Regulatory Review Reports Released
In recent weeks, we’ve seen the release of two documents, “Replacing life insurance – who benefits?” from the FMA, and the “Final Report – Review of the Financial Advisers Act 2008 and the Financial Services Providers (Registration and Dispute Resolution) Act 2008" from MBIE. Reaction has been, as you might expect, mixed – ranging from resigned acceptance to frustration, and everything in between – much of which has been vented on the Good Returns website following the announcement of the release of the documents.
Both reports are significant as they set the tone for the future of the advisory industry in New Zealand for the foreseeable future.
Looking at the FMA report initially, the investigation should be generally welcomed by all sensible advisers and hopefully be of concern to those whose practices and attitudes are rendered uncomfortable at the prospect of being asked to account for their behaviour.
That said, there are couple of points worth mentioning as the implications have been carried over into the MBIE Report.
• The first measure of a “high” rate of replacement business is contentious, to say the least. A lapse rate of 12%, coupled with a new business rate of 12% hardly establishes correlation, and most certainly does not establish causation. Lapse has multiple reasons – clients move away from the area and lose contact; clients change banks and don’t renew the Bank authority, clients change advisers (replacement of policies by a third party was not covered by the investigation); clients emigrate, the purpose of the policy has expired, and regrettably, some clients also expire. But these events that result in a lapse have no direct correlation to the rate of new business recorded by the adviser, unless of course, the investigation identified the new business file as having a corresponding lapsed file. To be fair, the report admits in a footnote that the replacement rate may be overstated.
• However, the second measure of high replacement, namely that 40 policies lapsed in a single month is certainly of concern and requires investigation to see if the lapses were indeed re-written on the same lives with different companies.
• The Report identified 54 ‘high volume’ advisers as having replacement of more than 20% p.a. which is also worth of further investigation – news of this will no doubt be forthcoming at some future date. But out of the 1100 ‘high volume’ advisers, 54 equates to 5% - hardly a dramatic figure, but still worthy of further investigation.
• In the ’How we compiled this report’ section at the end of the report, the sentence appears -“This will not include cases where an adviser recommends replacing a policy to a person who is not already their client”. In other words, replacement by another adviser, or another adviser entity, has not been included in the investigation – which also leaves the Banks and the QFEs out of the picture, as was the intention, so declared at the beginning of the Report. However, the claim that consumers are more at risk because independent advisers have more than one agency – and less at risk because Banks and QFEs have restricted choices is only true for ‘internal replacement’ i.e. replacement within a client base. For Banks and QFEs, it is equally valid to contend that the opposite is the case, and a similar investigation into non-aligned distribution channels would be of considerable benefit to the consumer, so that any lingering doubts can be suitably addressed.
Overall, the tone and content – apart from one or two irritations – should be acknowledged as a positive move to focus on poor practice and advisers who have inappropriate business models.
In general terms, I’d proffer similar positive comment on the Report Card for the MBIE document.
There are some minor irritations, such as the reference to the FMA Report, citing that (for life insurance) - “There were high rates of replacement business”.
With respect, that is an incomplete statement as the FMA Report picked up 200 out of 1100 as having high replacement incidence – 18%, and the more realistic figure identified by the FMA, 54 advisers with greater than 20% replacement amounting to 5%.
Hence, it would be more accurate to suggest that there were high rates of replacement among a small minority of advisers. That’s not to say that those advisers don’t need to provide a ‘please explain’ response – they most certainly do - but it would be preferable to present a more balanced perspective on the issue.
Another irritation is the insistence that lawyers and accountants are sufficiently regulated already, so there’s no need to place any obligations on them with regard to financial advice. I agree that members of the legal and accountancy professions are regulated already – but not in respect of financial advice. Neither their qualifications, nor their respective self-regulatory bodies, point to any competency in financial services advice.
But these are relatively insignificant issues when considered against the opportunity for the advisory industry to establish a professional benchmark beyond the minimum required by the proposed amendments to the Act.
Furthermore, it must be regarded as positive progress to see the abandonment of Category 1 and 2 products, the establishment of uniform disclosure, dispensing with the personalised v class advice distinction, proposing a universal Code of Conduct, including robo-advice platforms, and removing the RFA v AFA confusion.
But there is one structural aspect of the recommendations that could stand some clarification – the recommendation that “anyone (or any robo-advice platform) providing financial advice services should be covered by a licence”.
Apparently, the entity licensing approach “replicates the success of the QFE model” – although quite how this success has been researched, calibrated, or established is not explained.
The Report continues –
“In recognising that a one size fits all approach to licensing and reporting would not work, and to ensure that requirements are proportionate, there would be flexibility, depending on the size and nature of the firm, in how prospective licensees would be expected to meet those requirements”.
Quite why a uniform standard of qualification for a license would not work is not explained, nor is there any explanation of what the requirements will be, nor how they will be applied proportionately. But patience will be rewarded, no doubt.
But I’m going to take a punt and guess that the prospect of monitoring 8,900 RFAs/AFAs under the one adviser category would severely stretch the FMA’s resources.
However, the proposed new structure indicates that a licensed firm can contain financial advisers – personally accountable for their conduct – or agents – accountable to the firm for their conduct.
So Financial Advisers are directly accountable to the FMA.
Does the FMA have any notion of how many current RFAs are likely to opt to prefer the Financial Adviser title?
And then there are those risk writers who opt to license their own existing multi-agency company, but opt to be agents of that company?
Either way, it seems to me that the monitoring and supervisory departments of the regulator are in for a busy life!
And that’s all before the monitoring of the activities of the 56 QFEs – all of which are likely to opt for Financial Adviser Firm status and to contain both Financial Advisers and Agents.
According to the FMA Report, there are 26,000 QFE Advisers; the MBIE Report refers to “27% of AFAs work within a QFE business group” – or a little over 7000 souls.
So if the current RFA’s choose to go for the Financial Adviser status, and the existing AFA’s do likewise – then include the AFAs who currently work for QFEs, you have a potential population of over 15,000 Financial Advisers who “remain individually accountable for their conduct”.
Sure, the Financial Advice Firm “would be accountable for supporting the individual to comply”, but that’s still a lot of individuals accountable for their behaviour, and I suspect that the Report’s estimate may be on the light side.
Now here, I confess to expressing some suspicion of the entity licensing model at the outset – and I still have some reservations in light of experience elsewhere – but I am warming to the concept, and certainly open to further persuasion.
Also, I’m not sure about the suggestion that “competency standards would differ for general insurance and investment advice”.
I see the content of a standard being subject specific, but the competency level expected would be consistent across all areas where advice is being offered.
I also foresee a pivotal (non-regulatory) role for the unified Adviser body – Financial Advice New Zealand – or whatever the coming together of the IFA and the PAA lands up being called.
Of course, we are yet to be apprised of the details from the Code Committee, but the development of a uniform Code of Conduct is an important and positive recommendation from the MBIE document.
But once the Committee has decided, then hopefully we have a framework to continue the path to providing high quality financial advice across the financial services sector for the benefit of the consumer.
I believe there is enough potential in the document to develop positive directions that can help create a broad consensus in the industry.
There are some questions yet to be answered, and there is still some way to go in the journey to a more effective, robust, and workable regulatory environment, but between the FMA document and the MBIE Report, we have an idea of the direction the journey is likely to take us.
Slainte Mhath
The Laird