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SIFA pans second draft of financial advice code

SIFA pans second draft of financial advice code

By Jenny Ruth

Nov. 14 (BusinessDesk) - A group representing independent financial advisers says the latest attempt at a code of conduct for the sector is “both lacking in content and platitudinous.”

SIFA says it’s pleased the financial advice code working group listened to criticism of its first draft and “has decided not to write the mandatory ‘how to run your practice’ bible.”

However, SIFA says it’s just as critical of the second draft as it was of the first, although for different reasons.

“The overwhelming tenor of our submission is that the draft code is both lacking in content and platitudinous,” SIFA says

The first draft, produced earlier this year by the working group, was greeted with an avalanche of criticism because of concepts such as ensuring “good advice outcomes” which implies any investments recommended would perform well, something no adviser can guarantee.

Other submitters said the proposed code was too prescriptive and some worried that it might contradict existing or proposed legislation.

A number also took issue with the requirement for advisers to have a degree or equivalent qualifications – financial advisers under the current legislation have authorised financial adviser qualifications while other types of people who provide different kinds of financial advice, such as mortgage brokers, are simply registered financial advisers.

SIFA says the working group appears to have abrogated its duty as set out in the Financial Services Legislation Amendment Bill because the latest draft code makes “high-level statements in a number of important areas but left the flesh to other regulatory entities.”

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That includes leaving the definition of what constitutes continuing professional development to professional bodies, even though there is no obligation for financial advisers to belong to a professional body.

A number of things SIFA expected to be in the new code have been left to the Financial Markets Authority to sort out through the licensing process.

And competence assessment is "effectively left largely to an unknown assessment of prior learning capacity."

SIFA also takes issue with how the code proposes to deal with replacement life insurance sales, an area the FMA has highlighted as being characterised by churn for the sake of advisers’ profits rather than the needs of consumers.

The proposed code presents a case study in which adviser Beth is recommending that a client replace an existing life insurance policy that provides similar benefits to the existing one.

SIFA calls this case study “a limp-wristed attempt” to handle the topic.

“The replacement advice case study is seriously defective. The obvious question to ask is ‘if the new policy provides similar benefits to the existing policy, why would Beth even consider switching?’” SIFA says.

“We think …. Beth should be required to explicitly compare the benefits and costs of each of the alternatives and point out what the client might be given up,” it says.

“We think regulators continue to turn a Nelsonian blind eye to the issue in their tacit approval that there is no obligation on the adviser writing the new policy to enquire as to whether there is an existing policy that will be replaced.”

And rather than recommending advisers should “where practicable avoid conflicts of interest,” the code should cover situations where a conflict is actually present and deal with the adviser’s statutory duty to give priority to the client’s interests.

SIFA would like to see the prohibition on borrowing from or lending to a client added back into the second draft.

In dealing with the need to give financial advice that is suitable for the client, the proposed code uses the example of a bank teller advising on the relative merits of a savings account and a term deposit.

SIFA says this example is trivial and “we have always thought it crazy that this simple transactional information should be caught under advice.”

The organisation continues to grapple with the question of who can call themselves financial advisers, particularly those who work for vertically integrated organisations, such as banks, that both offer investment advice as well as providing investment products.

“We doubt that many financial advice providers who are licensed to employ nominated representatives to provide advice on their behalf will actually give such persons the job title ‘nominated representative,’” SIFA says.

“They won’t be able to call them financial advisers (except individuals who are separately qualified as financial advisers), but we reckon the public will be faced with a plethora of job titles – which has the great possibility of simply leaving the public confused,” it says.

“Will they know what an ANZ mortgage coach, a BNZ investment consultant or an ASB KiwiSaver specialist, for example, are under the law? We sincerely doubt it.”


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