• About
• Publications
• Exemptions
• Notices
• What's new?
• International
• Speeches
• Information for investors
• Contact us
• Site map
• Home

STAFF PAPER ON REGULATING AND SUPERVISING FINANCIAL ADVISERS

Regulating Financial Advisers

Overview of the regulatory framework

8. The Financial Advisers Act is concerned with the occupational regulation of individual financial advisers and will impact those whose business involves:
   1. giving financial advice - making recommendations or giving opinions or guidance - in relation to acquiring or disposing of investments, insurance, or credit contracts;
   2. making investment transactions - the receipt, handling, payment or investment of money or other property on behalf of another person - in relation to acquiring or disposing of investments, insurance, or credit contracts; or
   3. providing a financial planning service.
9. The impact of the Act depends upon the type of financial adviser service, the products it relates to, and whether an adviser is an employee or agent of a QFE.
10. Financial advice, financial advisers, and the QFE regime are defined by reference to financial products, which the Act divides 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.
11. Generally, an individual who advises on or undertakes investment transactions in respect of category 1 products, or who provides a financial planning service, will need to be authorised by the Securities Commission and registered on the financial service providers register. And, again generally, an individual who advises on or undertakes investment transactions in respect of category 2 products will need to be registered on the financial service providers register.
12. The main exceptions to the registration and authorisation requirements are that:
    1. an individual who is an employee or agent of a QFE may, in the course of a QFE's business, advise on or undertake investment transactions in respect of category 2 products without being registered; and
    2. an individual who is an employee of a QFE may, in the course of the QFE's business, advise on or undertake investment transactions in respect of category 1 products of which the QFE is the issuer without being registered or authorised.
13. Financial advisers not covered by a QFE are subject to conduct and disclosure obligations and are personally liable in respect of them. AFAs are subject to more obligations than those who are merely registered and, in particular, are subject to the code of professional conduct to be established under the Act. The disciplinary committee to be set up under the Act will be responsible for disciplining AFAs for breaches of the code.
14. Financial advisers covered by a QFE are still personally subject to a number of conduct obligations under the Act but are not personally liable for any contravention. Instead the QFE is responsible for ensuring its advisers comply with their obligations and is itself subject to related conduct and disclosure obligations (for which it is liable). This gives QFEs a frontline compliance role.
15. A QFE's obligation to ensure its advisers comply with their obligations applies in respect of all financial advisers who are employees or agents of the QFE, including those who are AFAs. However, AFAs employed by a QFE remain personally liable in respect of their conduct and disclosure obligations.
16. A QFE is responsible for ensuring that all its advisers who are required to be authorised are authorised; and the QFE rather than the individual is liable if they are not.
17. All advisers, including those who are registered but not authorised and a QFE's advisers, are bound by the fundamental conduct obligation to exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances, taking into account the nature and requirements of the financial adviser's client and the nature of the service performed for the client.

Registration of financial adviser employers or principals

18. Any person (the "business owner") who employs or engages someone as an employee or agent to perform a financial adviser service in the course of its business for its client or clients must be registered on the financial service providers' register, irrespective of whether it is a QFE. If the financial adviser service is provided to the public then to be registered the business owner will need to belong to an approved dispute resolution scheme. Employees will not be required to separately belong to an approved dispute resolution scheme (even if they are required to be separately registered, for example AFAs employed by a registered financial service provider). However, this does not apply to agents, who must belong to an approved dispute resolution scheme individually.

Financial planning services

19. The Act defines a financial planning service as one "that analyses an individual's current financial situation, identifies his or her financial goals, and develops financial options for realising those goals." Under the Act, only an AFA may provide a financial planning service.
20. What constitutes a financial planning service is therefore material in determining whether an adviser will need to be authorised by the Commission (as opposed to merely being registered or operating under a QFE's designation). A financial planning service could be interpreted as including a basic needs analysis for a particular product or advice combining, say, a credit contract with an insurance product relating to the credit contract. In our view, however, such an interpretation would catch too wide a range of financial advisers, making the Act unnecessarily restrictive and potentially undermining its objectives.
21. We therefore propose to interpret a financial planning service as involving more than merely doing a basic needs analysis for a particular product or combining two products where one product is ancillary to the other (such as life insurance taken out at the same time as a loan to cover the outstanding loan). We believe this is consistent with the intended application of "financial planning service" and allows product category 2 advisers and advisers covered by a QFE's designation to give customers a professional level of service.
22. However, it is important to maintain the integrity of the boundary between authorised and non-authorised advisers (and between AFAs who are authorised to provide financial planning services and those who are not). We will therefore be monitoring how advisers who are not authorised to provide financial planning services actually provide their services.