Financial Markets Authority get it right
Best Practice Advice & Compliance

Financial Markets Authority get it right

December 20, 2011
 by Tony Vidler.The Financial Markets Authority (FMA) just gave every NZ adviser a happier Christmas with an excellent piece of guidance to the entire financial services industry.  Give them a bow, and throw a bouquet – they just got a big deal very right.

The industry has been seeking guidance on a number of issues since the advent of new regulations, which came into effect July 2011.  The main piece of legislation governing advice is the Financial Advisers Act, supported by the Code of Professional Conduct (“The Code”).  Both are largely “principles” based, as opposed to being overly prescriptive and full of “thou shalts” and “shalt nots”.  A laudable and eminently pragmatic approach to creating lasting legislation generally – though it tends to get a bit awkward to apply in its early stages.  The key problem is the very people it applies to are initially left to try and interpret how a principle works and what the regulators or judiciary might think it means somewhere in the future.

In time, a principles based regime tends to be more robust and better able to cope with an evolving society.  On one of the more problematic areas for all market participants is understanding how a theoretical principle applies in the real world however.  Principles don’t always translate easily into the day to day actions of human beings, continually changing their minds or wanting things done, like, yesterday.  But theory is grand.  In the theoretical world bumble bees cannot fly.  But they do.  So much for theory.
So today the FMA issued a Guidance Note on the difficult issue of “analysis before recommendation”.  First big thumbs up is for issuing a well laid out and very clear guidance note.  The second – and way more important big thumbs up – is for the approach taken in interpreting the law and the Code.
It is practical.  It recognises how the industry actually works in interacting with clients.  It recognises that it is about agreeing to what the client wants.  It places responsibility fairly where it should be when external professionals take on part of the work in research. In fact on this point, it is more reasonable than anyone expected.
It is a great piece of work.  Incidentally, as an industry we have been quick to criticize the regulators.  As an industry we should be equally quick to congratulate them on a very useful and timely piece of work that indicates they have been paying attention and understand (at least some) of the issues advisers and industry are grappling with.
Let’s cut to the chase on this particular piece though.  Code standard 6 says that the AFA must “make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation….”  Collectively we have tried to determine the extent of analysis expected, and what evidence would constitute a “reasonable basis”.  We have been guided by rulings in foreign jurisdictions, and drawn conclusions from those.
A school of thought had evolved – and been blatantly promoted for commercial gain in some sections – that this meant the AFA must exhaustively analyse every possible product choice in the universe that might be a viable solution for clients.  A ridiculous interpretation – it was never going to be applied that way.  That would logically lead to paralysis through analysis.  Nobody would ever conclusively finish their research and clients would have died of impoverished old age waiting for the research and analysis to determine suitability.  As silly as this line of thought was, it was gathering momentum in the absence of better information.
The more rational industry commentators focused on elements such as a product needing to be “suitable” or “fit for purpose”.  This is effectively precisely where the FMA have drawn the appropriate line.
Better yet, they have recognised that what is suitable for one client is dependent upon the scope of service agreed to with the client, and the nature of the adviser-client relationship (para 17; Guidance Note).  This is a really significant point.  It provides context around what is considered to be reasonable work by the adviser, in each individual client situation.
They go on and provide some certainty regarding the positioning of independent research, or legal documents provided by issuers.  The responsibility for the veracity of the information provided by those documents sits firmly with the issuers, precisely as it should.  They have pragmatically considered the situation for dedicated adviser forces – those in dealer groups or aligned distribution channels – and determined that it is actually reasonable for the adviser to rely upon the technical assessment done by other and more suitably qualified professionals specialising in that work.  Hooray on that point.
FMA:  you have hit a home run here in my view.  Do more of it.  Provide more Guidance Notes on how you think the law should be interpreted and applied.  Especially do more if you maintain this pragmatic and thoughtful approach to making it work to promote and develope fair markets that engender confidence by all stakeholders.
Advisers:  Read this guidance, and digest it.  It is very helpful and should provide assurance that if you do diligently do research and know your products, and use them in a manner that is fit for purpose and suitable for your clients, then you have little to fear.  You can legitimately rely upon other professionals assessments of products, and you can trust that the information put into legal documents by issuers is accurate.  This frees the adviser up to actually focus on being excellent in their field of knowledge and focus upon the client.
That will do me for a positive message at the end of a challenging year, and hopefully set the tone for 2012 and beyond.
Merry Christmas one and all.
(The link to the full FMA Guidance Note is
http://www.fma.govt.nz/media/511496/seccomdocs-_191806-v2-fma_guidance_code_standard_6_d__2_.pdfLike this?  Then share it with others…or visit www.strictlybiz.co.nz for loads more useful and interesting information.

© 2011 Tony Vidler.  All rights reserved. All materials contained on this web site not otherwise subject to copyright of other parties are subject to the ownership rights of Tony Vidler.  Tony Vidler authorises you to make a single copy of the content herein for your own personal, non-commercial, use while visiting the site. You agree that any copy made must include the Tony Vidler copyright notice in full. No other permission is granted to you to print, copy, reproduce, distribute, transmit, upload, download, store, display in public, alter, or modify the content contained on this web site.

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