Fair dealing
This proposal adopts the same requirements as the fair-dealing standards under the FMC Act in relation to financial services, including:
- not engaging in misleading or deceptive conduct
- not making false or misleading representations
- not making unsubstantiated representations.
These obligations are broadly the same as the FTA fair-dealing provisions. However, applying the same concepts as the FMC Act means that the FMA can take enforcement action, and higher maximum penalties would apply. It ensures that ‘NZU financial advice’ is treated on a like-for-like basis with ‘financial advice’, to enhance the integrity and confidence of the NZU market in a fair and transparent manner.
Licensing
Under the financial advice regime, anyone who gives regulated financial advice to retail clients must hold or operate under a licence granted by the FMA.
However, providers are exempt from the licensing requirement in respect of a service that is not provided to any retail clients (ie, provided to wholesale clients only), although they may opt for voluntary licensing.
The distinction between retail and wholesale clients also affects the duties that financial advice providers must comply with to give financial advice, and whether or not belonging to a dispute-resolution scheme is mandatory. These definitions are expanded further below.
Licensing can be at the firm level – that is, if a firm employs individuals to give advice on its behalf, then it is the firm that needs to be licensed by the FMA. The firm must take all reasonable steps to ensure its advisers comply with obligations.
Before granting a licence, the FMA must be satisfied about various matters, including that:
- directors and senior managers are fit and proper persons
- the applicant is capable of effectively performing the service
- there is no reason to believe that the applicant is likely to breach its obligations.
Similar requirements for licensing NZU advice businesses would:
- give clients confidence that licensed firms have been through checks conducted by the FMA
- give the FMA further information to assist its monitoring of NZU advisers
- add financial and non-financial compliance costs due to FMA levies, as licence application fees vary based on the class of licence.* Applicants also need to spend time and resources to put in place the policies and processes necessary to meet the licensing standard.
The FMA sets out its expectations around licensing requirements in its Guide to Financial Advice Provider [PDF, 1,237 KB] licence requirements and application kit.
Financial advice licences also have standard conditions relating to: record-keeping, internal complaints processes, regulatory returns, outsourcing, business continuity and technology systems, ongoing requirements and notification of material changes.**
Duties in providing financial advice
All advice providers
All providers of financial advice must comply with minimum statutory duties that include:
- exercising care, diligence and skill that a prudent person engaged in the occupation of giving regulated financial advice would exercise in the same circumstances
- giving priority to a client’s interests where the provider knows, or ought to reasonably know, there is a conflict between the provider’s and the client’s interests.
Advice to retail clients
Providers who give regulated financial advice to a retail client must comply with additional statutory duties, including:
- complying with the standards of ethical behaviour, conduct and client care required by the Code of Professional Conduct for Financial Advice Services [Financial Advice Code website]
- meeting the standards provided in the code of competence, knowledge and skill in giving advice, and meeting any prescribed eligibility criteria to give advice
- taking reasonable steps to ensure the client understands the nature and scope of the advice being given, including any limitations on the nature and scope of the advice
- making prescribed disclosure information available, including
- making certain information publicly available (to help the public with choosing an adviser)
- disclosing certain information to the client (to help potential clients decide whether to obtain advice from that adviser, and to help clients decide whether to follow the advice given)
- providing, at prescribed times (such as when the provider knows the nature and scope of the advice service the client is seeking), information about the firm’s licence, the scope of advice, fees, commissions, conflicts, disciplinary history, and conduct obligations and complaints process.
The Code of Professional Conduct for Financial Advice Services contains nine standards and, among other matters, sets out the following:
- The standard of general competence, knowledge and skill means that the person has capabilities equivalent to the New Zealand Certificate in Financial Services (Level 5), version 2.***
- Individuals are required, at least annually, to plan for and progressively complete learning activities designed to ensure they maintain the competence, knowledge and skill for the financial advice they give, as well as an up-to-date understanding of the regulatory framework for financial advice in Aotearoa New Zealand.
It is proposed that these obligations also apply to persons that provide NZU financial advice.
Registration and dispute resolution
All financial service providers are required to register on the FSPR**** under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
In practice, the following would apply under the NZU financial advice proposal:
- For advice to retail clients, both the financial advice provider and individual advisers***** would be required to register on the FSPR. Registration and annual confirmation fees would be payable.******
- Where a provider gives advice only to wholesale clients, only the provider/firm needs to register.
