Good news: Regulators DO trust some advisers

by Tony Vidler.

Should Regulators trust some advisers to do the right thing? Or none of them?

This is the intriguing question which will be debated behind closed doors in NZ in the immediate future I am sure, following the latest round of financial services reform in Australia. The "Future of Financial Advice" (or FoFA as it has become known) has been a work in progress for three years, as Australian regulators do their latest bit to drive higher standards of client care and professional standards in their market.

Naturally there have been a number of contentious points there, and the usual mix of good intent mixed in with impractical rules, that have created debate and strong lobbying along the way.

One of the more contentious proposed rules from an advisory perspective has been the "opt-in" provisions. As is often the case, the rule-drafters have been driven to solve a genuine industry flaw (that of consumers paying ongoing costs for advice and/or service from within product fees or commissions, without necessarily being aware of it, or even receiving advice or service from those receiving the money). The method they chose to resolve the problem though was impractical, unfair and a logistical headache for adviser firms to implement - in the industry's view.

"Opt-in" requires the adviser to obtain periodic ongoing written consent from clients that they want the adviser to continue the relationship and receive agreed remuneration.

In principle that seems a fair thing. Though in practical terms everybody knows that consumers are just humans, subject to the same whims and emotions in general terms. The levels of client satisfaction and desire to stay the course with anything can be driven as much by the state of the economy or investment markets, whether we won the Rugby World Cup, or whether our boss is a complete twit, as much as whether the adviser is doing the job that they agreed to do in the way it was agreed to be done.

Logistically, the seemingly simple matter (in theory!) of getting the clients to confirm in writing once per year that they are happy to continue paying fees for ongoing advice, would be difficult. People are busy, and just forget to follow through on things. People go away, get sick, or just don't open their mail for weeks at a time. Clients - believe it or not - are often re-investing funds or sticking with the same product automatically year on year because they didn't bother to read a letter in time. And of course included within the "opt-in" provisions was a big stick for the adviser who did not obtain the written client consent within the required timeframe - meaning that it would become far too dangerous for an adviser to continue receiving fees or carrying on the relationship if that written consent was not obtained each year.

Logically one would have to expect that over time advisers would be having to disengage from otherwise happy professional relationships simply because they had not obtained the required consent at the right time in any given year. That cannot be a good outcome for consumers generally.

After much lobbying and debate, the opt-in provisions were amended to a 2 year period, instead of being an annual requirement. That change was an improvement to be sure, but all the flaws with this method of achieving client consent and aligning the professional obligations with consumer benefits remain.

In the last week though there has been an interesting twist. Interesting - and beneficial - for those advisers committed to working to the highest professional standards, and who are willing to pay the price to do so.

It should send a shiver down the spine of the many advisers who do not belong to a professional association, or who think they are fine just motoring along obeying the basic rules of the road that the FAA delivered.

Why? "Opt-in" passed, and has been included in the legislation in Australia. What happens there - particularly in terms of improving the immediate consumer experience in financial services - will influence regulators thinking here.

The really interesting point though: there is an exception to the opt-in provisions in Australia. The exception is that financial planners (in the widest sense) who are signed up to an approved professional code of conduct managed (with rigour) by a professional association are given a class exemption from obtaining the opt-in consents from individual clients.

In plain english: if you are an adviser who belongs to a genuine professional association, with high standards and the ability (and will) to enforce them, then you are trusted to do your job well and are relieved of some of the rules aimed at fixing the cowboy end of the market.

This is an excellent outcome for the many thousands of advisers who have invested in higher education, voluntarily operated at higher standards than the laws required for many years, have exposed themselves to the risks of getting it wrong in working to the highest standards - and who have demonstrated their commitment to doing their work as best they can.

This principle of applying tough rules across the market, yet providing class exemptions for segments of the market that have already demonstrated they have earned the right to self regulate to a degree, is sensible and practical. It is also the best possible method of ensuring that advisers who do operate on the fringes in terms of the business practices or standards become aware that there is actually real business benefit in voluntarily operating at higher standards than the minimums required by law.

We can only hope at this stage that this principle gets imported from Australia - that there are ways of raising standards generally, while recognising and trusting those who have already demonstrated their willingness to work at the highest standards. That would be good news for the local market.


