FMA set to assume more powers with conduct guidance

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The Financial Markets Authority (FMA) has published a guide outlining how it will determine whether licensed financial services providers are demonstrating good conduct.

The guide, issued to the market for consultation, illustrates how the FMA will use conduct as a “lens” for viewing and interacting with providers. It also details the “Five Cs” – capability, conflict, culture, control and communication - the FMA will use as part of its “good conduct profile” for influencing and monitoring providers’ behaviour.

Ticking boxes is no longer sufficient

Examples of questions the FMA may ask financial services providers are included in the guide. Clearly the regulator will look at conduct across all parts of a business, including strategy and business models, product design and governance, pricing, communication with all stakeholders, complaints and remediation, recruitment and people management, roles and responsibilities and risk management.

Accountability rests with the provider’s board and executive management team. Senior management must ensure a good culture is embedded throughout the organisation. This is a central focus.

Culture comes from the top and needs to “echo from the bottom”.

It is not enough to simply state corporate values. What matters is in how those values, and other corporate beliefs, attitudes and group dynamics translate into observable behaviours.

For providers, ticking boxes is no longer sufficient. They must also ensure they comply with the spirit of the law. The focus is on acting in customers’ interests.

New obligations proposed for financial advisers

A conduct-focused, principles-based approach also underpins the recommended changes to the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 recently released by the Minister of Commerce and Consumer Affairs, Paul Goldsmith.
  • Key recommendations: four new positively-framed obligations for all advisers
    1. Advisers must place the interests of the consumer first (conduct obligation). The report indicates this will be determined by what is reasonable in the circumstances but founded on what is suitable for the customer, regardless of differing incentives for the adviser or agent. This universal conduct obligation reinforces the focus on producing good outcomes. How this will apply, particularly outside the context of incentives, is yet to be seen. Market participants will no doubt wait for further clarity.
    2. Advisers must provide advice only where they are competent to do so (competence obligation). All advisers should be able to prove they have the level of competence, knowledge and skills to provide the particular advice or, at least, that they have a reasonable basis for believing they do so.
    3. Advisers must take steps to ensure consumers are aware of the limitation of the financial advice at the point of making a recommendation (client-care obligation). This aims to make consumers better off by improving consumer understanding of what they are receiving.
    4. Advisers must provide consumers with clear and concise information surrounding such things as remuneration, conflicts of interest, the nature of the service advisers can provide, and an indication of how many and which product providers they can consider (disclosure obligation).

    The report recommends simplifying the current regime significantly, including:

    • Simplifying the types of advisers. The current categorisations of advisers would be removed and three new types of advisers introduced: financial advisers, agents and financial advice firms; and
    • Simplifying the categories of advice. Advice would no longer be categorised as either class advice or personalised advice; instead it would all be treated the same. The review saw the distinction between the types of advice (in which class advice is generic information and personalised advice takes all of a client’s circumstances into account) as disincentivising financial advisers from giving personalised advice due to the higher level of regulation it receives.

    FMA appears set to become a significantly more powerful regulator

    If the recommendations are legislated as proposed, the FMA will be a significantly more powerful regulator with increased discretion around decision-making.

    With this greater flexibility also comes uncertainty for advisers. For example, the report suggests enabling the FMA to designate particular activities as advice, subject to a set of guiding principles. Such a mechanism would mean lack of certainty for advisers around whether their actions constitute giving advice as they will be subject to the FMA’s interpretation of the guiding principles.

    This is not a case of those working in financial services being able to do a self-assessment against an objective set of criteria; rather, they will have to guess how the FMA will apply a set of general and flexible guiding principles.

  • How we see it

    In our view, the recommendations will particularly impact registered financial advisers under the current regime who must meet the costs of licensing, as well as higher conduct and competency standards and disclosure requirements. The report suggests there may be cost savings for current authorised financial advisers.

    Overall, the recommendations align nicely with the raised expectations of market participants under the Financial Markets Conduct Act regime and the shift towards a principles-based approach by the FMA.

    The direction of travel is clear – consumers’ interests must come first.

    These are significant improvements to the current regime and we believe they will drive more confident and informed participation of consumers in financial markets.

    The detail of the proposals is still to be worked through. We believe advisers’ input is essential to ensure consumers can access independent financial advice. Our current understanding is that the proposals will be refined further through consultation on an exposure draft of the new legislation and testing with consumers and industry this year. The Minister hopes to have the new law enacted before the next general election.