Registration enables government agencies and the public to know who is providing financial advice services and includes criminal history checks on the applicant and its directors/senior managers/controlling owners.
Where financial services are provided to a retail client, the provider must belong to an approved dispute-resolution scheme. This requirement does not apply to financial services provided to a wholesale client.
If a provider gives poor or misleading advice, the retail client can bring a complaint to the provider’s internal complaints-handling process. If the internal complaints-handling process does not resolve the complaint, it can be forwarded to the provider’s dispute-resolution scheme at no cost to the client.
The scheme can consider breach of contract, industry codes and legal obligations. Depending on the severity of the complaint, the findings of the scheme can result in a range of orders, including compensation.******* Providers are required to pay an annual fee to belong to a scheme and an investigation fee per complaint (the fee varies by scheme).
Meaning of wholesale and retail clients
The regulation that applies to services provided to retail clients is significantly higher than for wholesale clients. This is because wholesale clients are generally considered to have greater experience in investing, financial expertise and wealth. Typically they are also better placed than retail investors to assess risks and seek additional information (including financial advice) where required, and therefore need less protection.
The meaning of ‘wholesale client’ is set out under clauses 37–41 of Schedule 1 of the FMC Act [New Zealand Legislation website] as a person (including entities controlled by the person and, as relevant, on a consolidated basis) who meets any one of the following summarised criteria:
- Investment business: A person who is, for example, a principal business investing in financial products, a registered bank, a financial adviser or issuer of derivatives.
- Investment activity criteria: A person who has, within the previous two years, owned a portfolio of (or carried out one or more transactions to acquire) specified financial products******** of a value of (or where the amount payable under those transactions was) at least $1 million (in aggregate).
- A large person: A person who (including entities controlled by the person and, as relevant, on a consolidated basis) had net assets in excess of $5 million as at the last day of each of the two most recently completed financial years.
It may be simpler for our proposal to adopt the same wholesale/retail distinction above for NZU financial advice. Using different wholesale/retail thresholds could introduce complexity, particularly if it leads to the same person being a retail client for one purpose (getting NZU financial advice) but a wholesale client for another purpose (getting financial advice about NZU derivatives or about any other financial product).
If adopting the same definitions (eg, if NZUs were a specified financial product for the purpose of the investment activity criteria described above, and thresholds were otherwise unchanged), that means a person who held more than $1 million of NZUs at any point in the past two years would be treated as a wholesale client.
We are conscious this could mean a number of small forestry participants would not benefit from the full protections of this proposal. We also note that the FMC Act thresholds were developed in the context of parties who buy or hold investment financial products generally by choice, whereas in NZU markets some parties need to hold NZUs to meet surrender obligations.
We seek feedback on whether the existing FMC Act distinction is appropriate in the context of NZUs.
Professional training and qualifications about the NZ ETS
There is a current gap between those who provide NZU advice and their qualification credentials. For example:
- forestry advisers do not explicitly have NZ ETS, NZU market or financial training in their qualifications
- financial adviser qualifications do not entail NZ ETS or NZU market training
- there is a general lack of formal NZ ETS or NZU market training across NZ ETS information providers.
A standardised qualification providing targeted professional modules would bridge the gap between the advice currently given to clients on how to manage NZUs and its financial implications.
Fees and levies
The FMA is funded through a combination of levies charged to financial markets participants, Crown funding, and licensing fees.
The FMA has a cost-recovery model for the licensing and regulatory oversight of the financial advice sector. Under this proposal, no change is intended to the way FMA currently collects fees and levies for this sector.
The size of any levies for NZU financial advice providers would be considered later. If NZU advisers and financial advisers are subject to similar levels of regulation by the FMA, it may be appropriate that NZU advisers pay similar FMA levies.*********
For these financial advice providers that require a licence, the minimum application fees are:
- Class 1 licence (sole-advisers): $703.80 (includes up to two hours’ assessment time)
- Class 2 licence (businesses that engage more than one adviser): $882.05 (includes up to three hours’ assessment time)
- Class 3 licence (large organisations with nominated representatives): $1,060.30 (includes up to four hours’ assessment time).
Additional fees may apply, at a rate of $178.35 per hour, if the application assessment exceeds the allocated hours.