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Financial Markets Authority get it right

 by Tony Vidler.

The Financial Markets Authority (FMA) just gave every NZ adviser a happier Christmas with an excellent piece of guidance to the entire financial services industry.  Give them a bow, and throw a bouquet - they just got a big deal very right.

The industry has been seeking guidance on a number of issues since the advent of new regulations, which came into effect July 2011.  The main piece of legislation governing advice is the Financial Advisers Act, supported by the Code of Professional Conduct ("The Code").  Both are largely "principles" based, as opposed to being overly prescriptive and full of "thou shalts" and "shalt nots".  A laudable and eminently pragmatic approach to creating lasting legislation generally - though it tends to get a bit awkward to apply in its early stages.  The key problem is the very people it applies to are initially left to try and interpret how a principle works and what the regulators or judiciary might think it means somewhere in the future.

In time, a principles based regime tends to be more robust and better able to cope with an evolving society.  On one of the more problematic areas for all market participants is understanding how a theoretical principle applies in the real world however.  Principles don't always translate easily into the day to day actions of human beings, continually changing their minds or wanting things done, like, yesterday.  But theory is grand.  In the theoretical world bumble bees cannot fly.  But they do.  So much for theory.

So today the FMA issued a Guidance Note on the difficult issue of "analysis before recommendation".  First big thumbs up is for issuing a well laid out and very clear guidance note.  The second - and way more important big thumbs up - is for the approach taken in interpreting the law and the Code.

It is practical.  It recognises how the industry actually works in interacting with clients.  It recognises that it is about agreeing to what the client wants.  It places responsibility fairly where it should be when external professionals take on part of the work in research. In fact on this point, it is more reasonable than anyone expected.

It is a great piece of work.  Incidentally, as an industry we have been quick to criticize the regulators.  As an industry we should be equally quick to congratulate them on a very useful and timely piece of work that indicates they have been paying attention and understand (at least some) of the issues advisers and industry are grappling with.

Let's cut to the chase on this particular piece though.  Code standard 6 says that the AFA must "make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation...."  Collectively we have tried to determine the extent of analysis expected, and what evidence would constitute a "reasonable basis".  We have been guided by rulings in foreign jurisdictions, and drawn conclusions from those.

A school of thought had evolved - and been blatantly promoted for commercial gain in some sections - that this meant the AFA must exhaustively analyse every possible product choice in the universe that might be a viable solution for clients.  A ridiculous interpretation - it was never going to be applied that way.  That would logically lead to paralysis through analysis.  Nobody would ever conclusively finish their research and clients would have died of impoverished old age waiting for the research and analysis to determine suitability.  As silly as this line of thought was, it was gathering momentum in the absence of better information.

The more rational industry commentators focused on elements such as a product needing to be "suitable" or "fit for purpose".  This is effectively precisely where the FMA have drawn the appropriate line.  

Better yet, they have recognised that what is suitable for one client is dependent upon the scope of service agreed to with the client, and the nature of the adviser-client relationship (para 17; Guidance Note).  This is a really significant point.  It provides context around what is considered to be reasonable work by the adviser, in each individual client situation.

They go on and provide some certainty regarding the positioning of independent research, or legal documents provided by issuers.  The responsibility for the veracity of the information provided by those documents sits firmly with the issuers, precisely as it should.  They have pragmatically considered the situation for dedicated adviser forces - those in dealer groups or aligned distribution channels - and determined that it is actually reasonable for the adviser to rely upon the technical assessment done by other and more suitably qualified professionals specialising in that work.  Hooray on that point.

FMA:  you have hit a home run here in my view.  Do more of it.  Provide more Guidance Notes on how you think the law should be interpreted and applied.  Especially do more if you maintain this pragmatic and thoughtful approach to making it work to promote and develope fair markets that engender confidence by all stakeholders.

Advisers:  Read this guidance, and digest it.  It is very helpful and should provide assurance that if you do diligently do research and know your products, and use them in a manner that is fit for purpose and suitable for your clients, then you have little to fear.  You can legitimately rely upon other professionals assessments of products, and you can trust that the information put into legal documents by issuers is accurate.  This frees the adviser up to actually focus on being excellent in their field of knowledge and focus upon the client.

