5 minute read
REGULATION
Industry overwhelmed with consultation
Financial Advice NZ has asked advisers for assistance, as the sector braces for reform on eight separate fronts.
BY ERIC FRYKBERG
As the regulatory offensive by state agencies on the sector gathers strength, Financial Advice NZ is bracing for reforms on eight separate fronts. It has asked its members, who are, of course, trying to run their businesses at the same time, to come up with ideas.
One of the most controversial elements relates to the proposed regulatory returns for licensed Class 3 Financial Advice Providers (FAPs), along with later proposals for Classes 1 and 2.
Financial Advice NZ chief executive Katrina Shanks has expressed concerns about the significant amount of information requested.
“At this stage we struggle to understand the relevance of some of the information requested and how the detail requested adds additional value when used in the aggregate.”
What the FMA wants to know
Senior FMA manager Romil Ghelan stressed the proposals were not fixed, due to the request for comment by the industry, but he detailed the five types of information the FMA would be seeking:
1 Advisers would have to provide details about their business and infrastructure. This would cover issues such as staffing levels, competency, and the support available to meet compliance obligations. 2 Details about an FAP’s licensed activities, such as how you market and advertise your product. 3 How advisers handle and resolve complaints. 4 Outsourcing – including the arrangements an adviser has to oversee the work of outsourced contractors.
5 Business interruption and cyber security.
Other aspects of the proposed regulatory returns include the fact that they should be filed annually, within the three months before a September 30 deadline.
Katrina Shanks
CoFI fees and the ban on sales incentives
There are other issues out for discussion, starting with the fees which will be charged for licensing under the Conduct of Financial Institutions (CoFI) legislation.
These fees affect mainly banks, insurers, and non-bank deposit takers - and their licensing regime will be monitored and enforced by the FMA.
It is not clear how much this will affect advisers, since the main rules regarding intermediaries are still being worked out.
Another issue is sales incentives. These were banned by a cabinet decision, which argued they incentivised sales people to take advantage of vulnerable consumers.
A discussion paper put out by the Ministry of Business, Innovation and Employment (MBIE) said sales incentives based on volume or value targets created a strong conflict between the interests of
consumers and the interest of sales staff.
It gave the example of life-insurance salespeople getting a $1,000 bonus for selling 100 life policies in three months. That would be prohibited, because of the potential for customer abuse.
The ban would also apply to money advances which were not stand-alone payments but part of a total assessment of an employee's job performance based on the “balanced scorecard” approach.
The ban on incentives would further apply to so-called “relevant persons”. This could be agents working for major providers or under contract to them.
The ban would not apply, however, to sales staff getting a 5% commission on each policy they sold. The MBIE document argued percentage payments were “linear”, which meant they did not change according to the volume or value of the sales concluded.
Senior managers and executives may also be excluded from the incentives ban, with MBIE arguing those higher up the ranks were removed from, or at a distance from, the offending transactions.
“It is less common for senior managers and executives (particularly in large organisations) to receive sales incentives based on volume or value targets,” the MBIE paper wrote.
It went on to defend the exclusion of managers in order to make allowance for “reasonable remuneration at more senior levels (which is) less likely to drive strong conflicts of interest at the point of sale.”
“The definition of ‘incentive’… only captures a person who is (directly or indirectly) involved in the provision of the service or the products,” MBIE wrote.
These are complex questions - and staff at Financial Advice NZ have been hard at work preparing answers. To assist them, they have sought a response from members, to guide them in their formal submission.
Accounting under the spotlight
Another regulatory issue up for review concerns the proposed guidance and expectations around accounting records.
This consultation seeks input from the industry regarding proposed ways of helping businesses to meet their statutory requirement to keep proper accounting records at all times.
In an explanatory note, the FMA says the Financial Markets Conduct Act 2013, and other acts which require appropriate accounting records, do not provide any further regulations on the content of these records.
It says as accounting requirements have become more complex over time, accounting records no longer comprise just bank statements and invoices, but also documentation which supports accounting considerations, decision making, and conclusions.
It notes there has been an increase in the number of instances with a lack of sufficient records supporting a firm's accounting treatment.
According to the FMA, in some cases there has been a lack of adequate documentation and accounting records to support recorded transactions. It adds there have been issues about the level of disclosure in financial statements – and, in some cases, important material had been gathered together only when the FMA was conducting a review of a particular business.
The proposed changes would require records to be sufficient, supportable and reliable, to be clearly formatted and easy to understand, and to clearly address material issues.
Records would also be expected to reconcile with financial figures and be protected with systems such as dependable backups.
Another area of regulatory reform concerns those who hold money on behalf of clients - but these are more likely to be people such as lawyers or real estate agents than mortgage advisers. Nevertheless, Financial Advice NZ is seeking comments from its members.
Financial infrastructure
Finally, there is the issue of so-called financial infrastructure.
This has been described as the plumbing of the financial system: the mechanism whereby electronic payments and financial markets transactions are actually completed between parties to a contract.
A draft proposal basically involves tightening up the obligations on market participants, by changing the word 'should' to the word 'must' when referring to compliance standards. The proposal also removes a potential loophole which allowed participants to 'endeavour' to meet requirements.
Other parts of the proposal refer to issues such as cyber security and risk and liquidity management.
These and other requirements are expected to keep Financial Advice NZ and its members busy for months; in many cases, implementation will not occur for months afterwards.
But the organisation is working hard to try to ensure its members will be able to continue working during tight economic conditions with as little disruption as possible.
In a post-CCCFA world - with reforms to that law deemed piecemeal and incomplete - anything to ease the adviser’s burden of paperwork would be welcome. ✚
