Papers please: Regulator set to crack down on financial advisory sector with spot checks, cold calls and protection for whistleblowers

By Amanda Morrall

Financial advisers are now subject to closer scrutiny under a new regulatory regime, with a dedicated taskforce conducting random inspections and cold calls to make sure practitioners are in compliance with the law.

Additionally, a formal complaints process has been established and is now available to members of the public who feel they have been ill-served by their advisers. (For details see the Consumer Affairs website).

Securities Commission Director of  Financial Adviser Regulation Mel Hewitson said policing efforts were intended to keep advisers on their toes and help protect consumers from bad advice.

"What's really important for us is that the public understand they can expect more from their advisers," Hewitson said.

Effective April 1, all financial advisers in New Zealand are required to be listed on the Financial Services Provider Register. And with the exception of advisors in the Christchurch area (granted extensions due to the earthquake), practitioners must have satisfied new professional qualifications that will classify them as either an Authorised Financial Advisers(AFAs) , a Registered Adviser (RAs) or a Qualifying Financial Entity (QFEs).

While financial advisers have until July 1 to become fully compliant, monitoring and enforcement policies are now in effect.

Eight full-time staff members have been assigned to a policing unit tasked with investigating professionals and businesses across the country.

Hewitson said a central focus of the team would be something called an Adviser Business Statement, a legally required document that sets out a practitioner's practice and understanding of the new regulation.

"It's one of the things we'll be most likely to call for," Hewitson said, explaining that it would be used to "picture a business and risk asses the adviser.''

"We can ask them to send it to us, and then we'll read it to get an understanding of their business and where they're at on the spectrum. For example, so we can see if they're at the 'full investment planning maybe complex' product end, or at the less risky category two.

Hewitson said one of the regulator's aims with the emphasis on the Adviser Business Statements was to get a sense of any gaps in the system.

To a large extent, the Securities Commission (assumed by the Financial Markets Authority on May 1 this year) will also be relying on the industry itself to help raise standards.

"We've got to show that we're good referees but we don't have eyes and ears totally sourced from within our organisation. We're reliant on professionals in the industry to give us a hand," Hewitson said.

Despite what could be construed as fear tactics, the commission wasn't expecting any resistance.

Hewitson said regulators and good standing members of the industry were working toward the same goal.

"We have to recognise that AFA's in particular have invested a lot of time and a lot of money into the professionalism of their business. We owe it to them not to tolerate those without tickets who try to jump the turnstile to engage with the game," she said.

A provision in the new legislation provides whistleblower protection for financial advisers who report a colleague suspected of bad practice.

"So if you're an AFA, and you spot a rogue adviser that's potentially bringing the reputation of the profession into disrepute, they're able to lodge a complaint about that person, provided it's not vexatious. It's a way for advisers to help to preserve the reputation of their profession by giving us information about practices we might not have been able to see," Hewitson said.

"We're not working with a lot of existing information in the market and it hasn't been regulated before so we'll be using a combination of market intelligence and complaints as some critical sources of deciding who we'll request ABSs from," she said.

With the July 1 deadline for licensing out of the way, Hewitson said monitoring and enforcement would take on an even stronger imperative for the Financial Markets Authority, which is gearing up for a massive public awareness campaign at that time.

Once the new regulatory regime is fully in effect, the number of practitioners is expected to shrink.

Hewitson said she couldn't quantify the professional purge because previous numbers were unknown. Until now, there has never been a requirement for financial advisers to be registered or held to a universal standard.

The Securities Commission originally estimated that some 5,000 advisors in New Zealand would become Authorised Financial Advisors but the Institute of Financial Advisers has suggested it could be half that. (See article by Amanda Morrall here.)

Hewitson said there's no question the landscape will be changed for the better but warned consumers that total safeguards were unrealistic.

"They (consumers) shouldn't assume that it strips out all risk from their advice decision as well."