Advisers’ fraudulent activity to be rooted out by FMA

Advisers selling mortgages and insurance through misleading or fraudulent activities are coming under the beady eye of the Financial Markets Authority (FMA).

The regulator has noticed increasing fraudulent activity, particularly in relation to mortgages and insurance.

It says while these instances are the exception rather than the norm, the severity of the conduct, exacerbated by the existing economic climate, makes this a priority.

In its Financial Conduct Report released today, the FMA says it has seen advisers taking advantage of new migrants’ lack of understanding of what products they need, including advisers from within their own communities.

These advisers have exposed them to unsuitable products and/or unnecessary costs.

The FMA says it will prioritise investigation of complaints from product providers about advisers adversely impacting people in vulnerable circumstances and use its full range of regulatory interventions to address poor conduct.

This is one of the priority areas for the FMA’s regulatory focus in the next 12 months.

FMA chief executive Samantha Barrass says it is taking a no surprises approach  to enable the financial sector – including banks, insurers, financial advisers, investment managers, and capital markets – to make sure they’re doing the right thing by their customers.

“This report shows we value transparency, accountability and engagement.”

Fees and incentives

Other priority areas include consumers and investors understanding fees, incentives and commissions.

In its monitoring last year, the FMA says many FAPs demonstrated good practices, but there were some gaps that pose risks to their clients including lack of clarity regarding commissions, incentives and fees; missing or inconsistent information; some disclosure not being provided in a timely manner, in some cases weeks after the advice was provided.

The focus in the next year includes reviewing the disclosure provided by financial advisers through a thematic review to increase the FMA’s understanding of FAP business models and remuneration structures.

It will assess the risks of investors and consumers being unable to access the right service or receiving unsuitable products. 
Custody of investments

FAPs will also be monitored over their arrangements in place to oversee the outsourcing of client money or property handling to a custodian.

The FMA says it has seen instances where weakness in custody have contributed to fraud or business failure resulting in investor loss.

The rules around client money and property handling are complex, so the FMA will review the governance and supervision of the custody service as well as how custody reports are provided to clients to ensure appropriate protections are in place.

If the FAPs provide this service and hold client funds, the FMA will assess how robust their processes are in terms of separation, accounting for money and property, record-keeping, and reporting to clients. 

Improving accessibility of advice

The regulator will also undertake a review of the challenges and opportunities for improving access to advice, including KiwiSaver.

It is concerned there has been a reduction in financial advice to investors and consumers in some sectors over the past few years and they may not be able to access the advice they need. 

Work by the FMA has found consumer preferences for receiving advice are changing and the lack of innovation in business models can limit the availability and affordability of advice.

Some approaches to compliance are acting as a barrier to providing advice, with some financial advisers taking a conservative approach to giving advice to clients, despite being permitted and trained to make it available.

There are also concerns the regulatory obligations associated with the provision of advice are a barrier to greater access for consumers.

In the fintech industry, a key theme of the FMA’s work has been to understand where AI adoption can assist financial advisers and their clients.

It says it is seeing AI being used to simplify processes and support customer personalisation, and there is an opportunity for the sector to make the use of technology to support the availability and affordability of advice.