Advisers pass FMA's FAP monitoring test, gaps remain

Association says ComCom should amend statements

Advisers pass FMA's FAP monitoring test, gaps remain

Industry associations have applauded advisers after a new report showed that financial advice practitioners (FAPs) have largely successfully acclimatised to the new licensing obligations that became fully effective from March 2023.

While some gaps remain across all areas covered, Leigh Hodgetts (pictured above centre), from newly formed mortgage broker association, FAMNZ, said the report showed that finance and mortgage advisers have “adapted very well” to the new financial advice regime, with only positive feedback provided.

“This shows high levels of professionalism in our sector,” said Hodgetts, who assumed the role as FAMNZ country manager in January.

“The report reflects on how mortgage advisers have stepped up to embrace the new regime and provided advice and solutions to New Zealanders, helping with their home purchases or to build wealth through property ownership.”

The road to the new regime

The scope of the Financial Markets Authority’s (FMA) inaugural monitoring report published on Thursday included 60 monitoring visits covering over 350,000 clients and was designed to monitor how each business responded to the regulatory changes originally introduced in 2021.

The FAPs monitored ranged from sole advisers to large providers and the report’s scope covered several key areas, including giving suitable advice, prioritising client interests, disclosure, and compliance oversight.

The road to the new regime included delays and challenges related to COVID-19 lockdowns, severe weather-related emergencies, and rising household costs.

Throughout this, FMA found the financial advice sector was resilient and continued to progress towards embedding the new requirements while meeting the needs of clients. 

Michael Hewes (pictured above left), FMA director of deposit taking, insurance and advice, said the FMA was “generally encouraged” by the way licensed FAPs had made progress at this early stage in the new regime.

“We wanted to provide a broad range of insights on good practices, and areas where FAPs can improve,” Hewes said. “The FMA found those FAPs showing an understanding of their obligations were able to deliver on the regime’s purpose to support their clients’ interests, enabling access to quality advice.”

Here are some of the findings:

  1. Giving suitable advice

Overall, the report found most advisers gave suitable advice under the code, but some lacked sufficient client needs analysis or product comparisons.

Advisers said understanding their clients was important to their advice process and were able to show how this led to quality advice. Many advisers used tools or checklists, including external tools, to help give suitable advice.  

Some advisers, however, did not demonstrate reasonable grounds to ensure their advice was suitable to their clients. This includes insufficient needs analysis, or product comparisons.

In some cases, this was due to a lack of underlying processes.   

  1. Prioritising client interests

The report found financial advisers had a “strong focus” on giving priority to clients’ interests.

Most advisers had good processes for replacement business advice, including additional peer reviews, to support advice that was in the clients’ interests.    

However, in some cases, the FMA continued to observe instances where advisers switched a client to a product provider that paid higher levels of commission for the adviser without demonstrating how they prioritised the clients’ interest.  

  1. Disclosure 

The report found many monitored FAPs had publicly available disclosures that were easy to locate.

“Most FAPs had clear information on their complaints process and dispute resolution scheme (DRS), and sufficiently covered possible fees and expenses,” the report said.

Advisers also regularly reviewed their disclosure to ensure it met the requirements. 

Some gaps observed included a lack of detail, in particular on disclosure of commissions and incentives. Some disclosure was not provided in a timely manner, and complaints and DRS information was missing. 

  1. Compliance

The report found few firms had proportionate oversight, and several lacked proper design or operation of compliance processes.

The role of advisers

Financial Advice New Zealand (FANZ), an industry body that covers financial planners, insurance advisers and others in financial services, also commended the role advisers play in the market.

“For many Kiwis, navigating the financial system can be complex and confusing, especially in the current economic climate. Financial advisers play a critical role in guiding clients through the system to grow, manage and protect their wealth,” said Nick Hakes (pictured above right), FANZ CEO.

“Financial advisers also play a role in educating and helping clients understand the strategy and products that are being recommended to them. Informed client consent is essential in building consumer confidence in the financial advice sector.”

Research showed that when clients work with a trusted adviser, they enjoy a higher quality of life, more financial confidence, and experience less financial stress, according to FANZ.

“To echo the findings in the Financial Markets Authority report, there is a diverse range of financial advice businesses, delivery styles, and scope of advice, providing consumers with positive choice when seeking financial advice to help them achieve their financial future aspirations,” Hakes said. 

“Great advice businesses, at their core, deliver great client experiences and we see that across the industry.”

ComCom urged to amend statements

The FMA monitoring report comes after a controversial market study into personal banking by the Commerce Commission, which recommended that the FMA should monitor mortgage advisers’ compliance.

The report said that “mortgage advisers may face a conflict of interest with their clients because they are incentivised to recommend a lender that pays them the best commissions, even if that lender is not the best fit for the borrower”.

However, as Hodgetts pointed out, the FMA largely found this to not be the case.

“I suggest the Commerce Commission have a close look at the comments made by the Financial Markets Authority and amend some of their statements made in the draft report into Personal Banking Services, which have been demonstrated as inaccurate,” Hodgetts said.

“The FMA report shows there are clearly no systemic issues around disclosure of commissions and putting client’s interest first. The Commerce Commission’s final draft should reflect these newly available facts.”