REGULATION

Full licence provisions: what you need to know

The FMA has finally released standard conditions for a full FAP licence. But what are the fishhooks?

BY DANIEL SMITH

As March 15 grows closer, many advisers across the financial services industry are scrambling to get ready for what may well be the most significant industry shakeup in a generation.

The latest and most important update over the past few months has been the release of the FMA’s full licence provisions. After much industry consulting, the FMA has finally released the standard conditions that financial advice providers (FAP) must adhere to in order to achieve a full licence.

The final standard conditions for a full FAP licence include three separate classes of financial advice service, as well as seven sections which the standard conditions will cover.

The seven standard conditions for a full licence

1. Record-keeping

2. Internal complaints process

3. Regulatory returns

4. Outsourcing

5. Business continuity

6. Technology systems

7. Notification of material changes

One notable omission from the conditions is professional indemnity insurance. The FMA media release says that “Professional indemnity insurance cover remains an important decision for each financial advice provider to consider, taking into account their own particular circumstances, and accordingly, the FMA decided not to include professional indemnity insurance as a standard condition.”

Katrina Shanks, CEO of Financial Advice New Zealand, said “We were extremely pleased to see the omission of professional indemnity insurance from the final full licensing conditions. There was a lot of consultation with the industry around this point. The FMA listened to the concerns of the industry and as a result, have removed PI from the final conditions.

'We were extremely pleased to see the omission of professional indemnity insurance from the final full licensing conditions' _ Katrina Shanks

“One of the big reasons for removal was the change in the market, as well as the uncertainty around the availability and affordability of PI. This was one of the key things that we advocated on behalf of advisers for as a part of our submission process.

“Financial Advice NZ have worked really collaboratively with the FMA on these full licensing conditions and we appreciate the consultation process which they put in place.”

The three different financial advice provider classes have changed from “A, B and C” to “1, 2 and 3”. The classes

mean financial advice provider applicants can apply for the licence that best suits their circumstances, whether they are a sole adviser business, engage multiple advisers or authorised bodies, or operate a business that has nominated representatives.

John Botica, FMA director of market engagement, said the consultation received a healthy response from the industry, with 55 written responses.

“Standard conditions play an important role in setting the bar for the businesses the FMA licenses. The consultation helped to ensure the standard conditions will be fit for purpose and we were pleased to see the industry was broadly very supportive of them,” Botica said.

The FMA continues to process transitional licence applications, leading up to the commencement of the new financial advice regime. Anyone who still intends to apply for a transitional licence is encouraged to do so before the summer break to ensure their application can be processed before March 15, 2021.

Shanks says that the full licensing conditions bring with them “a lot of new requirements which many advisers have not had to consider before. Advisers are going to have to look very carefully at those final standard conditions. To help them through this process Financial Advice NZ and the FMA are running a joint-launch of the final standard conditions guidance in Christchurch on November 17.”

Murray Weatherston, principal of Financial Focus, has commented that in the full licence provisions “there are a few things that I think will prove to be fishhooks”.

“The first one is record keeping. Now while everyone thinks they keep good records, these provisions are asking for ‘records relating to how you or any person engaged by you has complied with the financial advice duties’.

Murray Weatherston

‘I would imagine that large numbers of advisers who are going to be licensed have not even looked at these [conditions]’ _ Murray Weatherston

So in this new regime advisers are not only going to have to be careful when they give advice, but they are going to have to carefully document how they took into account, in any particular piece of advice, the laws and regulations.

“This is going to mean that once someone has given advice, they are going to have to sit down and spend hours writing notes in case the FMA comes calling. This is going to cost anyone who has a licence a truckload of money, and the regulators won’t like me saying this, but there is only one place these costs are going to fall, and that is on the clients.”

Compounding these fears of a skyrocketing cost of advice is Weatherston’s concern that many advisers don’t realise just how much these changes are going to affect their industry. “I would imagine that large numbers of advisers who are going to be licensed have not even looked at these [conditions]. Most people who do read them might think ‘oh this is all pretty simple’, but when you get into the nittygritty and you are faced by a monitoring visit, I think a fair number of advisers are going to be found to be wanting.”

Another fundamental shift March 15 is going to bring is changes to the disclosure regulations. These changes will see the end of the written disclosure document as after March 15 disclosure content must be presented to the client in a way that the client can understand and at a time where the information is relevant.

At an FSC “Get In Shape” conference dedicated to bringing the industry up to speed on the new disclosure regulations, David Greenslade of Strategi Group said that the new disclosure regulations will be “a big leap forward for some businesses”.

Greenslade added that some RFA advisers would not be used to talking about their own remuneration, but that the regulations were clear that it will be “on you to disclose the value that you add to a portfolio. This includes disclosing how much you are getting paid”.

Mark Banicevich from Partners Life clarified: “You don’t have to disclose your salary to clients, but you do have to disclose your commission. Also, you must disclose your individual reliability history, whether you had any bankruptcy or warnings from the regulator.”

The four stages of disclosure in the new regulations

1. At all times on the company website, for which the FAP is responsible.

2. When the scope of financial advice is known, for which the adviser is responsible.

3. When financial advice is given, for which the adviser is responsible.

4. When there is a complaint, for which FAP and adviser are responsible.

It may seem that the multiple stages and murky separation of responsibility could have some advisers scratching their heads. But Banicevich said that while the industry was “saying what you had to disclose, it isn’t saying how you have to disclose it”.

Greenslade adds that there is “huge flexibility with how you facilitate disclosure. Whatever way you can think of communicating it you can do it.

“Disclosures shouldn’t be something hidden away at the bottom of the website. Wherever a client is likely to land on the website the disclosure should be there.” ✚