In this third in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss some of the key factors to consider in deciding whether to become a licensed financial advice provider, and if so, how to structure your business. These factors include:
The first in our Series of Financial Law Insights on the financial advice reforms provides an outline of the Bill and can be found here.
Also in the Series so far:
2 - Key Concepts
The regulatory hurdle you currently need to jump to set yourself up as a provider of wholesale and/or generic financial adviser services, or as someone who employs financial advisers, hardly requires you to lift a foot. Register on the FSPR, pay some relatively modest fees and levies, and you are pretty much done.
Track forward to the new regime, and that’s all going to change. The hurdle to providing financial advice services in the retail space is about to get a whole lot higher. More strategic thought about playing in that space, and how best to go about it, is required.
Do I need to become a FAP?
The first question to ask is whether you actually want to be in the business of providing financial advice to retail clients. If that is a core part of your client value proposition, whether at an entity level or through individuals you employ, you are going to need to get yourself licensed as a financial advice provider.
Why will this become a more significant question? Registering to provide generic/non-personalised financial advice ‘just in case’ makes sense when there is not much involved. Seeking a licence – and complying with its terms – is a different ball game. Those that have previously just dabbled around the edges of financial advice have to decide whether they are in or out – dipping your toes in the financial advice waters in the future will carry with it a hefty regulatory burden.
Do I engage financial advisers or nominated representatives?
Once you have decided to become a financial advice provider, the next conundrum is to decide what form your financial advice proposition will take. If you are just providing generic or automated financial advice at an entity level, it is possible that you won’t need to engage any registered financial advisers or nominated representatives at all. It’s a pretty constrained financial advice model, but workable if your personal engagements with clients are minimal.
The bigger question that most prospective financial advice providers are grappling with is the extent to which interactions with clients will be fronted by financial advisers who are individually registered and accountable, as opposed to being fronted by unregistered nominated representatives. Liability and the extent of your control over the advice process will be key considerations.
Regardless of how you answer that question, it is likely that a proportion of your workforce will be neither financial advisers nor nominated representatives, and therefore can’t give financial advice on your behalf. How is your licence application going to deal with that?
Commentary to date suggests that the more you are reliant on nominated representatives to deliver financial advice on your behalf, the more extensive your policies, procedures, and controls will need to be. FMA will look to see these demonstrated during the licensing process. It’s also possible that licence conditions might limit the type of financial advice nominated representatives can provide.
The full extent of those consequences will not be known until FMA has developed its licensing guide. However, what seems clear for now is that developing a nominated representative-reliant model is making yourself a potentially uncomfortable bed to lie upon, even without taking into account the increased risk of exposure to penalties that arises when using nominated representatives.
So what are the alternatives?
For product providers who currently provide financial advice as an occasional part of their client value proposition, the question becomes – do you really need to do that? There are a number of exclusions available that we will cover in a future edition in this Series, but if you want to go outside those exclusions, is the financial advice service in question best delivered by the product provider, or by some other entity?
For a financial adviser business, options to consider includes:
If you are a service provider or dealer group office, the options become even more interesting. Do you just focus on supporting those who decide to become licensed financial advice providers, or do you go the next step and offer a financial advice provider licence umbrella yourself as an extension of your services?
The more you consider the proposed reforms, the more questions you come up with. That’s why the time to think about these questions is now, before the Bill goes off to Select Committee and the new Code of Conduct is developed. Otherwise, you risk not identifying the issues that will be critical to your future business success until it is too late to influence their final form.
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 on +64 4 498 0816, David Ireland on +64 4 498 0840, Hayley Miller on +64 9 915 3366, 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 firstname.lastname@example.org.