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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 7 – THE CODE OF CONDUCT AND CODE WORKING GROUP

Providers of financial advice services will soon be subject to a new professional conduct regime. The Code Working Group (‘CWG’) has a broad mandate to prescribe the standards that must be met when regulated financial advice is provided. But just how far can they go?

In brief: 

In this seventh in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss the mandate of the Code Working Group to draft a new Code of Conduct for financial advice, including: 

  • the wider application of the new Code to financial advice 
  • the ramifications of the Code applying to entities and not just individuals
  • key considerations and challenges for the Code Working Group.

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 

In full:

The current code of professional conduct only directly applies to AFAs (Authorised Financial Advisers). QFEs (Qualifying Financial Entities) are also expected to ensure their clients receive protections of a similar standard to that provided by AFAs when their QFE advisers give personalised advice on category 1 products. The Financial Advisers Act doesn’t require anyone else to have regard to the current code. 
As a result, a large number of individuals and entities that provide regulated financial advice services are outside of the ambit of the current code – an uneven playing field, if ever there was one. 

So what’s changing?

The CWG has been appointed to develop the draft Code pursuant to Ministerial appointment, in anticipation of the Bill coming into effect. This is intended to facilitate the new regime being put in place in a timely and orderly fashion. 
The development of the Code by the CWG has the advantage of building on the work done over the past eight years in developing the current code. However, there are key changes in the new regime that mean the work and focus of the CWG will be quite different to that of the current Code Committee. 

What standards does the Code need to cover?

At a high level, the minimum standards of professional conduct that the Code must prescribe are substantially the same as under the existing code, being standards of:

  • general competence, knowledge, and skills
  • particular competence, knowledge, and skills that apply in respect of different financial advice and financial advice products
  • ethical behaviour
  • conduct and client care.

The major differences from the existing code are the requirement for standards of particular competence, knowledge, and skill, and the express inclusion of minimum ‘conduct’ standards. 

he Code also has to provide for continuing professional training, and ways to demonstrate competence, knowledge, and skill. This last bit will be new ground for the CWG. What isn’t new is a power to limit or modify standards or provide for separate standards for one or more periods of transition. The CWG’s enthusiasm for making use of that flexibility to complement the statutory transition arrangements will no doubt be teased out in its consultation process.

What are the key challenges for the CWG to overcome?

The scope of the Code is expanded so that it will differentiate between different kinds of financial advice, different financial products, or other circumstances the CWG may consider. So while the old personalised-class advice and product categorisation divides are gone, the CWG is expected to differentiate between kinds of advice and products in setting standards, so it will need to make up its own rules on how that will work. 

In addition the new Code will be a service code governing financial advice, rather than an occupational code for AFAs. It will apply to financial advice provided by an entity, not just financial advice provided by an individual. Just how you set ‘professional’ conduct standards for an entity remains to be seen. 

The current code is allowed to set different standards for different ‘classes’ of AFA. The CWG, however, is prohibited from limiting the types of advice that someone may give just because he or she is a Nominated Representative. 

In preparing the Code the CWG is required to consider the main purpose sections of the Financial Market Conduct Act and the new purpose section set out in the Bill, requiring the Code to ensure both the availability of financial advice and the quality of financial advice as well as New Zealand’s relevant international obligations. 

The CWG has a more specific set of consultation obligations in preparing the new Code than was required for the current code. It will also need to satisfy the Minister that it has discharged those obligations. The CWG is also required to prepare and publish an impact analysis to describe how standards impact on the matters referred to in the previous paragraph. There is a statutory acknowledgement that there may be trade-offs involved in doing so. 

Conclusion

The new Code won’t just be a bible for AFAs to live by, but a Code that will regulate the business conduct of all those giving financial advice. It remains to be seen just how high the CWG will set the bar for delivering financial advice, and how similar it will end up being to the current code. 

Key dates

The CWG is expected to release a concepts paper for consultation over the final quarter of 2017. A preliminary draft Code is expected to be released for consultation in March/April 2018. From there the process is unclear, but we are likely to see at least one more version of the Code consulted on, as well as ongoing opportunities to have input into the Code’s development over the months ahead. 

The CWG won’t be able to finalise the Code until after the Bill comes into force around the middle of 2018, to ensure the Code reflects the final form of the legislative provisions. There is a lot of water to flow under the bridge before we get to that point.

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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