Regulation: Thousands unprepared for new regime

While most advisers have heeded the call of the FMA, some have been slow to react.

BY DANIEL SMITH

March 15, 2021, should be marked in the calendar of any adviser worth their salt. It is the date that the new financial advice regime kicks into gear. It marks a massive shift in the entire financial services industry. A shift that some are concerned many advisers are not prepared for.

The essence of the change is that all financial advisers will need to be connected to a licensed financial advice provider (FAP), enabling the FMA to monitor licensed entities and act where conduct falls short of the required standards. All advisers will need to comply with a new code of conduct when providing financial advice to retail clients. The code includes standards for conduct, client care, competence, knowledge and skill.

The disclosure regulations for FSLAA include expectations for providing information on the material limitations of advice given, disciplinary history of the person giving advice, and the fees, commissions or conflicts of interest that may apply. These are new obligations that all advisers must adhere to, and are designed to support good client outcomes.

A recent FMA Supervision Insight report shows that the changes are both necessary and needed for an industry that has progress to make in certain sectors. After supervision activities from January 2019 to June 2020, the FMA found that while large parts of the financial services sector are working hard to meet the FMA’s expectations, widespread improvements to governance and compliance are needed.

Rob Everett, FMA chief executive, said the issues identified in its monitoring were concerning, and he anticipated the regulator would take strong action where deficiencies are not remedied in a timely manner.

“We are at a point now where the volume of FMA guidance, level of engagement and maturity of the regulatory regime mean there are no excuses for conduct that presents the risk of harm to investors, customers and the integrity of the markets,” Everett said.

This is not a boxticking exercise; it needs to be woven into the culture of providers.

_ Rob Everett, FMA

“While we have seen positive evidence of genuine customer focus during Covid-19, there is more work to be done to build a sustainable customer-centric culture,” he added.

The FMA found weaknesses across its regulated sectors in four main areas: governance and oversight; conduct and culture; compliance assurance programmes; and compliance and controls.

“Firms need to constantly assess their conduct and culture to ensure good customer outcomes are core to their compliance systems and their overall strategy,” Everett said.

“We saw much good progress over the last year but were unimpressed by attitudes from one or two firms that suggested to us that they saw good conduct as something that only needs to be demonstrated when we visit. This is not a box-ticking exercise; it needs to be woven into the culture of providers.”

The surveillance report showed evidence as to why sweeping regulation changes were needed.

The Financial Services Council welcomed the FMA’s surveillance report with open arms. FSC CEO Richard Klipin told TMM that “the sector collectively has worked really hard to ensure that this transition is effective, orderly. It’s encouraging to see the numbers of advisers growing. But for the people who have not yet made a call, the clock is ticking.”

Klipin stated that although the regulation changes will substantially affect the sector, particularly around the tiers of accountability, “we’ve also had a lot of time to get used to it”.

Ryan Edwards of The Adviser Platform (TAP) is in a position to see a different side of the story. TAP provides services to help raise advisers up to the standard of the new regulations, so interacts with advisers who might be most affected by the changes. Edwards said that he sees “large sections of the industry aren’t taking the change in regulation as seriously as they need to be”.

While Edwards agrees with the FSC that there is positivity in the report’s showing a large number of advisers embracing change, he is concerned that “there is an equally large section of the market that is hanging out pretending that these changes aren’t going to happen”.

“We are very happy with the incoming changes, but there is more of the market that needs to draw a line in the sand and decide that they need to make some changes for the better,” Edwards added.

An FMA spokesperson told Good Returns that “our monitoring has shown areas of concern in the advice process, record keeping and continuing professional development. While large parts of the sector are working hard to meet our expectations, we are looking for significant improvement in the compliance and conduct of advisers, especially as the new regulatory regime begins.”

Ryan Edwards

We are very happy with the incoming changes, but there is more of the market that needs to draw a line in the sand and decide that they need to make some changes for the better.

_ Ryan Edwards, TAP

The spokesperson went on to say that the FMA is ready and willing to take “increasingly strong action where deficiencies are not remedied appropriately or in a timely manner”.

Largely, the FMA has been pleased with the willingness to change shown by most of the industry.

An FMA spokesperson told TMM that “advisers are highly engaged”. The regulator added: “Dbata from licence applications granted so far tells us an estimated 7,300 financial advisers are to be covered under a financial advice provider licence. That’s around 80% of practising advisers today who are well on the way to getting ready.”

The figures are encouraging for an industry on the eve of a radical shake-up.

But the numbers also raise the question, “What about the other 20% of financial advisers who aren’t ready for the change?” The numbers show that around 2,000 advisers still have not begun the application process for their transitional licences.

The FMA isn’t mincing any words regarding the late-comers. Speaking to Financial Advice NZ conference attendees in September 2020, FMA director of market engagements John Botica said advisers need to “be proactive”. He added: “There isn’t a lot of time to make decisions. It is time to be courageous in new business structures.”

As time goes forward, the FMA has taken a firmer stance. A representative said in October that “advisers can expect to see the FMA taking a hard line on anyone operating without a licence when the new regime comes into effect”.

The FMA has encouraged those who have not begun the application process to plan ahead to next March.

That may be applying for a transitional licence well before the start of the regime, putting some time aside to read the new code of professional conduct, or having a conversation with the financial advice provider that they hope to engage with.

“We strongly recommend advisers take the time to review their business, perform a gap analysis, and understand the regime’s new requirements and obligations. This may mean applying for a transitional licence in your own right, or working under another licence holder.”

The transitional licence process involves two steps: firstly, registering and requesting the transitional service on the FSPR, and secondly, applying to the FMA for a licence.

Several advisers have completed the first step but are yet to complete the second. The FMA recommends advisers get licensed – or know whose licence they will be operating under – before the summer break.

If only for the peace of mind that in a year of seismic change, they won’t get lost in the shuffle. ✚

We strongly recommend advisers take the time to review their business, perform a gap analysis, and understand the regime’s new requirements and obligations.

_ FMA spokesperson