Changes were made to the Financial Advisers Act by Parliament on 23 June 2010. As a result, the following material is currently under review by the Securities Commission.

QFE ADVISER BUSINESS STATEMENT GUIDE

CONTENTS

INTRODUCTION

What is this guide for?

BECOMING A QFE

Does my business have to become a QFE
What is an ABS?
What's for and against becoming a QFE?
How does my business become a QFE?
How do I prepare an ABS?
How will QFEs be regulated?
What happens next?

PREPARING PART 1 OF YOUR ABS: YOUR ADVISER BUSINESS

Overview of Part 1
Structure
Products and services
Customer types
Advisers
Delivery channels for products and services

PREPARING PART 2 OF YOUR ABS: GOVERNANCE AND COMPLIANCE ARRANGEMENTS

An overview of Part 2
The "if not, why not" analysis
People, Processes, Professionalism
PEOPLE: Recruitment
PEOPLE: Knowledge, skills and competence
PEOPLE: Supervision
PEOPLE: Performance management
PEOPLE: Reward
PROCESSES: Marketing
PROCESSES: Information for customers
PROCESSES: Suitability
PROCESSES: Servicing
PROCESSES: Complaints and compensation
PROCESSES: Operations
PROCESSES: Record keeping
PROFESSIONALISM: Governance
PROFESSIONALISM: Culture
PROFESSIONALISM: Compliance

INTRODUCTION

The Financial Advisers Act will be fully operational from December 2010. It sets new professional standards for financial advisers and gives the Securities Commission power to regulate people who give financial advice. The Commission will also regulate some businesses that employ or engage financial advisers, and these businesses will be known as qualifying financial entities (QFEs).

BECOMING A QFE

Does my business have to become a QFE?

No, it doesn't. Financial adviser businesses may choose whether or not to apply. An entity that decides not to can still conduct its financial adviser business, employ advisers and offer services to advisers. However, its financial advisers will need to be individually registered.

To become a QFE, an entity must satisfy the Commission it has the capacity to take responsibility for its financial advisers' conduct. We call this "frontline compliance responsibility" because the Commission will then rely on the QFE to ensure its advisers comply with the Act.

So long as businesses that engage advisers invest in appropriate compliance infrastructure, processes and people, becoming a QFE offers efficiency and cost-reduction advantages. The business and its advisers will benefit from streamlined registration, disclosure, disputes resolution arrangements and regulatory supervision.

Note, though, the Commission policy that QFEs will derive no streamlining benefit from conduct obligations because QFE and non-QFE advisers doing similar work must adhere to similar standards of professionalism and competence. We will use the QFE licence's terms and conditions to ensure regulatory neutrality between QFE and non-QFE advisers.

What is an ABS?

All businesses applying for QFE status must prepare an ABS. This describes your adviser business (Part 1) and the governance and compliance arrangements that ensure it and its advisers operate professionally (Part 2).

Your ABS will be the Commission's key source of information, allowing us to assess your entity's capacity to take responsibility for the conduct of its financial advisers, whether it can be granted QFE status, what terms and conditions to impose on the QFE, and how to structure its ongoing monitoring and supervision.

In particular, your ABS will:

• describe how your business takes frontline compliance responsibility for its advisers' professional conduct and competence
• compare (Part 2) your own business conduct and compliance requirements with those of the AFA Code of Professional Conduct, and, if they are not the same, fully explain why not. The Act allows a QFE to set its own standards of adviser conduct and competence. Using the Code as a benchmark allows the Commission to promote regulatory neutrality and assess an entity's capacity to take responsibility for its advisers' conduct
• be a "living document" that QFE-status will oblige you to keep up to date and reflect changes as your business evolves. We envisage your ABS being written in a form that suits your own business' needs - that way, it will assist your governance and management
• be approved and maintained by the relevant governing body - usually your board of directors
• remain an internal document - you do not need to make it public unless you choose to.

What's for and against becoming a QFE?

It's not compulsory to become a QFE because they have significant legal obligations (see above). You will have to weigh the streamlining benefits against the responsibilities and costs.

For example, your business will have to refrain from misleading or deceptive conduct. It will have to ensure it fulfils all its commitments under the Act, and its terms and conditions. Failing to do so may incur a range of penalties.

