The legal and regulatory framework for insurance brokers (and other financial advisers) is set to change substantially when the Financial Services Legislation Amendment Bill is passed later this year.
The Bill has been drafted in response to a number of problems with the existing regime for financial advice, which was said to be “hindering investor confidence, participation in financial markets and informed decision making”. It is intended that the Bill will address these problems by ensuring consumers can access the financial advice they need and by improving the quality of financial advice provided.
Previously some advice had to be given by “natural” persons. These restrictions have been lifted which essentially enables the provision of robo-advice. The intention is to “future-proof” the regime for technological developments.
Code of Conduct
The Bill proposes a Code of Conduct which sets minimum standards of competence, knowledge, skill, ethical behaviour and client care. It is anticipated that the Code will require minimum standards of competence in order for an individual to be able to hold a licence to provide financial advice. Indications are that individuals will require a minimum level of at least level 5.
The Bill requires anyone providing financial advice (which includes making recommendations in relation to insurance contracts) to retail clients to operate under a licence. Licences are given at a firm level in order to limit undue costs on the industry and government.
Individuals will need to be either a licensed financial adviser (FA) or a nominated representative (NR) Both FAs and NRs can only give advice on behalf of a financial advice provider (FAP). Companies will need to decide whether they want their individual advisers to be FAs or NRs taking into account considerations such as:
Liability – FAs are personally liable for the advice they give while a NR does not have personal liability;
Cost – It is anticipated that there will be a licensing cost for FAs whereby NRs will be licensed through the FAP;
Brand – There is likely to be a perception that a licensed FA is more experienced/qualified than a NR. For this reason companies may wish to have certain individuals licensed FAs;
Processes/compliance – Companies that decide to have individual advisers as NRs, rather than FAs, will need to ensure that they have processes in place to show that the NRs are fully complaint with the Act and Code of Conduct;
Portability – a NR can only give financial advice whilst working for the FAP it has been nominated by. If a NR wishes to move companies then s/he will have to move to another FAP which is licensed to have NRs and be licensed through that FAP. Alternatively, if s/he moves to a company that is not licensed to have NRs then s/he will need to become a licensed FA. This may make moving between companies more difficult.
The Bill should be passed towards the end of this year and come into force shortly after. The Code of Conduct is expected to be approved by the end of the year, with a 3-4 month period to allow advisers to obtain transitional licensing.
The transitional licensing process will require industry participants to satisfy a narrower set of entry criteria than the full licensing process. Existing industry participants who do not meet the competence standards in the Code of Conduct will have the transitional period to meet the new competence standards. The transitional licence period is anticipated to last for 2 years.
The Bill imposes duties on persons giving financial advice including the duty to give priority to the interests of the client. In addition all those giving financial advice to retail clients must ensure that their clients understand any limitations on the nature and scope of the advice provided. For example, how many products or how many providers they have considered.
There are likely to be challenges around the duty to put the consumer first. For example, concerns have been raised with regard to incentives offered to advisers by providers in respect of various products. Accordingly FAPs will need to consider remuneration structures which could be seen to encourage advisers to sell products without regard to the customers’ interests.
The Bill requires those giving financial advice to disclose certain information to retail and wholesale clients. At this stage the content, timing and manner of disclosure has not been detailed. It is anticipated that advisers will need to disclose to their clients any reward (financial or otherwise) received as a result of a product being purchased.
The Bill provides that FAs will be subject to the Financial Advisers Disciplinary Committee. If a FA is found to have contravened any obligation, the Disciplinary Committee will be able to censure, impose conditions, require the adviser to undergo training, impose a fine of up to $10,000, or direct the registrar of financial service providers to de-register, or suspend the registration of the financial adviser. The disciplinary measures do not appear to apply to NRs.
With the Code of Conduct not yet drafted, the full extent of changes likely to occur and their impact on insurance brokers is unclear. It is safe to say however that the Bill is proposing a considerable change to the regulatory regime currently in force. It is also going to be in force before we know it!
Brokers need to start thinking about the impact of these changes to their business and what they need to do to ensure they stay ahead of the changes, particularly relating to licensing, as the Bill passes through its next stages. For more information on this issue, please don’t hesitate to contact Craig Langstone or Virginia Wethey.