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STAFF PAPER ON REGULATING AND SUPERVISING FINANCIAL ADVISERS

Registration as a financial service provider

23. An individual or entity is entitled to be registered as a financial service provider if:
    1. they are not disqualified from registering;¹
    2. in the case of an individual or entity providing financial services to the public, they are a member of an approved dispute resolution scheme or the reserve scheme; and
    3. in the case of an individual or entity providing or offering to provide a licensed service - for example, a financial adviser service relating to a category 1 product or a financial planning service - they are a licensed provider.
24. The Registrar of Companies has been appointed as the Registrar of Financial Service Providers and will be providing information in due course about registration processes.

Supervising Financial Advisers

Supervision and the purpose of the Act

25. The overarching 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. In this section we explore what this purpose means in the context of our approach to supervision.

The sound delivery of financial advice

26. Several factors contribute to the provision of sound financial advice, including the adviser's professionalism, and the degree of care, diligence and skill they exercise. These are broad concepts and we will focus on three key attributes - competence, capacity, and conduct:
    1. Individual competence: The adviser must have the skills and competence to do the job.
    2. Organisational capacity: The organisation's capacity must be sufficient to support the advice process; that is, there must be adequate systems and procedures in place. Any financial adviser business - from a sole practitioner to a large institution - must have appropriate organisational capacity.
    3. Conduct: The adviser's conduct - especially in interacting with and servicing the client - must comply with mandated requirements (for example the Code of Professional Conduct for AFAs) or should otherwise follow best practice.
27. The required nature, scale and extent of these attributes will depend on the circumstances, for example the type of financial adviser service being performed. The relative weightings of the attributes will also vary according to the circumstances.

The efficient delivery of financial advice

28. The Act's disclosure requirements and accountability mechanisms underpin the efficient delivery of financial advice across the market and are central to the ongoing supervision of financial advisers.
29. The regulatory and supervisory framework must also accommodate different ways of delivering financial advice to ensure business models and advice delivery methods are not unduly influenced by it. The framework should be neutral across models and methods, unless they raise particular issues to do with the sound delivery of financial advice. This is particularly so in the context of QFEs and between QFEs and non-QFE financial adviser businesses.

Professionalism and integrity of financial advisers

30. We envisage a more expansive supervisory framework than one that focuses solely on advisers meeting core obligations. Core obligations must be supplemented by a culture of professionalism; this will ensure that meeting those obligations is not seen as merely a matter of compliance but more as a matter of best practice in providing a financial adviser service. This is at the heart of increasing public confidence in financial advisers.
31. Just as a culture of professionalism will enhance public confidence, the degree of professionalism shown by an individual adviser or within a QFE will have a bearing on our assessment of the risk posed by that adviser or QFE. A professional culture is likely to reduce non-compliance with the Act and, other things being equal, make it less likely that an individual adviser or QFE would be subjected to more targeted supervision.

How the Commission will supervise financial advisers

32. All AFAs and QFEs will be subject to supervision, in the first instance through their applications to become AFAs and QFEs, and through the need to periodically apply for the renewal of authorisation or QFE status. In some circumstances - in addition to any information that applicants provide in their application - assessment or renewal may include onsite inspections and interviews by Commission staff.
33. Applicants for renewal will be reassessed against the then current eligibility criteria. For an AFA's authorisation to be renewed, the Commission must also be satisfied that the AFA has complied with the minimum professional standards set out in the code which will include requirements relating to continuing professional training.
34. QFEs are also required to provide the Commission with an annual report on Financial Adviser Act matters.
35. We are establishing a framework for the systematic oversight of all advisers, including registered (but not authorised) financial advisers, commensurate with the obligations imposed on those advisers and the risks posed to consumers. The effective oversight of registered (but not authorised) financial advisers is a crucial part of the wider regulatory framework, particularly in terms of maintaining the integrity of the boundary between authorised and non-authorised advisers.
36. Similarly, to maintain the integrity of the wider regulatory framework put in place by the Act, our oversight will extend to monitoring for unregistered financial advisers and other illegal advice activity.
37. These across-the-board activities are likely to be supplemented by a more targeted supervisory programme where we will follow up with particular individual advisers or QFEs if we have identified them as posing a higher risk of non compliance or where particular concerns have been identified.
38. Intelligence we receive from complaints made by consumers and investors about adviser conduct or from other sources may also direct our supervisory attention to specific individual advisers (including AFAs, advisers who are registered but not authorised, and QFE advisers) and QFEs.
39. Targeted supervision is likely to include onsite inspections and interviews in addition to requiring written information.
40. From time to time we may also carry out issue-specific supervision projects (as opposed to those targeting individual advisers or QFEs), such as a general review of disclosure obligation compliance.
41. We anticipate dealing with many issues primarily through constructive dialogue. However, an unremedied issue may be dealt with by imposing additional terms and conditions on an AFA or a QFE or by taking other enforcement action. In some circumstances it may be more appropriate to proceed straight to enforcement. Also, if the Commission receives a complaint about the conduct of an AFA, which in its opinion amounts to a breach of the code of professional conduct, then it must refer the complaint to the code disciplinary committee.

Footnotes

1. An individual is disqualified if he or she is an undischarged bankrupt, prohibited from being a director or promoter or involved in the management of a company or issuer, subject to a management banning order under securities or takeovers legislation or an order under s 108 of the Credit Contracts and Consumer Finance Act, has been convicted of an offence against certain provisions of the Financial Service Providers (Registration and Dispute Resolution) Act or the Crimes Act within the past 5 years, has been convicted of a money laundering offence or an offence relating to the financing of terrorism, or is subject to a confiscation order under the Proceeds of Crime Act. An entity is disqualified if it has a controlling owner, director or senior manager who as an individual is disqualified.