QFE benefits vary depending on the product category on which advice is given, whether the product is issued by the QFE or a third party, and whether your business is providing a financial planning service.

Benefits are limited for QFEs engaging only authorised financial advisers (ie those advising on category one products issued by third parties or providing financial planning services). The Act requires these advisers to be individually registered and authorised even if they work for a QFE. They may individually benefit from some streamlining in applying for authorisation but the Commission does not expect this to save businesses any significant costs.

On the other hand, QFE status may substantially benefit businesses engaging many advisers who do not have to be individually authorised. The business and these advisers can take advantage of streamlined registration, disclosure, disputes resolution arrangements and regulatory supervision.

Not only do these advisers usually not need individual registration, their QFE's disclosure statement can cover them all rather than each adviser having to supply a separate statement. As well, the Commission will usually rely on the QFE's systems and compliance arrangements rather than directly monitoring each adviser's activities.

For corporate groups the choice of which entity or entities should be a QFE depends on where effective control over compliance is located. We will expect an entity to demonstrate it has effective control over its advisers (employed or nominated) and - in respect of category 1 products - effective control over the issuing or promotion of these products.

A proposed technical amendment to the legislation will allow a QFE to nominate any individual as an adviser. We will require the QFE to commit to frontline compliance responsibility for that person and demonstrate it has effective control over their conduct.

How does my business become a QFE?

To become a QFE a business must:

The Commission may interview senior management (the director of the financial adviser force, for instance) and conduct on-site visits.

How do I prepare an ABS?

Structure and write it in a form that suits your own business needs. We expect your ABS to help you with governance and management.

By documenting your business model, and governance and compliance arrangements, the ABS will ensure your business can comply with the Act and that your advisers can operate professionally in an appropriately controlled environment.

An ABS's length and complexity will vary according to your business and the extent to which your policies and procedures are already documented elsewhere. It should be comprehensive enough to help your governing body review and oversee its adviser business. Note that detailed procedures should be covered in separate manuals, which the ABS can cross-reference.

You may divide your ABS into sections representing your business's operational structure, but the sections or the whole document must clearly identify two parts:

• Part 1 describes your adviser business and, at the least, must contain the information detailed below in Preparing Part 1 of Your ABS. It will give a context for Part 2.
• Part 2 describes your governance and compliance arrangements, and must explain how your business will take frontline compliance responsibility for the professional conduct and competence of all its advisers in all their advice work. Preparing Part 2 of Your ABS (below) sets out key principles to address.

Diagram: Preparing an ABS

You should ensure your ABS conveys your business culture, and particularly how you ensure professionalism is embedded in governance and adviser activities. It must articulate how you propose maintaining the capacity for adviser frontline compliance responsibility.

It's important that Part 2 set out how you propose checking - through management information, supervision and audit, for example - that your business and its advisers are operating according to your policies and procedures and conforming to the standards set out in your ABS.

How will QFEs be regulated?

The Commission will use a range of information - including ABSs, periodic reports and notifications from QFEs about their activities, market intelligence and complaints - to focus its monitoring on QFEs with higher risk of serious non-compliance with the Act.

The ABS review and licensing process is important, but we will place emphasis on our ongoing regulatory relationship with QFEs. We will determine the extent of ongoing QFE regulation and monitoring by taking account of:

• what the ABS says about organisational culture and the QFE's approach to professionalism
• the thoroughness of its approach to compliance procedures
• the nature, scale and extent of the QFE's business, and the impact in its market
• the degree to which third parties verify, certify or accredit a QFE's compliance with the procedures and standards fundamental to adviser professionalism.

The Commission will tailor its regulatory approach to each QFE, and the industry as a whole, according to the extent to which the QFE, and the industry, are prepared to voluntarily adopt high standards of professionalism. If QFEs self-impose rigorous standards, we will be able to scale back the intrusiveness of regulatory supervision. Your ABS will give your QFE an early opportunity to take the lead by willingly embracing professional standards.

Agreed better-practice benchmarks are important here. We want to work with industry to develop standards that set benchmarks across the national adviser profession. Industry-developed standards - such as those already specifying competence levels for authorised financial advisers - and appropriate approaches to ensure conformance with them, give industry certainty and consistency, and facilitate the giving of professional advice.

