'New Era' of finance adviser rules starts today

Sean Hughes, head of the Financial Markets Authority, in Wellington. Photo / Mark Mitchell
Sean Hughes, head of the Financial Markets Authority, in Wellington. Photo / Mark Mitchell

Today is being heralded as the dawn of a "new era of professionalism" for the financial services sector in New Zealand with legislative reforms governing advisers coming into force.

Almost 300 financial advisers missed today's deadline, which saw the introduction of tough new rules making it an offence for unlicensed advisers to give advice on KiwiSaver, managed funds and other investment products, without proper qualifications.

The financial Markets Authority has begun doing spot checks on advisers who failed to make the cut, and will take action against anyone who falsely claims to be an authorised financial adviser.

To date 1605 financial advisers have been authorised.

Financial Markets Authority chief executive Sean Hughes said the new rules, which set in place minimum standards for financial advisers as well put into place systems to track, monitor and hold operators more accountable, are "an important first step" in building badly damaged investor confidence.

Hughes said the tighter regulatory framework would also set the tone for the maturation of New Zealand's investment market away from property towards alternative investment vehicles.

Relative to other developed nations, Hughes (a New Zealander who formerly worked for the Australian Securities and Investment Commission ) said New Zealand was lagging.

"What has struck me particularly is this lack of confidence but also information and knowledge about investing and we see improved standards of regulation around intermediaries such as financial advisers as one step along the path to improving that confidence.

Clean up job

On a more basic level, Hughes said the new regulation was a clean up within the advisory sector itself.

"What we're saying is that just don't call yourself a financial adviser. Be a financial adviser and that implies some additional skill, care and diligence that you have to extend toward your clients.

It's been a concern that until today anybody could set themselves up and call themselves an adviser but they had no overriding duty to put the client first.

"You just need to look at what happened with finance companies to realise either advisers were giving advice that they themselves didn't understand or they didn't understand the risks to which they were exposing their clients. Or they neither knew about or cared about their client's individual circumstances or they were being motivated by remuneration opportunities for themselves."

Hughes said all those concerns were covered by aspects of the new legislation.

Under the new regime advisers fall into one of three categories: authorised financial advisers (AFA), registered advisers (RAs) and qualified financial entities (QFES).

All must now be registered on the Financial Service Providers Register, an online register where members of the public can go to see whether an advisor is in compliance and ensure they are what they claim to be.

Hughes said the rules should help to dispel fears about rogue advisers and "cowboys" working in the investment space.

'Too many cowboys'

"Many Kiwis make decisions that affect their financial future without getting any professional advice at all. I think there's been a perception there are too many cowboys out there. But now they can be a lot more confident about the professional standards and integrity of financial advisers," said Hughes.

A key part of the regulation is that advisers can only recommend investments and products that suit their clients' situation and needs, Hughes added.

"Importantly, they must explain the risks of an investment while they are also selling its benefits to ensure it suits their client's circumstances. All of this advice must be in plain language they can easily understand."

"The new regulations will make this easier. For instance, advisers giving investment advice must now use a standard disclosure document that shows whether they are being paid fees, commissions or other financial and non-financial benefits. This helps clients see if they may be favouring products that will net the adviser more money and rewards."

Hughes said while the new regulatory framework would not remove the element of risk inherent with investment, it would go some way to protecting the public.

"We're not removing the level of risk in investment. What we're saying is this gives you additional comfort about taking those risks."

'People are terrified of the stock market'
As an extension of the new regulation, Hughes hoped it would encourage both the advisory network and product providers to come up with a broader suite of products more attractive to investors so there is a good range of options to them.

"Because at the moment, there is still far too much a focus on property, term deposits and cash. People are terrified of the stock market, and they're terrified of any form of second-tier debenture type stock. So we need to improve the quality of the stock so that when financial advisers are giving advice there really is a worthwhile range of products to offer to their clients."

By the numbers:

Authorised Financial Advisers (AFA) - There are now nearly 1600 AFAs and more approvals are pending. AFAs can advise on more complex investment products and can also offer investment management and planning services.

Registered Financial Advisers - A further 4000 professionals act as Registered Financial Advisers (RFAs). RFAs can provide advice on simpler products including insurances, term deposits and loans.

Qualifying Financial Entities (QFEs) - Alongside individual financial professionals, 63 companies have been registered as Qualifying Financial Entities. These include banks, insurance companies and friendly societies. Within these companies, over 20,000 employees are able to advise on financial products such as KiwiSaver, managed funds and insurance provided by their company.

For more information, the FMA recommends investors' ask their financial adviser for the FMA's 'Confidence comes from sound advice' brochure, or browse the 'Help Me Invest' section of the FMA's website.

INTEREST.CO.NZ with NZ Herald Online

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