Thousands of financial advisors unaccounted for as deadline looms for registration and licensing requirements

By Amanda Morrall

The Securities Commission is warning thousands of financial advisors could be forced out of business this year if they don't register themselves under new regulations by March 31 and sign up to sit mandatory licencing exams. The exams must then be completed by July 1.

Under new legislation aimed at tightening standards in the financial advisory sector, those in the business of giving investment advice have until March 31 to sign onto the Financial Service Provider Register (FSFR). Additionally, they are required by law to make sure they are booked to sit two sets of exams which will determine whether they can be licensed as an Authorised Financial Advisor.

"It will be illegal from April 1st onward to give advice if you are not registered but the more significant problem for them is the problem that crystallises on July 1: anybody who gives personal investment advice to retail clients must also be licensed,'' said Securities Commission director of supervision Angus Dale-Jones.

Dale-Jones said it was difficult to know just how many practitioners were at risk of flouting the law but estimated it could be at least 1,000. Precise numbers were difficult to judge because previously there was no requirement for financial advisors to be registered in New Zealand. Nor were there any base-line skills or competency requirements for those working in the industry.

With the introduction of the Financial Advisors Act along with the Financial Service Providers and Registration and Dispute Resolution Act (FSPA), that has changed.

Under the new law, practitioners who dispense investment advice are required to pass two sets of tests; a 'standard set b' and 'standard set c.'

While a good number of financial advisors had fulfilled the set b requirement (2,100 to date), Dale-Jones said there were worrying low numbers who had yet to book for and pass the more rigorous c examination requirement. This 'core professional examination' requires advisors' to meet with an assessor who reviews their work experience in order to make sure they are properly qualified to continue giving investment advice.

Although a certain segment of the advisory sector is exempt from this second requirement - mainly chartered accountants (CA's) and certified financial planners (CFP)s - Dale-Jones said that still did not account for the large discrepancy in numbers between those needed to meet the two-part requirement.

"So we think there are people out there who need to get their portfolio of evidence of work they've done ready to sit down in front of an assessor.''

Procrastination or natural attrition?

Institute of Financial Advisors President Nigel Tate said he shared the concerns raised by the Securities Commission.

"We're equally as concerned about the lack of numbers coming through. There are a lot of people who are putting things off to the last minute.''

Tate said compliancy rates were high among the IFA membership but there was room for improvement.

An IFA survey found that 89% were intending to becoming Authorised Financial Advisors but 13% had not yet booked themselves in for the tests. Tate said the IFA was conducting a roadshow next week to raise awareness and to help advisors better prepare for the compliance requirements.

Those that did not get themselves registered and licensed would simply be "regulated out of business,'' he predicted.

The Securities Commission originally estimated that some 5,000 advisors in New Zealand would become Authorised Financial Advisors, aligning themselves with the new regulations.

However, based on current numbers coming forward for registration and licensing, Tate speculated it could be half that.

"I suspect we might get 2,000 or 3,000 by June,'' he said.

Three-tier system for advisors

The new regulatory regime lays out a three-tier system of financial advisors: Authorised Financial Advisors (AFA), Registered Advisors (RAs), and Qualified Financial Entities (QFEs).

There are some important distinctions that the investing public ought to be aware of, said Dale-Jones.

Crucially, "AFAs are the only ones who can provide investment planning advice, no one else can do that,'' he said.

Registered advisors on the other hand are limited to a category of product. In brief, they can deal solely with insurance and credit products.

Finally QFE's are advisors who are not registered in their own name but rather through an organisation, such as a bank. In addition to being able to deal with the kind of insurance and credit matters, they can also deal with investment products. They are however limited to dealing only with investment products offered by their employer.

So what level of confidence can one have in the quality of advice given by someone employed by a bank offering guidance on KiwiSaver fund selection?

And how are consumers expected to know the difference? The onus is on the person dispensing advice or pushing a product to let consumers know the limitations or their knowledge base.

In order for a QFE to become licensed as such, they have to satisfy the Securities Commission that they have the "capacity to take responsibility for its advisors.'' In essence, QFEs are entrusted by the Securities Commission with making sure their employees are well placed and sufficiently qualified to give advise to consumers.

"So we don't have a problem when a person walking into a bank expecting to get the bank's investment product. That's fine as long as it's made clear to the consumer. If the consumer wants a broad range of advise on products from different organisations, they need to go to an AFA,'' said Dale-Jones.

To a certain extent this would seem to be faith based system, but regulators aren't leaving it entirely to good will in the market place.

New regulator the Financial Markets Authority, due to take over from the Securities Commission in May, has assembled a team of 20 people tasked with monitoring and enforcing regulatory changes under the new law.

Angus-Jones admits it's not a perfect system but is a lot better than the protections previously afforded consumers. He said the combined effect of increased professionalisation, a new code of conduct, disclosure requirements, the establishment of a disciplinary committee, and the requirement for all advisors to be members of an independent resolution scheme would help to raise standards and guard against consumer exploitation.

"None of these in isolation solves all the problems, even together they are no absolute guarantee but at least with the four or five new strands to the regulatory push to try to improve advice to New  Zealanders, there is a better chance the consumer will get a better deal.''