Financial Advisers Act reform will mean changes for banks - but are they enough?

Thursday, 14 July 2016

Bank staff will have new obligations under a revamped Financial Advisers Act.

A shake-up for financial advisers is likely to mean changes to the way some bank staff deal with customers and are paid - but industry commentators say the rule changes still do not go far enough.

The Financial Advisers Act is under review, and the Ministry of Business, Innovation and Employment (MBIE) has released its recommendations for changes.

At the moment, advisers who are 'authorised' - usually those who deal with investments - have to meet a code of conduct that covers things such as putting clients first, proving their competence and using sufficient processes to ensure advice is suitable for consumers.

They also have to disclose how they are remunerated.

But those who are operating as registered but not authorised advisers, or under the umbrella of a structure such as a bank, do not have those obligations.

MBIE wants to change that and is suggesting that everyone who offers financial advice should have to adhere to a code of conduct that will set out minimum standards of conduct and competency.

All advisers will start having to disclose things such as remuneration and there will be a new obligation for firms to ensure that their staff pay is not structured to incentivise them to sell a product in a way that does not put the consumer first.

They will also have to make clear any limitations on their advice - if they can only deal with their own employer's products, for example, customers will have to know that.

'This would require a firm to recognise potential conflicts of interest – such as the role of incentives in sales and advice – and develop plans to effectively manage such conflicts of interest,' MBIE said.

The Financial Markets Authority had earlier raised concerns that some KiwiSaver providers were paying sales incentives to staff or having KiwiSaver sales targets, which did not best serve the customer.

There were also cases where customers had been sold a product, such as life insurance or KiwiSaver, when their original intention had been to organise a different product, such as a credit card or home loan. The FMA said the secondary sale often had much less care or attention or time committed to it.

'The lack of consistent competency and ethical standards may mean that conflicts of interests, such as commissions, are not being managed properly by some advisers. This has the potential to undermine consumer confidence in the financial advice they are given,' MBIE said.

But financial advisers who operate independently said the move did not go far enough.

Robert Oddy said even if there were more rules, staff who were dealing with an employer's demands were under different pressure to those who were self-employed or worked for a purely advice firm.

'Which comes first, your job when you have your boss saying you have to do this, or the consumer? It places the employee in a rather difficult position.'

Rod Severn, chief executive of the Professional Advisers Association, said anyone who was giving advice that covered anything more than a discussion of their employer's products should be a financial adviser and accountable personally for their advice, in the same way independent advisers were.

But banks welcomed the proposals.

'Banks support good quality regulation that improves consumer understanding of financial advice and the conduct and competence of financial advisers,' said New Zealand Bankers' Association chief executive Karen Scott-Howman.

'The recommendations are comprehensive and align with banks' priorities in ensuring our financial advice is fit for purpose and puts the customer's interests first.'