NEWS

Another milestone reached on the way to full licensing

On June 15 the deadline for advisers to link themselves to a financial advice provider (FAP) passed marking another milestone on the journey to full industry licensing.

In the coming weeks, the New Zealand Companies Office will begin to deregister those advisers on transitional licences who haven’t linked themselves to a FAP, set up their own FAP, or become an authorised body (AB) under another business’ FAP.

While industry leaders say they have not seen much change in the overall number of advisers there has been a shift with some long-term advisers moving out of the industry and being replaced by younger people – many of them from banks, coming into the financial advice business.

It was not all plain sailing for those slow to link to a FAP with both the Financial Markets Authority and Financial Advice NZ warning that at the start of June almost half of the industry‘s advisers had not yet linked.

This was a concern as this part of the process was deemed to be fairly simple compared to what lies ahead in terms of the full licensing process.

Financial Advice NZ chief executive Katrina Shanks said after that hurdle had been crossed advisers could take a breather before applying for full licences.

“Once the FAP has linked [with] the adviser, then the adviser is pretty much good to go for the next two years,” she said.

“They also need to make sure that the FAP has their dispute resolution guidance registered with the Companies Office. But after that they have until March 15, 2023, to obtain their full licence.”

The good news is, according to the FMA’s head of compliance services Anita Frazer, obtaining a full licence is not as daunting as it may seem; but advisers should be working toward that goal now.

She said of the 1,807 transitional licences approved only 32 applications for full licences had so far been received and the deadline of March 2023 was rapidly approaching.

“So some haste please, we are not seeing enough momentum.

“It’s a lifetime licence pretty much, but it’s also an iterative process so we don’t expect perfection the first time round but we urge you to all think about it now.”

Frazer says there are no surprises in the questions advisers need to complete for full licensing and they can be seen before filling out applications.

Shanks reiterated Frazer’s call saying “... now we move into the full licensing process and have two years to do this, but that time will go very quickly”.

“The sooner you apply for the full licence the sooner you can put all of this behind you.”

Right now, the vast majority of advisers will be operating under a transitional licence with only a handful of businesses gaining a full licence.

A transitional licence is valid for up to two years and, along with the competency safe harbour, enables advisers to continue providing the advice they were legally able to provide before the new regime was introduced.

This gives advisers time to meet any new competence, knowledge and skills standards needed.

If you did not get a transitional licence before March 15, you cannot provide advice to retail clients until you have a full licence – unless you provide advice under another FAP’s licence.

The rising costs of PI cover

Since early-2020 those in the know were already talking about increases to the cost of professional indemnity (PI) cover, now those costs have become an unwelcome reality for the financial advice industry.

Spurred on by the introduction of the Financial Services Legislation Amendment Act (FSLAA) and uncertainty around underwriting capacity insurers have become much more cautious, which can be seen in the rising costs of premiums.

In December last year, NZI, which was understood to cover 60% of the financial advice sector, told the TripleA Advisers Association it would no longer cover advisory firms with less than three people.

NZI national relationship manager Andrew Jollands said the insurer would still offer PI cover to FAPs with three or more advisers, but “... we were concerned at the significant exposure generated from multiple individual advisers’ limits of indemnity for the minimal premium generated”.

“Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance.”

NZI’s stance was backed up by Andrew Ford, head of financial and professional risks at Crombie Lockwood, who said in May this year that external global factors, a lack of underwriting capacity and the introduction of the FSLAA regime had caused PI premiums to skyrocket.

“The whole professional indemnity landscape has been hardening for the past two to three years, driven by poor loss ratios. There has been historic under-pricing and increased claims activity,” Ford said.

In June this year, the NZ Financial Services Group said its advisers faced costs of $2,500 to $4,100 for PI cover as premiums soared under the new regulatory regime.

Advisers with their own FAP licence will pay premiums starting from $4,100 with those costs marking a significant increase on previous years when PI premiums were closer to $1,500-$1,700.

Later in June, Financial Advice NZ revealed its PI renewal costs saying those costs would continue to rise in the coming years.

Class 1 FAPs (sole advisers with their own licence), will face premiums ranging from $1,700 to $3,600, depending on the advice stream.

Meanwhile, costs for Class 2 FAPs (licensed FAPs with between two and 12 advisers) will need to pay premiums of between $2,250 and $4,300.

Financial Advice NZ chief executive Katrina Shanks said with PI insurance costs escalating, the new liability programme offered great value for money and further incentives for members who qualify for “trusted adviser” status, plus runoff cover for FAPs and individual advisers.

“Professional indemnity insurance is a hardening market in these uncertain times due to the changing regulatory environment and the risk appetite of insurers, and the process to finalise this programme has been robust,” she said. A