In this Financial Law Insight we unpack some of the detail of the new regulations, explore what the draft disclosure requirements might mean for financial advice providers in practice – and identify some of the key points we will be submitting on in a couple of weeks.
The regulations just released provide the machinery to implement the Financial Services Legislation Amendment Act 2019 (‘FSLAA’). This includes finalising fees and levies. These have been set at a higher level than previously signalled, but the overall framework for fees and levies is as expected.
The immediate timing consequence of the latest regulatory package is that transitional licensing for financial advice providers (‘FAPs’) is being pushed back from 4 November to 25 November 2019.
Why delay transitional licence applications? Regulations can’t take effect until at least 28 days have passed from the date they are notified in the New Zealand Gazette. Issuing transitional licences required an adjustment to financial service provider registration mechanics. That means the original start date proposed for transitional licensing of 4 November couldn’t be met, because the regulations necessary to support transitional licensing have only just been gazetted.
The other headline is that 29 June 2020 has been locked in as the date when all remaining provisions of FSLAA come into effect. Previously, all we had were policy announcements that the new regime would come into effect in June, and a pot pourri of provisions taking effect from April this year to enable everything to be put in place. The new code of professional conduct for financial advice services has been finalised to come into effect from the start of June, but there is no ability to apply it in practice until the rest of FSLAA comes online.
We now have 29 June 2020 as the date by which all FAPs will need to have their transitional licence issued, and have their systems and processes in place, if they are going to provide regulated financial advice in the new world.
The FMA is still encouraging would-be FAPs to apply early, despite the three week delay in its ability to accept transitional licence applications. The official line for that encouragement is to ensure you have your licence in place before the start of the regime. A transitional licence should be a doddle – the FMA has already indicated it expects to process most applications within two to three days. So why rush it?
We suspect there is a very real risk of a bottleneck in the FMA’s ability to process applications in time if too many FAP applicants leave it until the last minute. Will systems cope come June? Hopefully, but do you really want to take the risk of finding out? No transitional FAP licence in place by Friday night 26 June 2020, no provision of regulated financial advice to retail clients come Monday morning 29 June!
Consultation delay consequences
One of the more frustrating aspects of the timing of the regulatory developments has been the delay in releasing the draft disclosure regulations. When Cabinet decisions were released in mid-March, consultation was expected to take place in Q2. We are now going to be well into the New Year before those regulations are finalised. That leaves very little time for FAPs to ensure they have everything in place to reliably operationalise the new financial advice disclosure obligations.
The policy line is that the timeframe between finalisation of the disclosure regulations and their coming into effect at the end of June shouldn’t be a problem, given that what has been proposed simply gives effect to the Cabinet decisions made back in February.
We beg to differ. Yes, the draft disclosure regulations currently in circulation for consultation are consistent with the earlier Cabinet decisions, as you would expect. However, the way they will operate in practice is quite complex, with the delay in finalising the details likely to throw up quite a few challenges for some. The problem now is that there is minimal time available to finesse the draft regulations to iron out some of the wrinkles.
We therefore welcome the possibility of transitional provisions being provided to allow providers time to meet the new disclosure requirements. No clues have been offered as to the possible shape of any transitional relief that MBIE might consider. Some form of disclosure will inevitably be required, but at least the door has been left open. The challenge for the financial advice sector is to come up with a rationale for transitional disclosure that doesn’t undermine the policy objectives of the new regime.
Disclosure proposals in practice
The Cabinet decisions for financial advice disclosure sounded fine in theory when they were made back in February. In essence, there will be four distinct types of disclosure, all worded and presented in a clear, concise, and effective manner and given prominence:
A staged approach to ensure disclosure information is conveyed as it becomes relevant to the client is expected to enable clients to receive the information they need when they need it and enable businesses to develop disclosures to fit within existing processes. Has MBIE delivered on that expectation?
The draft disclosure regulations may raise more questions than answers. What has been proposed reflects the four-pronged approach to disclosure contemplated in the Cabinet decisions, and there’s a lot to like about some of the flexibility built into the rules. However, if the feeling is that we currently have an ailing dinosaur approach to disclosure, our concern is that we may just create a modern monster in its place.
What’s the problem?
If FAPs are prepared to embrace the spirit of the regime and take a pragmatic approach to discharging their disclosure obligations, then it should all work fine. That relies on being willing to take a purposive approach to applying the rules in practice, and not getting hung up over the strict letter of the new requirements. That’s a big ask in the absence of clear assurance as to an equally pragmatic approach being taken to enforcement.
The wide range of financial advice interactions that occur was always going to present a challenge for producing a scalable set of disclosure requirements. The proposals should work ok for long term, one-on-one relationships between individual adviser and client, but might be hard to apply for mass market interactions and de-personalised advice models.
We think there is still a lot of extraneous information contemplated, at both the initial and additional information disclosure stages, that clients really don’t need. We saw the idea of having information publicly available on a website as a real positive of the February Cabinet decisions, enabling advice-specific disclosure to be de-cluttered. In our view, not enough has been made of the opportunity presented. Disclosure risks being as impenetrable and ineffective as ever, only now with an even more challenging regulatory requirement to make it clear, concise and effective.
It’s advice scenarios that are limited or temporal in scope or nature where we see the greatest challenge in applying the proposed requirements in practice. All appears geared towards the personalised, dedicated relationship end of the market, without really catering for one-off engagements or for what is currently classified as ‘class’ advice.
For all advice scenarios, the proposed details of the requirements throw up a number of questions, such as:
Our message for would-be FAPs is clear. Don’t just sit back and assume the new disclosure requirements will work effectively for you and your clients. Work through all aspects of your intended financial advice model and mock-up what disclosure might look like in practice. If you don’t like the outcome and what it may mean for the processes you will need to put in place, submit.
And if you think more time is going to be required to get everything in place, push hard for some form of transitional relief. Even relief from the proposed record-keeping requirements for FAP licensees could go a long way in helping FAPs manage the regulatory burden coming their way. Releasing draft requirements for consultation in Q4, several months late and just 8 months out from them needing to be applied in practice, provides a strong case for seeking more time to comply with the full force of the disclosure requirements, whatever the final details might be.
The deadline for submissions on the disclosure regulations is Friday 8 November 2019. Regulations should be finalised by the end of the first quarter of 2020 following the consideration of submissions. That doesn’t leave any time for MBIE to do much more than tinker with the detail of what has been proposed. And if we get to April and the disclosure regulations have yet to be finalised, you have to question the wisdom of locking in a 29 June 2020 commencement for FSLAA.
Start a conversation
If you would like a specific briefing on the proposed disclosure regulations and what they may mean in practice for your business, or would like to discuss any aspect of the FSLAA reforms, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Pauline Ho on +64 9 909 6345, Megan Mcluskie on +64 4 498 0876 or Nick Beresford on +64 9 375 1150, or email the team at email@example.com.