should thoroughly prepare the information required to be in place for the full licence application before going online to apply through the FMA portal. This means carefully reading the FMA full licensing guide and reviewing the detail of the requirements. It’s not enough to have a policy in place, it needs to be documented, address the requirements, be approved, reviewed and maybe tested. Ensure that your submission has sufficient detail to address each area outlined in the application.

Your business should go through a formal internal review process before signing any declarations required as part of the application process. The FMA will want to see that your business has an advisory board or other oversight body suitable for the size and scale of your organisation. All meetings should be formalised to ensure that it provides sufficient value and that appropriate records of internal decision-making are available if needed.

If you have already been through an FMC licensing application process, you know that it can be a time consuming and stressful endeavour. Depending on the size or complexity of your business, you may feel more comfortable engaging outside compliance expertise to conduct a “readiness review” of your arrangements (ie policies, processes and procedures) and draft application. A