FMA Publishes First Monitoring Insights Report Into Financial Advice Providers

The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – today published its first monitoring report of the new financial advice regime. The report shows how a range of Financial Advice Providers* (FAPs) responded to the obligations and licensing requirements under the new regime introduced during the transitional period in 2021, and fully effective from March 2023.

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

The report covers a targeted sample of the sector and is not intended to be fully representative. Approximately 60 monitoring visits represent the findings in the report**, covering over 350,000 clients. The size of FAPs monitored ranged from sole advisers to large providers, representing the scale of this sector.

FMA Director of Deposit Taking, Insurance and Advice, Michael Hewes, said: “The FMA is generally encouraged by the way licensed FAPs have 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. 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. As the regime matures, we expect entities’ understanding of their regulatory obligations to mature and be reflected in their practices. Our approach to supervision will strongly reflect this expectation.”

Below are a few examples of the key areas that were covered in the monitoring reviews. Please see the full report for more details.

Giving Suitable advice

The requirement to give suitable advice under the Code was often supported by in-depth product knowledge and understanding of their clients’ background. 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.

Prioritising clients’ interests

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.

In some cases, the FMA continues 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.

Disclosure

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. 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.

Compliance oversight

The FMA observed few instances where FAPs were taking a proportionate approach to oversight, in line with the size and scale of their business. Several reviews found that compliance oversight was lacking in both design and the operation of compliance oversight processes.

Next Steps

The FMA will continue to engage with the advice sector based on the findings in this report, to ensure providers take the opportunity to reflect on where their peers are doing well and where there are gaps or weaknesses.

Mr Hewes said: “In those instances where compliance was either poor or complacent, the FAPs ran the risk of delivering poor outcomes for their clients. In some of the worst cases where we saw client harm, this has led to formal regulatory intervention, including public censures. Some FAPs also had a limited understanding of the purpose and intent of the regime and took a ‘tick box’ approach, rather than looking at how their arrangements can achieve good client outcomes. The FMA encourages all FAPs to read the report and think about ways they can incorporate the insights and make improvements to their operations.”

*A Financial Advice Provider (FAP) provides advice on the following financial products and services:

· Investments (including debt and equity securities, DIMS facilities, and managed investment schemes, such as KiwiSaver)

· Insurance

· Consumer Credit Contracts including mortgages

· Investment Planning Services

**Summary of supervision activity from 15 March 2021 – 30 April 2024:

· Processed 56 notifications from entities that provided information required by regulations

· Responded to 1,029 enquiries and information reports from market participants, industry bodies, and members of the public

· Assessed and responded to 147 reports about alleged misconduct of FAPs we supervise

· Conducted monitoring engagements of almost 60 FAPs, touching over 350,000 clients, with FAPs monitored ranging from sole adviser businesses to some of the largest providers. As part of this we:

o Reviewed over 1,000 documents

o Reviewed more than 500 client files

o Conducted almost 500 interviews

o Interviewed over 200 people

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