Bad News For Advisers: The Regulators aren't finished with you yet!
Best Practice Advice & Compliance & Strategic Issues

Bad News For Advisers: The Regulators aren't finished with you yet!

April 27, 2015

by Tony Vidler

The storm is quietly building…..In the UK, the USA, Australia…and now New Zealand.

On the off-chance that some financial advisers have been thinking they have finished going through all of their regulatory reform, allow me to be the bearer of bad tidings.  There is way more to come.

The Regulators aren’t finished with you yet.

I have watched development overseas with great interest, especially as it has seemed reasonably obvious for some years that regulators of financial services around the world talk to each other and share their thinking with a view to finding common ground in an increasingly border-less global financial services scene.

The New Zealand regulator just released their first report on their findings and concerns with financial advice in New Zealand since they began collecting data on Authorised Financial Advisers (AFA’s).  Of course they only have meaningful data on AFA’s as that is the one type of financial adviser who is approved by the regulator to deal in “complex” products and advice directly with retail clients.  The AFA’s remain vastly outnumbered by Registered Financial Advisers (RFA’s) who are able to provide “simple” products and advice to retail clients.  In practice this means that anyone giving financial planning or investment advice ends up having to be an AFA, and the RFA’s deal almost exclusively in the risk management/insurance space, or in lending.  The regulator is specifically responsible for managing standards and behaviour amongst AFA’s and as such that is where the bulk of their focus is applied when it comes to managing financial advice issues.

The FMA Report “A snapshot of the industry from AFA information returns from 01 July 2013-30 June 2014” can be found here.

In that report however the regulators give clear notice that much of what is taken for granted in the current industry structure is certainly not being taken for granted by them.  For example:

  • AFA’s have an average of 250 clients each, but 12% of the AFA’s have more than 500 clients.  FMA: “We would like to better understand in subsequent reports how these AFAs are managing such a large client base”
  • About 13% of AFA’s are closely aligned to a single product supplier. FMA: “We have previously signalled our concern about distribution models that exacerbate conflicts of interest. We have indicated that we will look at remuneration arrangements that can lead to conflicted advice”
  • Some 85% of AFA’s remuneration comes via commissions and bonuses.  FMA: “…this is too high….” and “we have previously stated that distribution models such as volume-based incentives, up-front commissions and trail commissions should not encourage conflicts of interest between AFAs and their clients.”
  •  About 40% of AFA’s are providing insurance to clients, but about 2% of the AFA’s have been identified as providing a high volume of product replacement.  FMA: “we are concerned about the potential mis-selling of insurance products, including selling products that do not meet the customers’ needs, or churning of customers (rapid turnover of insurance business that is not in the customers interest)”

These are the highlights only, but don’t they sound just like the issues being debated in Australia and the USA right now?  That is not a lead-in to a conspiracy theory or raging paranoia….I accept it as a fact that international regulators are working openly towards common ground wherever they can in terms of creating professional behavioural standards.  Actually, I think it makes sense for them to do so too as clients and advisers alike are increasingly mobile and have portable labour and capital – the world is becoming a much smaller place with far more international movement of industry participants and their customers, and customers money.

My reason for drawing attention to this report is to highlight that the winds of change have certainly been blowing in the past, but the BIG storm is still building.  What we have seen to date has at times been unpleasant, as change often is, but it is clear that further change is coming too.

imagesClearly there is regulatory scrutiny over the capacity for professionals to service a high volume of clients in any meaningful way with personalised advice. That does not negate the possibility of a professional building a highly leveraged business model whereby they are dealing with a very high number of transactions in a complex product area, such as share-broking. It does suggest however that if one is building a factory dealing in professional services transactions of a robotic nature, then there needs to be very transparent and clear terms of engagement limiting the advice components.

The perfect storm area though is “conflicted advice”.  The business or product supplier affiliations, remuneration structure, business or advice lines which are engaged in….all are open to being challenged as presenting potential danger to clients.  Putting in place the right structures, branding, engagement tools and client service (or support) systems to manage these potential danger areas must be a priority for career professionals.

It is your best protection from the coming storm.

You may also find this post useful:

R.I.P. to the Accepted Wisdom for Growing Your Practice

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Comments (2)

  • Good post, Tony. This FMA document backs up their earlier Strategic Risk Outlook 2015 publication, and just in case any of your readers are under the illusion that the various reports refer to AFAs only, be assured that there is no restriction on the expectations by the FMA on Director behaviour. Most advisers operate under the banner of a limited liability company, and are therefore within the FMA remit – AFA, RFA, whatever. Some will accuse you of scare-mongering – let them. I’d rather recommend taking prudent steps to prepare a future-proof strategy, than rely on the beneficence of the regulator.

    David Whyte
    • Spot on David. I was well aware of their views, as I know you are. But this report gives as clear a warning about the future as possible. The only question is how quickly things move along really.

      tonyvidler
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