Inside Money

Business writer David Chaplin blogs on personal finance

Inside Money: Code on the road - new rules for advisers

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Financial Advisers will have to study the new rules again early next year. Photo / Thinkstock
Financial Advisers will have to study the new rules again early next year. Photo / Thinkstock

Financial advisers in New Zealand live by a code.

And the first rule of the code, is to know the code.

In fact, that's rule number 15, which the 'Code Committee for Financial Advisers' have let stand in its proposed revamp of the rulebook released last week.

In order to comply with rule 15 financial advisers, or more correctly Authorised Financial Advisers (AFA), will, however, have to study the Code details again early next year with 10 of the 18 standards due for a rewrite.

Some of the proposals are a pragmatic gesture to the daily realities of AFA life, such as an updated rule 13 (record retention) to "clarify obligations when using third party platform providers" - essentially allowing advisers to offload some record-keeping responsibilities to investment platforms.

The Committee has also been influenced by the David Ross scandal with the now-famous 'discretionary investment management service' (DIMS) featuring prominently in the document.

Despite the DIMS-heavy dialogue, the Committee only makes one major recommendation in this area, removing previous educational standards relief that was available to DIMS-only advisers.

Elsewhere, the Committee has tweaked the education standard requirements, which are scheduled to rise over time, and 'continuing professional development' (CPD) rules, which have been relaxed slightly.

One of the most notable proposals is to establish a 'KiwiSaver-only' AFA educational exemption. Under the current rules, advising on KiwiSaver requires AFAs to have completed 'Educational Standard Set D' - stuff about investments.

The proposed change will allow AFAs to give some KiwiSaver advice without demonstrated competency in the investment field.

Judging by the language, the Committee was uneasy about granting such relief, which it describes as "only appropriate as an interim measure, until a specific KiwiSaver endorsement is finalised as part of the Level 5 Certificate in Financial Services".

The rush, according to the Code review document was based on "the pressing need to increase accessibility" of the public to KiwiSaver advice.

Developments across the Tasman have also influenced the Committee's thoughts, in particular, the Future of Financial Advice (FOFA) regime that, almost, went fully-functional this July.

FOFA is far more prescriptive than NZ's comparatively gentle Code-directed financial adviser environment. Amongst other items, FOFA bans commissions on investment products (and other 'conflicted remuneration') and hinges on a 'best interests of the client' principle.

The Code's version of 'best interests' is 'client first', which, on reflection, the Committee felt was superior to the Australian wording.

'Best interests', the Committee says "is not very clear in its meaning in an advisory setting", which would be news over in Australia (or perhaps not).

But the Australian take on 'conflicts of interest' has been absorbed into the Code proposals.

To be renamed, in fact, 'Conflicts of interest', Code Standard 5 will impose more rigorous disclosure duties on AFAs.

"Managing a conflict of interest requires an AFA to ensure that the interests of the client are still placed first, notwithstanding the conflict of interest," the proposal states.

But the Committee can go no further down the FOFA road, banning product commissions, it says, "would be outside the jurisdiction of the Code".

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