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STAFF PAPER ON AUTHORISED FINANCIAL ADVISER COMPETENCE

Authorised financial advisers and competence

9. In this section we outline how the Act relates to the competence of AFAs and discuss the competence-related roles of the Code Committee, the Commission and the Commissioner for Financial Advisers.

Competence

10. The purpose of the Act is to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers, by:
    1. requiring disclosure by financial advisers,
    2. requiring the competence of financial advisers, and
    3. ensuring that financial advisers are held accountable for any financial advice that they give and there are incentives for financial advisers to manage appropriately conflicts of interest.
11. Competence is therefore central to the Act. However, the impact of the Act depends upon the type of financial adviser service being performed, and whether an adviser is an employee or agent of a "Qualifying Financial Entity". This paper is concerned with competence as it relates to AFAs.

Authorised Financial Advisers

12. The Act divides financial products into two categories:
    1. Category 1 (higher risk or more complex products) - securities (other than those listed as Category 2), real estate, and futures contracts.
    2. Category 2 (lower risk or less complex products) - call debt securities, bank term deposits, insurance products (other than life insurance issued after 31 December 2008), and consumer credit contracts.
13. In general, advisers who give advice on or undertake investment transactions in respect of category 1 products, and all people who provide financial planning services, will need to be authorised by the Securities Commission. The exception to that is an employee of a Qualifying Financial Entity (QFE) advising on or undertaking investment transactions in respect of category 1 products issued by the QFE will not need to be authorised.

The Commission

14. To obtain authorisation, a person must satisfy the Commission that, amongst other things, he or she meets levels of competence, knowledge and skills set out in the Code of Professional Conduct for AFAs.
15. The Commission itself is therefore a key stakeholder in the development of the Code. The competence framework established in the Code will have a direct bearing on what the Commission will need to do to determine applications for authorisation and on the efficiency of the Commission's ongoing supervision of AFAs.

The Code Committee and the Code of Professional Conduct

16. Responsibility for preparing the Code falls to the Code Committee. Amongst other things, the Code must provide for minimum standards of competence, knowledge and skills for AFAs. The Code must also provide for continuing professional training for AFAs, including specification of minimum requirements that an AFA must meet for the purpose of continuing professional training.
17. The Act expressly requires the Code Committee to consult with interested parties in preparing the draft Code. A key objective of this paper is to lay the groundwork for that consultation.
18. Members of the Code Committee are appointed by the Commissioner for Financial Advisers. The Code Committee must have at least 7 members and not more than 11. One of those members must have consumer affairs knowledge and experience, and the remaining members must have industry knowledge and experience. The Commissioner is not a member of the Code Committee.
19. The Code must be approved firstly by the Commissioner for Financial Advisers and then by the Minister of Commerce.

Summary of roles and tasks

20. The following is a summary of the roles and the sequence of tasks involved in putting in place the Code to the point where financial advisers can be authorised under the Act:
    1. The Minister of Commerce appoints a Commissioner for Financial Advisers.
    2. The Commissioner for Financial Advisers appoints members of the Code Committee.
    3. The Code Committee prepares a draft Code in consultation with industry and others.
    4. The Commissioner for Financial Advisers approves the draft Code (or declines to approve it and refers it back to the Code Committee).
    5. The Minister of Commerce approves the draft Code (or declines to approve it and refers it back to the Code Committee).
    6. The Code comes into force on the date notified by the Commissioner in the Gazette.
    7. The Commission processes (or completes the processing of) applications for authorisation.

Competence framework

21. Establishing a competence framework is perhaps the most complex aspect of preparing the draft Code. That complexity derives from a number of factors including that the competence framework needs to be -
    1. effective in establishing minimum levels of competence in practice,
    2. meaningful and credible in order to underpin consumer confidence,
    3. flexible and adaptable in order to accommodate the diversity of financial advisers, financial adviser services, and the range of potentially relevant qualifications and experience,
    4. cognisant and accommodating of international mutual recognition issues, and
    5. workable and in proportion to the issues at hand to ensure that the right balance is achieved between the regulatory impact and the objectives of the Act.