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FSLAB POISED TO BECOME FSLAA
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The first half of March has seen the financial advice reforms roar into life. The Financial Services Legislation Amendment Bill (‘FSLAB’) is now just awaiting Parliament to resume in early April before it becomes an Act (so the reforms will become the ‘FSLAA’), after extensive 11th hour technical adjustments through a Supplementary Order Paper (SOP). Cabinet has also confirmed its decisions on the future of advice disclosure.

In August 2017 we launched our Financial Advice Regulatory Reforms series, with each newsletter discussing a different aspect of the FSLAB reform package. Much of the previous commentary we have provided remains applicable: the disclosure announcements clear up one of the remaining areas of uncertainty for the industry, and the SOP provides some important tidying up.

In this Financial Law Insight we summarise the key aspects of the latest developments, and revisit the timeline from here.

Direction of disclosure requirements confirmed

Cabinet’s recommendations for financial advice disclosure reflect the direction that was signalled in MBIE’s consultation paper released in April 2018. The proposed disclosure requirements provide significantly greater flexibility for the new regime than current financial advice disclosure requirements. 

Key features of the recommended requirements include:

  • Targeted timing: Focusing on disclosures being provided when relevant to the customer, rather than a single upfront statement
  • Flexible delivery: Moving away from the current prescriptive forms of disclosure towards allowing businesses to determine the best delivery method for them and for their clients
  • Effective disclosure: Requiring all disclosure information provided to retail clients to use plain language and be clear, concise, and effective.

Based on the Cabinet decisions, we are likely to end up with a three-tiered approach to disclosure involving:

  • entity-level information to help consumers find financial advice that meets their needs – to be disclosed on the provider’s website
  • information to help consumers decide whether to proceed with the firm or individual – to be provided once the nature and scope of the service is known
  • information to help consumers decide whether to follow the advice they have been given – to be provided no later than the time the advice is given.

Overall the disclosure position is as expected, with the major challenges for providers likely to be ensuring:

  • they have clear business processes and rules for when, and what, information is provided to clients
  • disclosure meets the ‘clear, concise, and effective’ regulatory expectation
  • clients are not smothered by multiple disclosures out of an abundance of caution
  • disclosures for ongoing advice relationships are updated when required.

The proposed disclosure settings take a more principled approach to disclosure, putting the client (rather than compliance) at the heart of disclosure requirements. The current prescriptive approach has been criticised as promoting a tick-box approach which has been counterproductive and has rarely met clients’ needs.

A lot of effort went into the design of the current requirements, with the best of intentions. Only time will tell if the new rules will produce a more effective outcome. We are quietly optimistic.

Supplementary Order Paper changes

Most of the changes to FSLAB proposed by the SOP are technical or clarify matters, although not all of the changes have been well signalled. The core changes include:

  • providing for licence conditions to be imposed on financial advice providers to prevent or restrict financial advisers from being engaged by multiple financial advice providers
  • clarifying that advice duties and obligations only apply where regulated financial advice is provided to clients – and that such duties and obligations will not apply in respect of advice given internally
  • extending the life of transitional DIMS licences granted to AFA DIMS providers under the Financial Advisers Act to two years after the commencement of the transitional provision
  • clarifying that a person may demonstrate competence, knowledge, and skills in ways that are not expressly set out in the new code of professional conduct for financial advice services (‘Code’)
  • removing the complexity caused by the original proposal for financial services sub-categories on the FSPR: prescribed sub-categories will no longer feature
  • providing more flexibility for when a financial adviser may be deregistered if they are not engaged by a financial advice provider
  • providing that regulations under the FSPR Act can prescribe additional information to be collected from providers as part of their registration application
  • providing for the Registrar of FSPs to share information with the FMA and Reserve Bank of New Zealand.

Offshore experts

A few aspects remain unclear. A particular concern we have is that there still seems to be no streamlined way for offshore experts to come to New Zealand and share their wisdom on specific opportunities with retail New Zealand. No changes have been made to the relevant statutory provisions to facilitate this expertise being made available. Market participants will be left to rely on new Regulations and/or Exemptions to make that work.  Read more about our concerns here. Existing challenges look set to remain.

Analysts and internal advice

Our submission on FSLAB when first introduced highlighted the need to include a requirement for there to be a client involved before regulated financial advice arises. We are pleased to see that submission will make its way into FSLAA. However, it isn’t a complete home run for analysts and other internal advisers. Financial advice providers still need to take care when relaying opinions and recommendations of inhouse analysts to the outside world, to ensure those views are expressed to clients in a manner permitted by law.

Limit on advisers working for multiple FAPs

Under FSLAB, there were no restrictions contemplated for financial advisers being aligned with (and providing services on behalf of) more than one financial advice provider. We have previously identified this possibility here, and submitted on the issue. Concerns raised include the risk of consumer confusion about who the adviser is working for, and/or ineffective redress for poor advice in terms of liability and complaints-handling.

The SOP added a provision that would allow an additional condition to be added to a provider’s licence, or additional Regulations, which would prevent or restrict a provider from engaging an adviser who is engaged by another provider.

Whether this works effectively in practice will depend on FMA’s policy in applying it. For now, those anticipating becoming financial advisers under the new regime can no longer confidently assume they will be able to advise on behalf of multiple licensees, if that had been their thinking. The same goes for providers planning on using financial advisers engaged to provide financial advice on behalf of other providers.

Timing

The last possible commencement date for the new regime has been pushed out a year to 1 May 2021. The new rules are still expected to go live in the second quarter of 2020, but the later go-live date allows breathing room for any slippage or unforeseen events.

At the time of writing, we had yet to see the final form of the Code that was recommended for approval by the Minister earlier in March. The secrecy of that content is a bit cloak and dagger, but we are not expecting any substantial changes. Once the Code has been gazetted, the clock is well and truly running towards the FSLAB regime’s implementation.

The Cabinet Paper outlining disclosure requirements reconfirms the separate workstream in train to remove certain sales incentives. This, along with mechanisms to address unspecified ‘issues across the broader financial services sector’, will be separately addressed outside of the targeted framework of the FSLAB regime.

This workstream will play out in a consultation paper on additional measures to ensure consumer protection, expected to be released in May. This is shaping up as another significant piece of reform for the industry to engage with. The end outcome will include a new mechanism for regulating financial service provider conduct and culture. That’s unlikely to change the detail of the financial advice regime, but it will undoubtedly influence how it plays out.  

Conclusion

FSLAB is now well and truly in the home straight. Somehow, once passed into law, we don’t think the new acronym of FSLAA will be as catchy, and this fundamental overhaul of our financial advice regime will be forever known as the FSLAB reforms.

Financial advice providers can now turn their attention to getting ready for the new regime, with the possibility of a last-minute derailment of FSLAB largely put to bed. Unlike the implementation of the current regime, it’s unlikely there will be any fundamental changes in direction for the FSLAB reforms before they go live. 

If you would like specific briefing on this or any other aspect of financial advice reforms or what they may mean for your business, or would like advice on planning for the new regime, please contact Catriona Grover, David Ireland, Nicole Xanthopol, Karen Mace, Megan Mcluskie or Nick Beresford, or email the team at bankingandfinancialmarkets@kensingtonswan.com.

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