The Code – issues for advisers (Part One)

This commentary looks at the new Code of Conduct and the issues, opportunities and challenges for adviser businesses. It is written by John Berry, a member of the Code Working Group (CWG), in his capacity as a commentator on NZ financial markets and as CEO of Pathfinder.

This commentary therefore contains his personal opinions. It is not written on behalf of the CWG and is not intended to reflect CWG views. 

Where we are now
Before launching into issues around the new Code, it is important to look at where we are now.  Part One of this commentary needs to begin with some background while Part Two will address what I consider are key topics to be considered by retail advisers (which will hopefully encourage further adviser submissions).

To start with, what parts of the current regulatory regime are lacking?  What needs to be fixed? Here are five key issues commonly identified by advisers:

Issue Description Can the new Code deal with this?
Prescriptive documentation Required adviser documents are too detailed and clients often don’t read them.  Is there a better way to share information with clients? Yes, the CWG can help here, although note that RFA and AFA disclosure documents are not set by the CWG.  MBIE is separately working on new disclosure rules for advisers (MBIE issued a discussion paper on adviser disclosure with comments closing on 25 May – see link at the end).
Sales vs advice There are a range of business models providing financial advice in NZ.  These include advice businesses selecting what they see as the best product in the market, businesses choosing product from a small number of providers and businesses only making their own product available.  Unfortunately the later model (where the provider manufactures and then advises on its own product) is heavily entrenched in NZ financial services.  This model may result in a service which has more in common with “sales” than “advice”.  No, this is a matter for the Bill and Select Committee.  The designation of “sales” vs “advice” is outside the ambit of the CWG.
However, one point should be noted when comparing the current Act with the proposed Bill. The current Act requires clients to “agree” scope with an adviser while the new Bill proposal requires scope and limitations be “understood” by the client.  This change implies providers will need to be very clear with clients where “advice” is minimal and is more like a “sale”.Many advisers are concerned how the “sales vs advice” issue can be best managed for consumers, and we may look at this further in part two of this commentary.
Exemptions from giving advice Various professions (such as accountants and lawyers) can give financial advice yet nothing in their training prepares them for this.  The fact these other professions fall outside the giving of regulated advice is seen by many advisers as problematic for consumers. No – although it should be noted that the CWG agrees with the advice industry and has asked the Select Committee to tighten the exemption.
Lack of guidance on “good behaviour” There appears to be uncertainty around where boundaries may sit.  A simple example is the “client first” duty – there are a variety of views on exactly what this means in practice and how it is applied across different business models. Yes – although there is always a tension between creating a prescriptive Code (as big as a telephone book but with greater certainty and exactness) vs a principles-based Code (shorter in word count but having less certainty).  The CWG has submitted to the Select Committee asking for confirmation that the Code can include guidance and examples which will provide more certainty with interpretation.
Financial advice as a profession The industry is not currently seen as a true profession by many advisers and by consumers. Yes.  This is a long-term objective widely shared by advisers and adviser associations.  The new Code can help encourage positive change.

There are several other issues we could add that are widely discussed – for example consumer confusion around AFA and RFA designations.

Regulatory change for advisers
Advisers have faced and are continuing to face a great deal of regulatory change. This is tough to deal with, particularly for smaller businesses who won’t have the scale to employ in-house legal or compliance specialists to manage the change. 
The cost of change for both small and large businesses can be considered in three ways:

  1. Dollars: money spent on external advice such as on lawyers and compliance experts.
  2. Time: additional management (and adviser) time and energy spent on compliance work such as coming to grips with on-going change. This can be invisible to the outside world but inside a business is a very real cost.
  3. Upfront or ongoing:  understanding whether the compliance expense or time spent is a one off cost at the point of transition to a regime or whether it will be ongoing into the future.

Retail advisers will be well aware that the revised Code is only one of a handful of important regulatory changes. In addition to the Code, advisers need to keep up to date with changes to:

  1. The Financial Services Legislation Amendment Bill (and the Select Committee process)
  2. MBIE’s consultation on new disclosure rules
  3. FMA licensing

It’s a lot of work - no wonder adviser businesses (particularly smaller businesses) are feeling crushed by compliance and regulatory change.  Key links to documents relating to the Code and also 1 and 2 above are at the end of this commentary.

Challenges for the Code Working Group
While advisers already have a Code of Conduct, this cannot simply be re-dated and re-issued by the CWG.  Significant changes are needed for several reasons:

Key issues Current Code (FAA requirements) New Code (new FSLAB requirements)
The adviser audience Under the FAA regime the current Code deals only with AFAs (of which there are less than 2,000). The new Code must cover AFAs, RFAs and QFE staff – which will extend the universe to over 20,000.
Robo advice The current Code is created for a world where only humans can deliver financial advice. Under the new regime advice can be delivered by humans, “robo” systems or some hybrid combination of the two.
Code type The current Code is an occupational code meaning individual standards define the activities of an adviser. Under the Bill the new code is to be a service code which focuses on service levels from a consumer’s perspective.

The regulatory changes mean development of the Code is a tough challenge for the CWG. Add to this that the CWG must regard both the availability and quality of financial advice (which can at times seem like a balancing act) and you will appreciate it is not an easy task.  Wide consultation by the CWG is critical.

An initial question for preparing the Code is also how prescriptive it should be.  It can be long, detailed and have a “check the box” approach. This would give advisers some certainty but would also be complex and open opportunities to arbitrage the rules.  The converse is to be shorter and principles based, which throws a lot back to adviser businesses to decide if their approach is compliant. 

Principles based is less black and white but can deliver a common-sense approach with more flexibility for adviser businesses.  The CWG has signalled its preference for a principles-based Code – be sure to submit if you think this is fundamentally the wrong path.

Developing the new Code
The CWG is on a relatively tight time frame with a draft Code to be submitted for Ministerial approval later in 2018.  The process requires wide consultation with key stakeholders (advisers, consumers and the regulator) and an impact report considering key decisions the CWG makes.

There has been criticism of the make up of the CWG particularly around the lack of representation from small retail adviser businesses not associated with large corporates. The disquiet was evident from early on when the CWG was appointed by the National Government’s Commerce and Consumer Affairs Minister (Jacqui Dean) in June 2017. It is important for advisers to understand that these concerns are not a matter that the CGW itself can deal with – other than by consulting widely, openly and as often as possible with all parts of the adviser community.

Impact on advisers and looking towards “part two”
Current regulatory changes are important for both consumers and adviser businesses. Within the adviser community any change has potential to impact the careers and incomes of individual advisers.  This importance is reflected in the depth of adviser feelings on issues around the Code and CWG, but also means as an adviser you must dedicate some time to reading and thinking about proposals. Start with the links below and also note that this initial round of CWG consultation closes on 30 April.

Apologies for leaving you hanging, but it is the next instalment of this commentary that will deal with the critical issues impacting advisers and consumers.  These include good advice “outcomes”, ethics, competence, CPD, training and client care.  A final reminder – this commentary expresses the personal views of John Berry and Pathfinder (it does not represent official views of the Code Working Group).

John Berry is co-founder and CEO of Pathfinder Asset Management, a boutique responsible investment fund manager.  He is also a member of the Code Working Group.

Useful links:
The Code Working Group’s consultation paper (start with the executive summary on page 8)

Slides from the Code Working Group’s public presentations in March

Financial Services Legislation Amendment Bill (it can be hard work reading legislation - may be start by looking through the headings to clause 27).

MBIE’s discussion document on financial advice disclosure

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