The financial advice industry in New Zealand is undergoing a major transformation with the introduction of a new regulatory regime that aims to improve the quality and accessibility of financial advice for consumers. The new financial advice regime in New Zealand, which came into effect on March 15, 2021, introduces a new set of requirements and obligations for financial advice providers (FAPs) and their advisers. The regime aims to improve the quality and accessibility of financial advice for consumers and to promote trust and confidence in the financial advice industry. To comply with the new regime, FAPs and their advisers need to do the following:
- Obtain a licence from the Financial Markets Authority (FMA). FAPs can either apply for a transitional licence, which is valid for up to two years, or a full licence, which has more conditions and criteria. FAPs can also engage authorised bodies or nominated representatives under their licence. Advisers must be registered on the Financial Service Providers Register (FSPR) and linked to a licensed FAP or authorised body.
- Comply with the new duties under Part 6 of the Financial Markets Conduct Act 2013. These duties include putting the client’s interests first, meeting the standards of ethical behaviour, conduct and client care set by the Code of Conduct for Financial Advice Services, ensuring that the client understands the nature and scope of the advice, exercising care, diligence and skill in giving advice, and complying with any other regulations or standards that may apply.
- Comply with the new disclosure requirements under Part 6 of the Financial Markets Conduct Act 2013. These requirements include providing information to clients at different stages of the advice process, such as before giving advice, when giving advice, and after giving advice. The information must be clear, concise, effective and timely, and must cover matters such as the licence status, fees, commissions, conflicts of interest, limitations of the advice, complaints process and disciplinary history of the FAP or adviser.
One of the main challenges facing small and medium FAPs in New Zealand is adapting to the changing regulatory compliance requirements and ensuring that they meet the competence, knowledge and skill standards set by the new Code of Conduct for Financial Advice Services. According to the FMA, 82% of FAPs are businesses with fewer than 10 financial advisers spread across the country. These FAPs may have limited resources and capacity to invest in training, technology and systems to comply with the new regime. They may also face increased competition from larger FAPs that have more economies of scale and scope.
Another challenge facing small and medium FAPs in New Zealand is keeping up with the latest trends in automation and other technological innovations that are reshaping the financial advice landscape. Technology can offer many benefits for FAPs, such as enhancing efficiency, reducing costs, improving customer experience and expanding market reach. However, technology can also pose risks, such as cyberattacks, data breaches, ethical dilemmas and regulatory uncertainty. FAPs need to balance the opportunities and threats of technology and ensure that they use it in a way that is consistent with their fiduciary duties and client interests.
One possible strategy that small and medium FAPs in New Zealand can consider to overcome these barriers is forming an aggregate or joining a network of FAPs that share common goals, values and standards. Aggregation can offer many advantages for FAPs, such as leveraging collective bargaining power, accessing economies of scale and scope, benefiting from shared services and support, enhancing professional development and learning opportunities, and increasing brand recognition and reputation. However, aggregation can also entail costs, such as loss of autonomy, increased complexity and coordination, potential conflicts of interest and liability issues. FAPs need to weigh the pros and cons of aggregation and choose a model that suits their business objectives and culture.
Another possible strategy that small and medium FAPs in New Zealand can consider to overcome these barriers is offshoring or outsourcing some of their functions or activities to third-party providers based in other countries. Offshoring can offer many benefits for FAPs, such as reducing operational costs, increasing flexibility and scalability, accessing global talent and expertise, and diversifying risk exposure. However, offshoring can also pose challenges, such as quality control, communication barriers, cultural differences, legal compliance and reputational risk. FAPs need to carefully select their offshore partners and ensure that they adhere to the same standards of professionalism, ethics and quality as they do.
In conclusion, small and medium FAPs in New Zealand face significant barriers in sustaining business operations and expansion in the new financial advice regime. However, these barriers can be overcome by adopting strategies such as aggregation or offshoring that can help them leverage their strengths, address their weaknesses, exploit opportunities and mitigate threats. Ultimately, the success of these strategies depends on how well they align with the FAPs’ vision, mission and values.
This article was co-written with Smart Adviser and Sam Kodi.
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