What happens next?

From now on, prospective QFEs may start preparing their ABSs. If you have questions about it, please contact the Securities Commission.

Although we are not formally consulting on the content of this guide, we welcome any suggestions for improving later versions.

The Financial Services Providers (Pre-Implementation Adjustments) Bill introduced in December 2009 will simplify implementation of the new law and may impact on arrangements you put in place for your QFE. Contact the Commission if you would like to discuss your approach to dealing with the effect of these changes in your ABS.

We will accept ABSs for review from 1 February 2010. You should aim to submit your ABS no later than 30 July 2010 so you are ready when the Financial Advisers Act comes into force.

Overview of Part 1

Part 1 must describe your entity's adviser business and give a context for Part 2. Part 1 must, at a minimum, contain the expected information outlined in this section.

You may decide on the form and structure of your ABS, but complying with the following suggestions will minimise Commission queries:

• Write your ABS in a way that helps your governing body review - and the Commission understand - your business from the perspective of complying with the Financial Advisers Act
• Keep ABS material to a high level where possible, so it is useful as a governance document
• Involve your business managers in preparing your ABS, make sure it's sponsored by senior management and your governing body, and that the latter approves it. Note in your ABS who has approved it
• Focus on the Act's objectives: how the QFE promotes sound financial advice and encourages public confidence in industry professionalism
• Address all financial adviser services for which your entity intends taking responsibility
• Give enough information to allow us to assess your entity's potential impact in its markets
• Include any changes to the business in progress or planned
• Describe any assumptions your ABS makes where expected changes to the Act, the Code, or other law, might create uncertainty
• Give supporting quantitative information to show the relative importance of various business areas. If exact quantitative information is unavailable, give the closest information you can to enhance understanding of your financial adviser service. Information should be the latest available (include its date) and, if for a period, should ideally cover a year (state the period it covers). You may use forecast information, particularly if changes are expected.

Structure

Principles

Your ABS should:

• explain your QFE's structure and key internal and external relationships
• explain any entity-level conflicts of interest.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• whether the QFE expects to appoint nominated representatives, and the nature of any significant groups of nominated representatives (such as where a large number have one employer)
• entity-level arrangements that might give rise to conflicts or pressures on advisers (such as commissions the entity receives from third-party suppliers, fee structures and group relationships).

Suggested information

The following may help your ABS explain the QFE's structure:

• describe the entity's organisational structure, including the location of key managers and other roles, and focus on responsibilities for activities covered by the Financial Advisers Act
• describe the relationship between the entity and any group entities and holding companies relevant to its financial adviser service (such as issuers or employers of nominated representatives), plus the regulator of these entities, if any
• describe any outsourcing significant to understanding your financial adviser service (such as call centres).

Products and services

Principle

Your ABS should:

• outline the products and services your adviser business offers, focusing primarily on retail products and services with the greatest consumer risk.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an analysis of the business by high-level product types or classes, noting categories 1 and 2 product business separately
• a brief explanation of any unusual or complex retail product types, such as those with embedded derivatives or swaps.

Suggested information

The following may help your ABS describe the QFE's products and services:

• the proportion of the business providing financial adviser services
• the proportion of the business represented by financial planning services
• the product split between those issued by the entity, those issued by companies the entity effectively controls, and others
• whether the entity and its advisers handle client money or property.

Customer types

Principle

Your ABS should:

• outline who the QFE's advisory business customers are, distinguishing between retail and wholesale customers.

Suggested information

The following may help your ABS describe the QFE's customer types:

• the business split between retail and wholesale customers, giving the total number of retail customers for each product group
• any specially targeted customer segments that might need more financial advice or be more vulnerable to poor advice (such as older customers).

Advisers

Principle

Your ABS should:

• profile the QFE's advisers, documenting the category 1 and/or category 2 product types on which they advise.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• the numbers of advisers who will be a) authorised financial advisers b) advisers on category 1 products who do not have to be authorised, and c) category 2 advisers
• the numbers of a) employee advisers, and b) nominated representatives.

