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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 10 – THE SCOPE OF THE NEW REGIME
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With the regulation of financial advice moving to the Financial Markets Conduct Act 2013 (‘FMC Act’), a key question to answer is whether there is any change to the scope of activities covered – is anything new brought under the regulatory umbrella, and is anything left out?

In brief:

In this tenth in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss the scope of the new regime, including:

  • what is caught as a ‘financial advice service’?
  • where do DIMS sit, and what are the implications for DIMS providers?

In the Series so far:

1 – confirmation of the proposed reforms
2 – key concepts
3 – the FAP conundrum
4 – key changes to the FSP Act
5 – transitioning to the new regime
6 – offshore advisers
7 – the Code of Conduct and Code Working Group
8 – the new regime for custodial services
9 – the new statutory conduct obligations

In full:

The overall scope of activities subject to regulation will remain substantially the same under the new regime set out in the Financial Services Legislation Amendment Bill. There are some minor tweaks, but a major exception to this is that a discretionary investment management service or DIMS will no longer be regulated as a financial advice service, with DIMS solely governed by the existing FMC Act DIMS regime. 

What is caught as a ‘financial advice service’?

To work out what is caught as a ‘financial advice service’ and is subject to the FMC Act, we need to work our way through the complex maze of definitions set out in the Bill.

First, a person provides a ‘financial advice service’ if regulated financial advice is given in the ordinary course of his, her, or its business. The service can be given on the person’s own account or by someone else on behalf of that person (by a nominated representative or a financial adviser).

The scope of ‘financial advice’ is similar to the current scope under the Financial Advisers Act 2008 (‘FAA’), other than the omission of DIMS (more on that later).

‘Financial advice’ includes:

  • Making a recommendation or giving an opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product.
  • Designing a personalised investment plan for a person, which is no longer a separate type of financial advice service.

Similarly, the scope of ‘what is not financial advice’ is broadly the same as under the FAA. For example, passing on financial advice given by another person continues to fall outside the scope (unless the person holds out the financial advice as the person’s own advice), with no substantive change.

Notable changes to the concept of financial advice include:

  • There is an additional catch-all exclusion category of ‘carrying out a prescribed activity’, which gives flexibility for additional exclusions to be prescribed in regulations.
  • The current ‘providing information’ exclusion has become a ‘providing factual information’ exemption, arguably narrowing its scope: information-only services will only enjoy an express carve-out if the information is ‘factual’.
  • There is an express exclusion for carrying out an instruction from a person to acquire or dispose of, or not to acquire or dispose of, a financial advice product for that person.
  • The exclusion for advice about a ‘class’ of products has been reworded, so that it is now expressed as advice about ‘a kind of financial advice product in general’, consistent with the removal of the class concept from the regime.
  • The exclusion for giving certain documents (such as those required by law) has been updated to reflect FMC Act changes, although DIMS advertisements remain outside the scope of this exclusion. 

If ‘regulated’ financial advice is provided, you have a financial advice service. To be ‘regulated’, financial advice must be given in the ordinary course of a business and not expressly excluded. Unlike the current regime, you won’t need a client involved in order for a financial advice service to be provided. Which seems a little odd…

We will be covering the full suite of exclusions in a later Financial Law Insight, but at a high level, the existing exclusions for financial advice provided by lawyers, accountants, and other specified persons, and certain types of ancillary financial advice, are set to continue.

Where do DIMS sit?

A notable difference under the new regime is that the provision of a DIMS will no longer be considered a financial advice service.
Instead, under the new regime:

  • The existing ability of authorised financial advisers (‘AFAs’) to provide a personalised DIMS under the FAA without needing to be licensed under the FMC Act regime will disappear.
  • All financial advisers currently authorised to provide DIMS under the FAA will be treated as having an FMC Act DIMS market services licence to cover that service.
  • DIMS providers will no longer be regulated under two separate DIMS regimes. Instead, any person providing a DIMS to a retail client must be licensed, and will be regulated, under the FMC Act.
  • Those providing DIMS for wholesale clients will continue to be regulated under the FMC Act, and won’t require a licence to do so.

Financial advice provided in the ordinary course of, and incidentally to, providing a DIMS will continue to be excluded from the financial advice regime.

As is currently the case, advice about entering or exiting (or not entering or exiting) a DIMS will fall outside the above ‘incidental’ exclusion and will be regulated as financial advice.

Strictly speaking, DIMS providers are able to provide DIMS without giving financial advice, meaning that they will not necessarily need to obtain a financial advice provider licence. However, if financial advice is provided that does not otherwise fall within the ‘incidental’ exclusion, a financial advice provider licence will be required.

Conclusion

The overall scope of activities subject to regulation will remain substantially the same under the new regime. However, the proposed changes for DIMS providers may prompt some to examine the type of advice (if any) they provide as part of their DIMS, as they will soon have a strong regulatory incentive to avoid giving financial advice in conjunction with their DIMS.

Start a conversation

If you would like a specific briefing on the Bill, what the proposed reforms may mean for your business, or would like advice on how the current regime applies, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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Karen Mace
Karen Mace

Senior Associate

Wellington

+64 4 496 5941

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