That will do me for a positive message at the end of a challenging year, and hopefully set the tone for 2012 and beyond.

Merry Christmas one and all.

(The link to the full FMA Guidance Note is

http://www.fma.govt.nz/media/511496/seccomdocs-_191806-v2-fma_guidance_code_standard_6_d__2_.pdf


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Regulators Report card: "Should do better"

 by Tony Vidler.

What should we expect a regulator to regulate? 

We (advisers and other industry stakeholders) presume that the regulators role logically is to administer the law (and regulations relating to the implementation of the law that the regulators themselves write) that they have been tasked to manage. 

It would seem to follow therefore that they must know that law and their regulations. 


You'd think they should have a clear idea as to how they intend to apply, or interpret, the rules and regulations on the sector they regulate.

So why isn't that quite happening?

At the outset and for the record, this is a not an anti-regulator rant.  In the main I have felt that the various departments and government bodies involved in implementing new regulation in the New Zealand financial services sector have done a difficult task pretty well thus far as I have dealt with them.  I don't have any particular issues with how the FMA, or the Companies Office, or Ministry of Consumer Affairs (etc, etc) have gone about their jobs.  Quite the opposite generally.  My involvement with each of these groups at different times have been polite, business-like, engaging and friendly.  They are generally staffed by very able people that take their roles seriously, and who are trying to do the best they can from what I have seen.  The report card (from my perspective) is generally positive.

Despite that, there is a really awkward and dissatisfying element to regulation work thus far causing disproportionate frustration.  The lack of "market guidance" is beginning to look like the most significant "cost of compliance" for industry, and is a source of teeth-gnashing that could so easily be avoided.

Most industry participants understand and accept that strict interpretation of new laws will largely come about as a result of future court actions providing case law.  That is not a regulators job to pre-empt, as it is the domain of the courts to strictly interpret the meaning of law when that meaning is contested.  Taking it a step further back from that, we generally accept also that a regulator may not wish to pre-empt the outcome of their own market complaints or disciplinary functions by advising the market of expected behaviors or business methodology.  Perhaps an arguable point there to many, but one I am personally willing to give regulators the benefit of the doubt upon, as their position makes sense from the perspective of maintaining judicial independence in the event of complaints that they must manage.

One area where most industry participants DO expect clear regulatory guidance though is on the basic "ticket to the game" elements of the industry structure that they govern.  The rules of entry and participation as financial services providers, and as RFA's or AFA's for example.

There should be no doubt at all for instance on the part of the FSP Registrar regarding what any business or individual must do to register as a Financial Services Provider legally.  It is ludicrous that the very people in charge of administering the process and accepting registration on the part of applicants cannot themselves tell applicants what needs to be done in order to satisfy the Registrars requirements.

It is decidedly unhelpful, and a direct cost imposition on business, to respond to such questions by suggesting that external legal advice should best be sought by the person being regulated.  Imagine if we actually replied to such suggestions as we truly felt:

"Pardon?  You want me to go and pay a lawyer to guess what your thinking might be in the future when you clearly cannot work out what your own thinking is at the moment?  And you are supposed to be in charge of understanding what the rules are?  Do you seriously want me to go and pay for an  opinion from someone who probably understands it all less than I do, and who is at best only going to be trying to guess what decision you'll come to?  Why can't YOU just tell me what your thinking is - you're supposed to be in charge anyway?"

I have had similar experiences with several departments now as we have tried to get to the bottom of how to successfully apply new rules, or understand what is expected of industry participants.  Suggestions that market participants head off and get opinions that provide no certainty whatsoever merely puts up a barrier and a cost to business, and achieves precisely zero.  It doesn't positively contribute to what could be a healthy partnership on the part of professional market participants and regulatory authorities.  I'm reminded of the old school reports that I seemed to continually receive for years, which could be summarised as "smart, and doing ok.  But really should do better".  That's about where the regulatory report card sits currently I suspect.

What the industry needs, and what the authorities must do if they wish to create an efficient and professional market place here is to make their own rules regarding participation in the industry clearly understood by everyone.  Greater clarity via market guidance will promote confidence in the authorities, it will promote confidence in advisers, and that will flow through to greater confidence in the industry by consumers.  That of course was supposed to be the objective of all the reform wasn't it?


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