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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 5 – TRANSITIONING TO THE NEW REGIME
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Transitioning to a new licensing regime is never easy. With higher standards for financial advice coming into play, the transitional arrangements provide entities and individuals with a grace period to get their house in order, but with a few catches.

In Brief:

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

  • Transition period timing
  • The transitional licensing regime
  • The transitional safe harbour from any new Code of Conduct competency requirements
  • The flexibility retained for transition-related regulation-making powers
  • FSPR transitioning.

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

The transitional provisions of the Financial Services Legislation Amendment Bill contain few surprises, with most elements foreshadowed by MBIE during the February consultation process. The Bill will insert a new Part 6 into Schedule 4 of the Financial Markets Conduct Act 2013 (‘FMC Act’) containing the bulk of the transitional provisions.

Importantly, no provision had been made for ‘grandfathering’ experienced advisers: the policy position is to up-skill, up-grade, or up-sticks.

Timing

A transition period will commence when the new licensing requirement for financial advice providers kicks in (‘Transition Date’) and run for two years from that date. Based on indicative timings provided by MBIE, we expect the new code of conduct (‘New Code’) to be approved by August 2018, with the Transition Date for the start of the transitional licensing period falling about nine months later (around May 2019), as set out below:


Transitional licensing

As expected, in order to continue providing financial advice after the Transition Date, a provider of financial advice services will need to apply for, or be engaged by a firm that applies for and receives, a transitional licence.
While regulations setting out the eligibility criteria are yet to be released, the criteria for obtaining a transitional licence are expected to be very simple: being a provider currently registered to provide financial advice should get you there.
Significantly, only QFEs (including corporate entity members of QFE groups) will be able to engage nominated representatives under transitional licences. Non-QFE firms will have to wait until they receive a full licence under the new regime to do so.

The Code

A key element of efficient transition to the new regime is the development of the New Code while the Bill works its way through Parliament. The Bill contains a transitional provision giving validity to these early actions of the Code Working Group.

Duties and enforcement mechanisms

Most legislative duties and enforcement mechanisms will take effect from the Transition Date. These, and the work of the Code Working Group, will be discussed in future editions of this Series.

Safe harbour from new competency requirements under the New Code

A transitional safe harbour exception is provided for existing advisers who do not meet the New Code’s competence standards,  enabling them to continue their pre-Transition Date services. You must have been an AFA, RFA or QFE under the Financial Advisers Act 2008 to benefit from the safe harbour. The safe harbour will provide a useful grace period for existing advisers to identify and address compliance with any new competency standards, but won’t help new participants or provide relief from other obligations.

Transition regulations

The Minister is empowered to recommend regulations under the FMC Act for a wide variety of transition-related purposes until the end of the ‘three year date’. We think this flexibility could prove invaluable as the complexities of transitioning become apparent.

The ‘three year date’ ends three years after the Transition Date – one year after the transitional period ends. The overrun will provide legislators with the power to flexibly address transition-related issues.

FSPR Act 

The Financial Service Providers (Registration and Dispute Resolution) Act 2008 (‘FSPR Act’) also receives some transition attention, with those registered under the FSPR Act for financial services that are amended, repealed, or replaced by the Bill deemed not to be in breach as a result of the changes. The transition period runs for three months after the commencement of the new registration requirements, which might not coincide with the Transition Date.

Conclusion 

The transition provisions are simple and pragmatic. They essentially provide for a two year period of pre-Bill business operations, allowing time to modify business processes to meet the new regulatory expectations. However, providers must still ensure they comply with all new conduct and disclosure requirements from the Transition Date. The only relief during the transition period is from competency requirements for existing advisers, and from the need to satisfy full licensing requirements.

The FMCA Act transition process did not include a transitional licensing period, so this will be new ground for both regulator and most industry participants. It will be interesting to see how they approach the process, especially given the possibility some transitional licensees might not proceed to a full licence.

Start a conversation

If you would like a specific briefing on this or any other aspect of the FSLA 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 financialmarkets@kensingtonswan.com.

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