Regulation: Disclosure unpackaged

As we head towards a change in disclosure requirements early next year, compliance and training specialist Leigh Hodgetts discusses the implications for advisers.

BY LEIGH HODGETTS

The new disclosure requirements come into effect on March 15, 2021 and many industry participants are only now reviewing their obligations and thinking about how to make some fairly significant changes to their advice processes. Attendees at Financial Advice New Zealand’s “Bounce” Roadshow Masterclass had the opportunity to run through the new regulations (facilitated by yours truly) in a practical format with working examples of how they could adapt to the changes in their business.

It was clear from the group discussions, that advisers who are currently RFAs, had the most to do in preparation for the new disclosure requirements. The reliance on a prescribed template will no longer be an option and building in disclosure at relevant stages, while giving financial advice to retail clients, is the key.

AFAs, on the other hand, could potentially update or adapt their current disclosure documents to include the new required information in their advice process. All financial advice providers' (FAP) websites will need to be updated to incorporate the publicly available information disclosure requirements.

An overview

The Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020 will commence on March 15, 2021 when the new financial regime comes into force. The requirements apply to financial advice given to retail clients.

A financial advice provider, a financial adviser or a nominated representative must provide disclosure to clients at suitable times during the financial advice service.

Disclosure can be given verbally, in writing or electronically (email/text message).

There are no set formats for the new disclosure requirement regulations (229C to 229G) as long as the following is applied.

• It is presented in a clear, concise and effective manner.

• If it is presented with other information, it is given prominence (websites for example).

• If it is presented in writing, it is in a format, font and type size that is easily read.

• It is made available or given free of charge.

If disclosure is not given in writing (verbally) a client must be told that it can be provided in writing on request.

Stages of disclosure

• Publicly available information

• Disclosure when the nature and scope of advice is known

• Disclosure when advice is given

• When a complaint is made

What information needs to be disclosed

• FAP licence information

• Fees and commission

• Conflicts or incentives

• Reliability history

• Nature and scope of services

• Complaint process

• Availability of information

• Identifying information

• Duties information

If disclosure is not given in writing (verbally) a client must be told that it can be provided in writing on request

Publicly available information (regulation 229C)

The purpose of the regulation is to help consumers find a financial advice provider that meets their needs. A website or internet page maintained by a FAP would be the most common place that publicly available information would be found by consumers.

The information must be prominently displayed either on the homepage or somewhere easily found on the site. It could also be via a link from the homepage. You need to ensure that the public can easily access this information at all reasonable times.

Nature and scope of advice is known (regulation 229D)

The purpose of this disclosure is to help consumers make an informed decision on whether to seek, obtain or act on advice from a person or provider. This disclosure is given by the financial adviser who is giving the advice to the client on behalf of the FAP. To be given at the time when the nature and scope is known or as soon as practicable after afterwards.

When advice is given (regulation 229E)

The purpose of this disclosure is to help a client make an informed decision about whether to follow the advice that they have been given.

This disclosure is given by the financial adviser who is giving the advice to the client on behalf of the FAP. This disclosure must be given before or at the time the advice is given, or if it is not practicable to do so, soon after advice has been given.

There is some flexibility to combine the disclosure for 229D (nature and scope is known) and 229E (when advice is given) for a client in certain circumstances. Providing consumers with relevant information at the right time is the key.

When a complaint is made (regulation 229F)

What is a complaint?

A complaint is an expression of dissatisfaction relating to the FAP’s financial advice service to which a response or resolution is explicitly or implicitly expected (including any dissatisfaction with advice given on the FAP’s behalf).

The FAP must give the complainant an overview of the FAP’s internal complaints process and information about the FAP’s dispute resolution scheme. You could also refer the client directly to your website as this information is available there at all times.

The complainant has access to a free independent dispute resolution service, and this service may help to investigate or resolve the complaint if it is not resolved to the complainant’s satisfaction using the financial services providers’ internal complaints process.

Remember that having a complaints process is a standard condition for licensing FAPs. Clear policies, procedures and a complaint register is important to have and keep up to date. Include how you escalate complaints and communicate with the complainant during the process.

Issues raised at Masterclass in group discusssions

The lack of templates was a concern for some advisers who just wanted to be told what to do. After explaining that this is a principles-based regime, and you need to cover off the required information in a way that you choose to by following the guidelines, we all agreed that this could be a great opportunity to market yourself.

Making the disclosure relevant and meaningful to both the client and the adviser is important. Get creative and use this as a sales tool or marketing document. Increase the information on your website to cover the requirements in an appealing way that attracts clients with a good design.

During the groups breakouts we really pulled apart conflicts of interest, what they were, and how they would be managed by the FAP. Commissions were a talking point and how to manage the differing amounts paid by product providers. Using a reliable comparison tool for your analysis, following the sixstep advice process and your business process every time seemed to be the obvious way to mitigate this risk. This should ensure good client outcomes.

Remember Code Standard 2 – Act with integrity at all times.

Disclosing the amount of commission in dollars or percentages and how to justify this to clients was something a few advisers struggled with. Understanding their own value proposition can really help advisers with these types of conversations. This is something many financial advisers need to work on now and gain confidence with.

Financial advice providers will need to build processes around how to provide disclosure to existing clients, new clients and meet the standard licensing conditions for record keeping. Does your CRM or platform allow you to evidence this easily? Something to consider with advice processes and record-keeping policies.

A reminder to review agreements with FAPs, FAs and nominated representatives and explore what changes will be built into agreements under the new regulations. Agreements with product providers are all under review with some extra items to be agreed to so be very aware of these.

In regards to complaints – think about if a complaint might trigger notification under your agreements – along with following the new disclosure requirements with the client. The devil’s in the detail with some new agreements.

Making the disclosure relevant and meaningful to both the client and the adviser is important

Wrap up

Now is the time to review websites and marketing material in preparation for disclosure required for publicly available information.

It may be challenging to operate under the FAA Act for another few months and then switch to the FMC Act, meet your legislative duties, obligations with the new Code, and new disclosure requirements. Time is running away on us and we all need to have appropriate policies, processes and be ready to go on March 15, 2021!

(Financial Advice New Zealand will be supporting members with another Masterclass in Auckland in November and a guide to the new disclosure requirements will be available in the member resource area on the website.)