The Financial Markets Authority (FMA) says it’s generally encouraged by the way licensed financial advice providers and advisors have taken on the new financial advice regime – but there are still some “gaps”.
A new report out of the market watchdog looks at how Financial Advice Providers (FAPs) have handled new rules and licensing requirements that fully took effect last year.
Michael Hewes, the FMA's director of deposit taking, insurance, and advice, says financial advice providers (FAPs) and advisers have adapted to the new rules, using them to improve client support and business resilience.
The report found financial advisers were focussed on making their clients’ interests a priority and made clients their top priority, with most advisers having good processes in place for replacement business advice, often including additional peer reviews.
Most monitored FAPs also had easily accessible information on fees, about their complaints process and dispute resolution scheme (DRS). The report found advisers also regularly reviewed their disclosures to ensure they met requirements.
However, the FMA says it identified some “gaps” and if the gaps remain unchecked, Hewes says this “could escalate into poor outcomes for clients”. Some of the gaps were in advisers’ ability to demonstrate that advice given was in their clients’ interest.
“In some instances, the root cause of these gaps is complacency, where the FAP has taken a ‘tick-box’ approach to compliance instead of making an effort to fully understand the purpose of the new obligations,” he says.
Another area of concern was some advisors not taking reasonable steps to ensure clients actually understood their financial advice.
“When a client does not understand the advice they receive, this can result in poor decision making and lead to potential financial harm, particularly with insurance, investment and loan products,” the report said.
The Financial Services Legislation Amendment Act which was initially scheduled to be rolled out in 2020 but got delayed due to the pandemic, brought updated rules for financial service providers and markets in March 2021.
The FMA said the updated changes came fully into effect in March 2023 and aimed to simplify regulations, allow online financial advice, and set industry-wide standards for conduct and competence.
Among other things, the changes also removed regulatory boundaries around adviser classifications, the distinction between ‘class advice’ and ‘personalised advice’. It also addressed the ‘misuse’ of the financial service providers register by offshore entities, according to the FMA.
Hewes says the FMA had identified a small number of compliance gaps that had resulted in client harm.
“Where we identified serious client harm resulting from non-compliance, we have taken, and will continue to take, action proportionate to the level of misconduct, including intensive supervision and formal regulatory action where appropriate,” he says.
Next steps
The FMA says the financial advice sector is the most varied among the sectors it oversees and monitors, with advisers working from home offices to large companies all over the country.
These advisors provide advice directly through authorised bodies, financial advisers, and nominated representatives, as well as indirectly.
The FMA’s report is based on findings from 60 monitoring visits and examined a targeted sample of the financial advice sector between 15 March 2021 to 30 April 2024 – covering over 350,000 clients and a wide range of FAP sizes.
There are 1,466 licensed FAPs in NZ, and the FMA says they range from sole adviser businesses to entities with 500 or more advisers.
“As the regime matures, we expect entities’ understanding of their regulatory obligations to mature and be reflected in their practices. Our approach to supervision will strongly reflect this expectation,” Hewes says.
“Our approach to supervision will reflect this: where we see conduct that has potential for serious client harm, our actions will increase in intensity and include the use of intensive supervision and formal regulatory tools where required.”
4 Comments
It’s a tricky one, more compliance for advisors generally means:
- Higher barriers to entry for advisors/FAP holders
- Longer more complex processes for customers to jump through to obtain advice
- Further segmentation of advice offerings (I.e, “we only provide managed fund advice, to get holistic advice you need to talk to 3-4 other advisors)
Another big issue being an advisor is generally only as good as their customers understanding of their financial goals, and given most people have zero financial literacy, their goals generally only extend as far as “be rich”, “get house”, “be comfortable”, which further exasperates the process for the customer and advisor.
Considering how few advisors we have, the costs to maintain a FAP, and the dire straights our population are in with long term financial goal setting / planning, I doubt simply making changes to FAP or advisor processes is going to make meaningful changes, if the policy is to be utilised or enforced it should only be done to hammer those advisors who clearly are providing advice that isn’t in the clients best interest, money should be diverted to getting financial literacy added to the education system, make it a core NCEA requirement
Some good points Brick. It is very easy to lapse into cynicism when commenting on statutory authorities such as the FMA. They are after all a bureaucracy who employ civil servants somewhat isolated from the reality of the changeable market. Do they really, themselves put the interests of their "clients" (ie not in this case the people who pay their wages) first and foremost?
In my understanding, they were set up by a government more interested in being "seen to do something", rather than "actually doing something". Typically of modern legislation, their authorizing statute is full of wonderful but undefineable good intentions. Statutes should surely result in those affected "ticking boxes" to assure compliance with objective regulations. Instead, like the Resource Management Act, individual clauses give broad authority to unnamed bureaucrats to make subjective value judgements as whether the regulated (in this case FAP's) are "really" meeting the "spirit" of the statute.
A requirement which basically rests on the need to gain the approval of a civil servant, has, over many years been criticized as "bad" lawmaking. And inevitably means high costs of compliance.
To try to be sceptical and not just cynical, the FMA's at least initial focus after being set up, was to find the requisite income to meet their bureaucratic "needs". Undoubtedly this focus drove some, particularly smaller FAP's (who might have expected to be closer to the needs of small investors, out of business.
As one small investor, I receive a barrage of paperwork telling me how wonderful the FAP or the proposed target investment is...how environmentally responsible, how diverse their staff, how green their infrastructure and how interested they are in my financial future.
But human nature hasn't changed! I suspect they just really want my money so that they can pay their bills. So we now have to wade through piles of "fluff" before we get to the bit about proving we are actually "us". What we can guarantee is the the return on investment will after the deduction of the costs of all this well meaning nonsense aimed at saving ourselves from ourself.
Consumers: CAVEAT EMPTOR
Links to documents:
1) https://www.fma.govt.nz/assets/Reports/Financial-Advice-Provider-Monito…
2) https://www.fma.govt.nz/consumer/getting-advice/
3) https://www.fma.govt.nz/business/services/financial-adviser/
Note that financial advisers meet a suitability standard which is a lower standard than a fiduciary standard to the client.
In addition, it might be worthwhile for the FMA to do mystery customer checks on financial advisers where there are complaints in NZ. There is a huge potential for conflicts of interest at the expense of an investment novice and uninformed client.
Out of Canada - journalists went undercover. Here is what they found
1) https://youtu.be/WtQeQzUfYrI
2) https://youtu.be/htm38oM5WFE
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