Suggested information

The following may help your ABS profile the QFE's advisers:

• the adviser split according to their service or product ranges (such as where an entity has distinct sales forces or advisers operating in different departments and markets; explain which deal with retail customers and whether these adviser groups provide products from one provider, choose from a product panel or have an unrestricted product choice)
• the number of advisers providing financial planning services
• the national geographical spread of adviser locations.

Delivery channels for products and services

Principle

Your ABS should:

• show how much advice your entity provides through what channels.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• how guidance and advice is provided: whether face-to-face, by telephone, post or internet.

Suggested information

The following may help your ABS describe the QFE's business channels:

• the split of volumes/advisers by channel
• the split of services (eg guidance/advice/planning services) by channel.

PREPARING PART 2 OF YOUR ABS: GOVERNANCE AND COMPLIANCE ARRANGEMENTS

An overview of Part 2

You may decide on the form and structure of your ABS, but complying with the following suggestions will minimise Commission queries:

• Provide an overview of compliance infrastructure, processes and people, and describe any reliance on third parties
• Describe your adviser business's governance and compliance arrangements. Businesses will implement processes and controls in different ways, depending on the nature, scale and complexity of their services
• Explain how adviser professionalism is embedded in the QFE's overall governance and culture
• Detail the management role responsible for key processes and controls, and describe the information used to monitor them
• Set out how you propose to check your business and your advisers are operating according to plan and conforming to the standards set out in your ABS
• Recognise any gaps and explain how these will be dealt with and when. Some process improvements may not have been fully implemented yet, in which case your ABS should say so and point out where processes are new. One approach is to set out a "Path to Compliance" that indicates how long implementation will take and how you propose to monitor it
• Describe any assumptions made where uncertainty is due to expected changes to the Act, other legislation or the Code.

The "if not, why not" analysis

Part 2 of your ABS must include a comparison of your business's conduct and competence requirements with those in the AFA Code of Professional Conduct, and, if they are not the same, fully explain why not.

The Act allows a QFE to set its own standards of adviser conduct and competence. Using the Code as a benchmark allows us to promote regulatory neutrality and assess an entity's capacity to take responsibility for its advisers' conduct.

People, Processes, Professionalism

Principles underpinning QFE governance and compliance arrangements are grouped under these three headings.

People

The QFE's governance and compliance arrangements should ensure:

• Recruitment: it recruits people with appropriate skills and ethical behaviour
• Knowledge, skills and competence: it supports individual advisers to achieve and maintain the right level of knowledge, skills and competence
• Supervision: it actively supervises advisers so they behave appropriately, provide suitable advice and comply with QFE processes
• Performance management: it identifies advisers who do not meet the required standard and takes appropriate remedial action
• Reward: its reward structures and practices drive appropriate adviser behaviours and advice standards.

Processes

The QFE's governance and compliance arrangements should ensure:

• Marketing: it does not mislead or confuse customers or engage in deceptive conduct
• Information for customers: it supports its advisers in giving clear, timely information that helps customers make informed decisions
• Suitability: its processes help advisers to consistently recommend or guide customers towards a suitable product
• Servicing: it delivers agreed products or services, and meets reasonable expectations for ongoing services
• Complaints and compensation: it has an internal process for addressing customer complaints and helping advisers learn from them
• Operations: it has robust compliance arrangements, including those relying on IT systems or outsourcing
• Record keeping: it retains appropriate, easily accessible records.

Professionalism

The QFE's governance and compliance arrangements should ensure:

• Governance: it has a high-level person or body responsible for overseeing adviser professionalism and compliance
• Culture: its culture supports advisers' professionalism and compliance and the attainment of a suitable customer outcome
• Compliance: it has appropriate arrangements for challenging and testing the adviser compliance framework and its outcomes.

PEOPLE: Recruitment

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It recruits people with appropriate ethical behaviours and skills.

Guidelines for addressing the principle

• Checks are part of the recruitment process so that advisers meet registration or authorisation standards, as far as these are known.
• New advisers are assessed against the standard of knowledge, skills and competence required for their proposed roles, and their adviser qualifications are checked.

PEOPLE: Knowledge, skills and competence

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It supports individual advisers to achieve and maintain the right level of knowledge, skills and competence.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an overview of training and standards for each group of adviser roles
• the number of trainees, advisers and supervisors in each role
• an explanation of the approach to product training and any standardised approach to continuing professional development.

