• 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

Qualifying Financial Entities

QFEs - general comments

55. The QFE regime was included in the Act to avoid imposing what might otherwise be excessive compliance costs and requirements on firms with large numbers of advisers. In effect, the QFE regime is a means for the efficient regulation of individual advisers.
56. The Financial Advisers Act is concerned with the occupational regulation of individual financial advisers. An adviser will be supervised either directly by the Commission or, where a QFE is responsible for the adviser, indirectly through the QFE with the QFE assuming a frontline compliance role under the supervision of the Commission.
57. QFE status is granted by the Commission if, amongst other things, it is satisfied that the entity can and will ensure that its advisers meet and maintain appropriate standards. In this regard it is important to note that the same standards should be met and maintained by advisers performing similar roles, regardless of whether or not a QFE is responsible for them. The key point of difference is that, whereas a "non-QFE" adviser will be individually accountable under the Act, a QFE sits between its advisers and the Commission and is responsible for ensuring that its advisers meet and maintain appropriate standards. The QFE is then accountable to the Commission. AFAs employed by a QFE will also remain individually accountable. This is illustrated as follows:

Who and what a QFE is responsible for

58. In the context of the overarching purpose of the Act, a QFE is responsible for the sound delivery of financial advice by its financial advisers, and encouraging public confidence in the professionalism and integrity of its financial advisers.
59. More specifically, a QFE is responsible for:
    1. ensuring that its advisers comply with their financial adviser obligations (which may be in addition to an AFA's individual responsibility); and
    2. the advice given by its financial advisers (which may be in addition to an AFA's individual responsibility).

Agents of a QFE

60. A QFE's advisers might be employees or agents of the QFE. It is clear who an entity's employees are, but less clear who its agents are for the purposes of the QFE regime. Agents could potentially include:
    1. contractors;
    2. employees of related companies;
    3. franchisees and their employees; and
    4. stand alone product distributors.
61. In our view, it is consistent with the purposes and scope of the QFE regime for the agents covered by the QFE's designation to extend to (and be limited to) those who the QFE has accepted responsibility for.
62. We note that part of a QFEs annual reporting obligation under the Act is to list those who, as agents of the QFE, were financial advisers in that reporting year. It also seems desirable from a supervisory and enforcement perspective (and from a liability management perspective) for there to be a more active or forward-looking list of those who, as agents of a QFE, are financial advisers.
63. We therefore propose that as a standard QFE term and condition the entity will be required to establish and maintain a list of agents it has assumed responsibility for ("nominated agents"). This may also have to be supplemented by a further standard term and condition requiring QFEs to ensure that any agent who sells their products but who they are not responsible for does not hold themselves out as being a nominated agent of the QFE.

AFAs who are employees or agents of a QFE

64. QFE employees, and agents who a QFE is responsible for, (in either case a "QFE adviser") will need to be separately authorised in the following circumstances:
    1. the QFE adviser is an agent who gives advice on or makes investment transactions in relation to category 1 products issued by the QFE (noting that employees in this circumstance do not need to be authorised);
    2. the QFE adviser gives advice on or makes investment transactions in relation to category 1 products that are not issued by the QFE, which we have broken down into the following groups:
       1. products the QFE is responsible for and which are issued or provided by an entity the QFE exercises effective control over;
       2. products the QFE is responsible for but which are issued or provided by an unrelated third party (for example, white-labelled products issued or provided by a third party which are sold as QFE-branded products);
       3. products issued or provided by unrelated third parties but which the QFE has approved; and
       4. products the QFE is not responsible for and which are selected at the sole discretion of the employee or agent; or
    3. the QFE adviser provides a financial planning service.
65. In all these circumstances, the QFE is responsible for its advisers (even though they are AFAs) and has an interest in ensuring that they are competent and professional. It may therefore be appropriate for the Commission to recognise that extra layer of responsibility in the authorisation and supervision processes. For example, it may be appropriate for the Commission to rely on a QFE's employment or engagement processes to be satisfied that an applicant for authorisation is of good character. Similarly, it may be appropriate for the Commission to place some reliance on the QFE's frontline compliance monitoring role.
66. Where an adviser can exercise wide discretion and more reliance is put on the adviser's professional judgement, as opposed to relying on the QFE and its control and capacity, there is less scope for streamlining. Circumstances in (b)(iv) and (c) above are in this category. In contrast, the circumstances outlined in (a) and (b)(i) to (iii) bring the QFE more into the picture and present a quite different risk profile.
67. We therefore propose developing streamlined authorisation and supervision for AFAs who are employees of a QFE or agents a QFE is responsible for based on:
    1. terms and conditions restricting the AFA's area of practice to the products that the QFE is responsible for (or a subset of those products); and
    2. terms and conditions requiring the QFE to take full responsibility for nominated agents as if they were employees.
68. We note that this approach could be complemented by the code of professional conduct for AFAs including specific provisions for AFAs who are employees or agents of QFEs. This would involve the Commission and industry engaging with the code committee in the development of the code.