This is more than just a backgrounder for future editions in the Series. Understanding these concepts is critical to coming to grips with the financial advice reform proposals, and there are a few surprises tucked away in the detail.
The new key concepts to be familiar with include:
The first of our Series of Financial Law Insights on the financial advice reforms providing an outline of the Bill can be found here.
Much noise has been made about the proposals to declutter the terminology and concepts involved in the regulation of financial advice. The category 1 v category 2 financial product distinction is gone, as is the distinction between authorised and registered financial advisers. The class v personalised financial advice distinction will be removed from the legislation, but we will discuss its likely resurrection in a future edition in this Series. The special status enjoyed by QFEs is also gone, replaced by universal entity licensing.
So what are the new key concepts?
Financial advice providers: the key players in the new game in town. These are people who, in the ordinary course of their business, engage one or more individuals to give regulated financial advice on their behalf, or who give regulated financial advice on their own account. Such a person is regarded as providing a financial advice service. They must be licensed by the FMA to do so if any retail clients are involved.
Financial advice: looks the same as the current concept, only it’s different. Someone gives financial advice if they make a recommendation or give an opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product, or if they design an investment plan for someone that meets prescribed criteria. One key change is the old concept of ‘investment planning service’ being absorbed within the concept of ‘financial advice’. ‘Regulated’ financial advice is financial advice given in the ordinary course of business that falls outside the exclusions set out in the Bill (more on those in a future edition in this Series). So the other key change is you don’t need a client to be involved for regulated financial advice to be given.
DIMS or Discretionary Investment Management Service: this concept remains. However, a financial advice provider licence will not cover the provision of a DIMS. Financial advisers currently authorised to provide DIMS will be treated as having a DIMS market services licence to cover that service.
Financial adviser: an individual registered in relation to a financial advice service, other than a financial advice provider. This designation rolls the current AFAs and RFAs together to be regulated under the same umbrella. Individual financial advisers will not be licensed or authorised in their own right. Rather, they will need to operate under the umbrella of a licensed financial advice provider. Financial advisers can’t be civilly liable for any contravention of a duty provision under the Bill, but might be subject to disciplinary action or deregistration or suspension.
Nominated representatives: at least, that’s what they’re called this week. This is the new regime’s equivalent of a QFE adviser. They don’t need to be registered in their own right, but must operate under the umbrella of a financial advice provider licence. Concerns raised in the consultation process about the lack of transparency and individual accountability of this group have not been addressed. Nominated representatives will be neither civilly liable for contraventions nor liable for regulatory disciplinary action or penalty. The onus will fall on the financial advice provider to make sure nominated representatives behave.
Brokers and broking services: these terms are gone. Instead, the new regime will regulate something called client money or property services, with custodial services being a subset of that. In a cunning move to avoid further controversy, the drafters of the legislation have not attempted to replace the ‘broker’ term, instead describing those previously defined as ‘brokers’ as persons who provide a client money or property service. Catchy. As with financial advice services, a client money or property service will be a regulated client money or property service if it is not specifically excluded.
Code or Code of Conduct: this is short for the ‘code of professional conduct’ contemplated in the new schedule 5 to the Financial Markets Conduct Act. It will provide for minimum standards of professional conduct that must be demonstrated when regulated financial advice is given. It will replace the current Code of Professional Conduct for Authorised Financial Advisers when the Bill comes into effect in 2019. A Code Working Group has been established to develop the Code, with that group morphing into the replacement Code Committee when the Bill comes into effect.
The Code will provide the rule book for licensing financial advice providers, and will play a far more significant role in the new regime than is played by the current code for AFAs. Rather than being an occupational code, it will be a service code needing to cover all forms of advice. The debate has already started about how concepts of ‘professional’ conduct can be applied in an entity or digital setting, and we will delve into that debate in a future edition in this Series.
Of course, there are a raft of other terms that will play a part in operationalising the new regime, such as the retail v wholesale clients distinction. However, the above terms are the ones we have identified as being critical to understanding the new regime, and to future editions in this Series.
Start a conversation
If you would like a specific briefing on this or any other aspect of the Bill or what the proposed reforms may mean for your business, or would like advice on what you can do now to plan for the new regime, please contact Catriona Grover, David Ireland, Hayley Miller, Nick Summerfield, Karen Mace, Tom McLaughlin or email the team at firstname.lastname@example.org.