Guidelines for addressing the principle

The Act requires a QFE to:

• ensure its advisers are registered or authorised, as necessary (s76)
• keep an up-to-date list of its authorised financial advisers (s76)
• keep a list of its nominated representatives (s77).

Further guidelines for addressing the principle

• Every adviser role carries a set level of skills, knowledge and competence that, where applicable, takes account of Code requirements. Usually, these will be provided by a training programme, assessed to ensure it has delivered the required level.
• Individual adviser's training and support needs must be assessed, recorded and addressed, and their progress monitored.
• New advisers must meet a set standard to become fully fledged advisers. The standard takes account of Code requirements where applicable, and assessment determines whether advisers have reached the requisite level.
• Advisers are trained and supported to ensure they understand their Act obligations.
• Advisers are trained on relevant new products or processes, and, in the case of significant changes, assessed to ensure they have achieved their learning goals.
• Standards are in place for continuing professional development that, where necessary, meet Code requirements, and standard compliance is monitored.

PEOPLE: Supervision

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It actively supervises advisers so they behave appropriately, provide suitable advice and comply with the QFE processes.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an explanation of your approach to supervision.

Guidelines for addressing the principle

• Appropriate criteria are in place for acceptance as a supervisor.
• Supervisors have the appropriate level of skills, knowledge and competence for the role and receive initial and ongoing training and support.
• Supervision properly covers the financial adviser service, targets risk areas (for example, particular advisers or products) and is suitably regular.
• Supervision processes are clearly set out, including ways of dealing with particular issues, and supervisors are clear about their role.
• Any supervision result trends are identified and appropriate action taken (such as changes to adviser training).
• Supervisors are also monitored and managed to ensure they exercise care, diligence and skill.

Supervision is a key control over adviser behaviour and ensures they operate in accord with processes. Supervisors themselves are as important, in terms of their recruitment, training, and reward, as supervisor processes.

PEOPLE: Performance management

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It identifies advisers who do not meet the required standard and takes appropriate remedial action.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an explanation of your approach to identifying underperforming advisers
• the proportion of advisers who are underperforming in terms of advice quality or compliance
• number of disciplinary cases relating to advice quality or compliance.

Guidelines for addressing the principle

• Advisers who do not meet required standards or deliver the right customer outcome are identified.
• Customer feedback and complaints information are part of the identification process.
• Reasons for poor performance are considered, a plan and timetable drawn up to address the problem, and adviser progress monitored.
• Appropriate measures are implemented where necessary to protect customers from underperforming advisers.
• Disciplinary action is taken on unacceptable behaviour or insufficient progress in reaching an acceptable standard.
• The QFE co-operates with the Commission on any investigation of a complaint about a current or past adviser, and with the Disciplinary Committee on any proceeding and any resulting action the Commission takes.

We will focus on under-performance in the areas of professionalism and compliance.

PEOPLE: Reward

Reward covers a range of ways to influence behaviour, including remuneration, monetary and non-monetary incentives, and promotion and preferment.

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• Its reward structures and practices drive appropriate adviser behaviours and advice standards.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an explanation of how key reward structures address compliance and quality issues
• an explanation of the balance of salary and bonus/commission in retail adviser remuneration - for an average adviser and for the most successful adviser.

Guidelines for addressing the principle

• Reward structures incentivise professionalism.
• Adviser remuneration structures only reward sales/profit-oriented targets when compliance and advice quality requirements are met.
• Advisers do not depend on volume-based bonuses to earn a living wage.
• Non-financial rewards, such as prizes, recognition events and promotions, also require advisers to meet quality and compliance standards.
• Management adheres to the QFE's reward guidelines; for example, bonuses are withheld and quality criteria are not over-ridden.
• Performance and reward structures for managers of adviser groups include compliance and advice quality measures.

PROCESSES: Marketing

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It does not mislead or confuse customers or engage in deceptive conduct.

Guidelines for addressing the principle

The Act requires:

• a QFE or adviser to refrain from advertising a financial adviser service in a misleading, deceptive or confusing way (s35 and 48)
• a QFE or adviser to refrain from any conduct in relation to a financial adviser service that is misleading, deceptive or confusing (s34 and s47)
• marketing materials to use the term sharebroker only if the adviser or QFE doing the marketing is a member of a registered exchange (s36).

