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Financial Conduct Bill Well Intended But Has Serious Flaws

The Financial Markets (Conduct of Institutions) Amendment Bill is well intended in helping ensure customers have access to quality financial advice and products, but that won’t happen unless some serious flaws are addressed, Financial Advice New Zealand told the select committee considering the bill today.

Chief Executive Katrina Shanks appeared before the Finance & Expenditure Committee via video link.

She said Financial Advice NZ had six main concerns: the bill’s power to regulate sales incentives, no definition of ‘fair’, confusion over whether financial advisers are included in fair conduct programmes, the definition of intermediary, the claims process, and the timing of the bill’s enactment.

She said the power to regulate sales incentives for some products gives “significant power” to the regulator and could have “devastating effects on the sector if there is not adequate legislative oversight”.

“To allocate these powers to regulations and licensing, we believe, is dangerous and has the ability to destroy the advice sector and New Zealanders’ access to financial advice, leading to an increase in the massive under-insurance issue that currently exists. This section should be removed from the bill.”

Mrs Shanks was concerned there was no definition of ‘fair’ in the bill. Its absence would be confusing for consumers who thought they had been unfairly treated. “This bill’s aim is to provide better outcomes for consumers, so the pivotal concept of ‘fair’ must be defined in it.”

She told the committee the bill was confusing around whether or not financial advisers were included in the fair conduct programmes or not, and recommended clarification that financial advisers are expressly excluded.

There was also confusion around the definition of intermediary. “The definition of intermediary appears to include financial advisers who operate under FSLAA. Clarification is required to ensure any financial adviser providing regulated financial advice under a FAP is excluded from the bill.” The section on compliance requirements of providing advice on products from more than one provider could lead to advisers limiting their range of product providers and should be removed from the bill.

The claims process also should be excluded from the bill. “As it stands, an adviser assisting or advocating on behalf of a client, particularly relating to a claim, will be included in the ‘fair conduct programme’ because this is outside the advice process. But it’s at the point of a claim that its fundamentally important advisers remain independent of the provider, and for that reason we recommend FAPs and their financial advisers be excluded when in the claims process.”

Mrs Shanks told the committee she was concerned about the timing of the legislation due to the sector already facing significant change, and recommended the bill not be enforced until the Financial Services Legislation Amendment Act 2019 has had time to settle and any unintended consequences are recognised.

“I’m confident the new regulatory regime that will flow from this legislation will provide additional focus for institutions on the principles of fair conduct and how to apply them, by introducing systems to identify, manage, and remedy conduct issues.”

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