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The long awaited document proposes three different classes of financial advice provider licences and proposes eight standard conditions.
The Financial Market Authority's (FMA) long awaited consultation document was released on 17 June and sheds much needed light on what the full licence process potentially may entail.
The FMA has proposed to specify three different classes of financial advice providers to streamline the licence applications and assessment criteria which allows clients to pick a licence that best suits their circumstance.
- Class A – covers the service of providing regulated financial advice as a sole adviser. This class explicitly does not permit the use of interposed persons, authorised persons, authorised bodies, multiple financial advisers, or nominated representatives.
- Class B – covers the service of a financial advice provider and permits the licence holder and any authorised bodies to provide regulated financial advice on the financial advice provider’s own account and/or through one or more other financial advisers. A Class B licence does not allow the licence holder or authorised bodies to engage nominated representatives or entities to provide advice on its behalf. Interposed persons are only permitted with the FMA’s approval.
- Class C – the broadest class, covers the service of providing regulated financial advice in any manner. It includes all of the services covered by a Class A and Class B licence, and permits the licence holder and any authorised bodies to engage any number of nominated representatives, along with any other type of structure permitted by the Act and not covered by Class A or B.
The FMA is considering eight standard conditions that licence holders and those authorised under a licence must comply with. These are:
- Record keeping – a requirement that adequate records must be retained in relation to the financial advice service, in a form that ensures the integrity of the information, in English, available for inspection and kept for a minimum of seven years. This is the same as the record keeping condition for transitional licences.
- Internal complaints process – a requirement that there is an internal process for resolving client complaints that provides for complaints to be dealt with in a fair, timely and transparent manner and records to be kept of the complaints. The standard condition wording is the same as that applied to other licences under the Act.
- Regulatory returns – a requirement that all information is provided to the FMA that is necessary to monitor the adviser’s ongoing capability to effectively perform the financial advice service in accordance with the applicable eligibility criteria and other requirements with the Act. The standard condition wording is the same as that applied to other licences under the Act.
- Outsourcing – if a system or process is outsourced there is a requirement that arrangements are in place to meet the adviser’s market service licensee obligations. The purpose of this requirement is to ensure that outsource providers and associated arrangements are regularly reviewed.
- Professional Indemnity Insurance – a requirement that professional indemnity is taken out that is appropriate for the provision of the financial advice service to ensure that retail clients can be compensated for financial loss as a result of a breach of professional duty by the adviser.
- Business continuity and technology systems – a requirement to have and maintain a business continuity plan that is appropriate for the scale and scope of the financial advice service to ensure that they are able to manage disruptions in the business.
- Ongoing eligibility – a requirement to meet section 396 and, if applicable, section 400 of the FMCA which specify the matters in respect of which the FMA must be satisfied in order to grant a licence, or authorise an entity as an authorised body.
- Notification of material changes – a requirement to notify the FMA in writing within 10 days of commencing to implement material change to the nature of, or manner in which the financial advice service is provided.
The release of this consultation document will be welcomed by all involved in the financial advice sector, demonstrating that implementation of FSLAA reforms is underway again after the delay caused by COVID-19. The proposed standard conditions and FMA commentary provides some much needed detail on FMA’s licensing expectations enabling financial advisers and financial advice businesses to start planning for full licensing in a meaningful way.
The FMA has invited feedback on the questions contained in the consultation document. Submissions close at 5pm on Friday 7 August 2020. We encourage all financial advisers and financial advice businesses to consider the content of the consultation document, and make submissions to the FMA in particular on any aspect of the proposed licence conditions where compliance may involve unreasonable cost or significant practical difficulties. We would be happy to make submissions on behalf of your business if you wish.
If you would like more information on this topic or its implications for your business, please get in touch with one of our contacts.