Further guidelines for addressing the principle

• An entity must not use its QFE status as a marketing tool or imply its QFE status represents Securities Commission approval of the entity or its advice.
• An appropriate approval process exists for marketing and customer-facing materials to ensure compliance.
• Staff preparing marketing materials are aware of the requirements and understand the approval process.
• Records are kept of marketing materials and approval received.

PROCESSES: Information for customers

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It supports advisers in giving clear, timely information that helps customers make informed decisions.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an explanation of the process for helping advisers with required disclosures
• an explanation of the approach to understanding and addressing customer information needs.

Guidelines for addressing the principle

• The QFE discloses to customers the information the Act requires (s26).
• Processes and training help advisers comply with the Act's and the regulations' disclosure requirements (s21-31), including requirements for format, content and timing. Processes help advisers comply with relevant Code requirements.
• Information is not misleading, deceptive or confusing and is up to date (whether the Act requires it or not).
• The customer is given information when they need it in a suitable format (written or oral) including during sale or advice and, if appropriate, during ongoing servicing, or proactively if it changes.
• Information provided covers matters relevant to the individual customer, in language and at a level of detail customers can understand.
• Potential adviser conflicts are identified and disclosed, managed or avoided.
• The quality of customer information is periodically assessed and improved as necessary.

The regulations will cover some elements of customer information, but customer needs go beyond the regulations, depending, for instance, on individual circumstances and products proposed. Information also helps customers form realistic expectations.

PROCESSES: Suitability

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• Its processes help advisers consistently recommend or guide customers towards suitable products.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• an explanation of your approach to ensuring advice is suitable for retail customers, including any differences in the approach of various adviser groups in the QFE. Specifically address how you deal with suitability in the context of a financial planning service, affordability of credit (responsible lending) and insurance exclusions.

Guidelines for addressing the principle

• Processes take account of relevant Code requirements.
• Enough information is collected to understand customer requirements (within the scope of the service being provided).
• Advice has a reasonable basis and is supported by analysis.
• Advice is suitable, with recommended products being fit for purpose and the most suitable available to the adviser.
• Advice is appropriately explained and recorded.
• Processes allow for situations when advice should not be given or a referral should be made, and the culture supports both options.
• A QFE operating a sales process that only gives customers information (and is, therefore, unregulated) ensures process design is appropriately approved, staff are trained on its acceptable limits so they do not offer financial advice, and staff are monitored to ensure they adhere to this process and its limits.
• A QFE operating an internet or paper-based sales process that includes customer guidance has that guidance approved by an appropriately qualified adviser.

PROCESSES: Servicing

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It delivers agreed products or services, and meets reasonable expectations for ongoing services.

Guidelines for addressing the principle

• Where the adviser or QFE is responsible for implementing the agreed guidance or advice, that is done accurately and promptly.
• Appropriate adviser resource and processes exist for responding to customer enquiries and advising on variations or renewals of existing products.
• Processes are in place to deliver on any promises made to customers about future services.
• A customer is given any necessary information and timely assistance if he/she decides to change their adviser.

PROCESSES: Complaints and compensation

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It has an internal process for addressing customer complaints and helping advisers learn from them.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• your entity's definition of complaint and an explanation of its internal complaints process, including whether this is independent
• the number of complaints received and upheld in the last 12 months together with any "hot spots" and actions taken
• the proportion of complaints decisions (as a percentage) overturned by any Ombudsman or dispute resolution scheme
• any arrangements in place to ensure the entity can pay customer compensation, if awarded (such as capital, professional indemnity insurance, allocated funds).

Guidelines for addressing the principle

• Internal processes comply with dispute resolution scheme requirements.
• Independent investigation processes for complaints exists, if possible.
• The quality and timeliness of complaints handling are monitored.
• Complaint information, both internal and from dispute resolution schemes, is analysed to identify any information, training and process improvements, and any necessary action is taken.
• Complaints information is used to improve adviser performance, preferably at an individual level.
• The QFE co-operates, as far as possible, with other entities to resolve customer complaints.
• The QFE co-operates with the dispute resolution scheme or the Commission in the investigation of complaints.

