Financial Services

17 May 2010

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The New and Improved Financial Advisers' Regime – Answers to Key Questions

The Government announced significant changes to the new financial advisers' regime at the end of April 2010. These changes address many concerns raised with the proposed regime. The regime is not now due to be fully implemented until 30 June 2011.

This FYI highlights the potential impact of the changes for the financial services industry. 

Do we now know what the final regime will look like?

Not entirely. The Government has clarified a number of key details, but industry members are continuing to lobby for further changes. Further amendments are likely as the legislative process progresses. 

Will the regime cover financial advice to wholesale clients?

The Government has proposed an exemption for financial advice to wholesale clients. However, the exemption is relatively narrow and does not apply to the entire regime.  

The Government's proposed definition of "wholesale clients" is narrower than many would like. The proposed definition is:

1. large clients, ie entities which, over the last two accounting periods, have:
   1. gross assets of more than $10 million;
   2. annual turnover of more than $20 million; or
   3. 50 or more full-time equivalent employees;
2. investors receiving advice about a single security valued at more than $500,000;
3. institutional investors (eg banks); and
4. "eligible investors". 

Eligible investors will be individuals or organisations meeting criteria including the ability to assess the merits of the advice. Financial advisers are likely to have to comply with "know your client" obligations for eligible investors. Eligible investors will have to acknowledge their status in writing.

Some parts of the regime will still apply to financial advice given to wholesale clients. Financial advisers who advise wholesale clients will still be subject to overriding duties to act with due care, skill, and diligence and must not mislead clients. New Zealand based financial advisers who advise wholesale clients will need to be:

1.  registered; or
2.  employed by, or responsible to, a company which is registered. 

Financial advisers who advise wholesale clients will be exempt from most of the regime's key requirements. They will not have to give wholesale clients disclosure statements, become Authorised Financial Advisers (AFAs), or become members of a dispute resolution service. 

Overseas based financial advisers who advise wholesale clients will not have to be registered.

Will there be an exemption for companies seeking venture capital funding?

Yes, but the proposed exemption is not as wide as many would like. 

The proposed exemption will allow issuers to give financial advice in relation to either private offers, or offers to wealthy or experienced "eligible persons" (in terms of the Securities Act 1978). Discussions between two potential investors will not be covered by this exemption.  However, the potential investors may fall within the "wholesale client" exemption.

How will Qualifying Financial Entities operate after the most recent proposed changes?

A Qualifying Financial Entity (QFE) which is part of a corporate group will be responsible for the behaviour of:

1.  financial advisers employed by the QFE or a related entity of the QFE; and
2. nominated representative financial advisers operating outside the corporate group.

The key change is that corporate groups which use one company to issue securities, and other companies to employ financial advisers, will be able to use the QFE model. 

Further changes will emphasise QFEs' obligations to supervise individual financial advisers for whom they are responsible. An "if not, why not" policy will be enacted. This policy will typically require QFEs to ensure their non-AFA advisers who advise on category 1 (complex) products issued by a member of the QFE's group meet the standards in the Code of Conduct for AFAs (Code).

Will companies be able to give advice, or must a financial adviser be an individual?

Yes, companies (and other legal entities) will be able to give financial advice. This does not alter the requirement for advice to be provided through appropriately qualified financial advisers. The regime will regulate the conduct of the individual financial advisers.

Will it be possible to give general financial advice (eg by mailers and online tools)?

Yes, provided the advice is prepared with due care and skill and is not misleading or deceptive. Regulations may also impose additional requirements, including obligations to:

1. have the directors of the company giving the general advice certify that it was prepared with due care and skill;
2. include a "health warning" in the general advice stating that the advice is not intended to be personalised; or
3. obtain approval of the general advice from a qualified financial adviser.

What is the effect of the proposed changes to the exemption regime?

The Securities Commission and the Minister of Commerce will have expanded exemption powers.

The Securities Commission will be able to provide exemptions from conduct obligations (including the conduct obligations in the Code). The Securities Commission can only currently give exemptions from general disclosure obligations.

The Minister will be able to exempt any person or class of person from the regime. This power could only be exercised previously where the exempted person or class was engaged in an occupation which was subject to equivalent regulation (in New Zealand or overseas).

What are the key dates?

July 2010

• Parliament is due to complete its amendments to the Financial Advisers Act.
• The Code is due to be finalised.

1 December 2010

• All financial service providers need to be registered and be a member of a dispute resolution scheme.
• Applications for AFA/QFE status must be received by the Securities Commission.

30 June 2011

• The regime comes into force.
• Disclosure obligations under the new regime begin. The existing disclosure obligations will cease to apply.
• Financial advisers will have to have completed all training required under the regime.

Authors

Wayne Browne

Partner - Banking & Finance

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Shelley Cave

Partner - Corporate & Commercial

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Peter Eady

Partner - Banking & Finance

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Andrew Harkness

Partner - Banking & Finance

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Don Holborow

Partner - Corporate & Commercial

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Michael Pollard

Partner - Corporate & Commercial

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Stephen Ward

Partner - Corporate & Commercial

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