PROCESSES: Operations

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It has robust compliance arrangements, including those relying on IT systems or outsourcing.

Guidelines for addressing the principle

• Where a QFE relies on IT systems to support advisers, it has appropriate backup arrangements.

Where a significant part of the financial adviser service is outsourced:

• due diligence, management and monitoring systems exist to deal with compliance matters, including any changes, and action is taken to address any identified failings
• the Commission has appropriate access for carrying out its compliance assurance function
• periodic reviews of outsourcing arrangements address compliance performance.

PROCESSES: Record keeping

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It retains appropriate, easily accessible records.

Guidelines for addressing the principle

• Records demonstrating compliance with requirements are made and kept.
• Records are promptly accessible by management, compliance assurance functions and the Commission.

PROFESSIONALISM: Governance

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It has a high-level person or body responsible for overseeing adviser professionalism and compliance.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• A description of your reporting and governance framework, including an explanation of the role and composition of the governing body
• An explanation of the ABS's role in the financial adviser service governance framework, which should include how the ABS was prepared, reviewed and approved, and senior business management's involvement
• The ABS reflects the results of the latest framework review.

Guidelines for addressing the principle

A QFE must ensure that it, its employees and nominated representatives comply with the Act and QFE terms and conditions.

Other guidelines for addressing this principle:

• have a clear reporting and governance framework for adviser professionalism and Act compliance matters
• the governing body reviews, considers and approves the annual report to the Commission (required by s77(1))
• the governing body considers, at least annually, the adequacy and robustness of processes and controls, compliance assurance and governance framework for encouraging adviser professionalism and ensuring Act compliance
• the governing body reviews, considers and approves the ABS at least once a year.

The Commission expects the governing body chosen by the entity to include some senior executives, such as those responsible for business lines associated with financial advice, as well as relevant legal, risk or compliance representatives.

PROFESSIONALISM: Culture

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• Its culture supports adviser professionalism and compliance, and achievement of suitable customer outcomes.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• any steps senior management have taken to sponsor and support an appropriate culture (if the ABS does not address them elsewhere)
• the approach to managing the potential effect of any entity-level conflicts of interest on advisers and their advice (such as group product provider relationships and entity level commission arrangements).

Guidelines for addressing the principle

The Act requires that:

• A QFE or adviser refrain from any conduct to do with financial adviser services that is misleading or deceptive or is likely to mislead or deceive (s34 and 47).

Other guidelines for addressing this principle:

• management actively supports professionalism in their messages to staff
• management moves quickly to address customer outcome issues
• management allows enough time and resources for training and quality checking
• management is conscious of potential entity-level conflicts of interest and takes steps to avoid or manage them, including through disclosure and segregation of duties
• an independent whistle-blowing procedure operates
• the QFE deals with the Commission openly and honestly, voluntarily reporting any significant compliance issues.

PROFESSIONALISM: Compliance

Compliance principle

The QFE should have governance and compliance arrangements that ensure:

• It has appropriate arrangements for challenging and testing the adviser compliance framework and its outcomes.

Expected information

We expect your ABS to address this principle by covering, where relevant:

• a description of the entity's approach to testing, including any risk-based approach
• a description of the expected work plan and its governance oversight, along with resources allocated to it, including the number of staff, skills and experience
• an explanation of how the approach allows findings to be independent, along with how and to whom findings are reported and any necessary actions determined and tracked.

Guidelines for addressing the principle

• Challenging and testing address the design and operation of processes, controls and management information, and also consider the outcome for the customer.
• A risk-based approach to compliance assurance.
• A plan is approved by the governing body and its progress monitored.
• Significant findings are reported to the governing body and remedial action is followed up, including any action necessary for customers.
• Compliance assurance is, as far as possible, independent of line managers responsible for the process and controls being assured.

Assurance is likely to go beyond the day-to-day controls operated by managers directly responsible for key processes to include more in-depth and independent periodic challenges, such as arrangements for separate compliance monitoring teams, internal audits or the commissioning specific external work.

Entities may wish to refer to the New Zealand Standard on Compliance Programmes (NZS/AS 3806:2006).