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The Code of Professional Conduct for Financial Advice Services (the Code) has been approved, but will not come into force for at least nine months, allowing the industry time to comply.
The Code has nine standards, is eight pages long, and is clearly written – making for a user-friendly document. It will apply to all persons who give regulated financial advice when the Financial Services Legislation Amendment Act 2019 commences next year (Q2).
We run through the contents and provide a brief commentary.
Part One – ethical behaviour, conduct and client care
There are five standards on ethical behaviour, conduct and client care, down from 13 in the existing Code.
Standard One – treat clients fairly
A person who gives financial advice must always treat clients fairly, including:
- treating the client with respect
- listening to and considering the client’s views, responding to their concerns and preferences
- communicating in a timely, clear and effective manner
- not taking advantage of a lack of financial knowledge or other vulnerabilities
- not applying undue pressure.
The last two bullet points have been added since the draft and may reflect the increased sensitivity to consumer outcomes since the Hayne Inquiry Final Report and the review by the Financial Markets Authority and the Reserve Bank.
Standard two – act with integrity
A person who gives financial advice must always act with integrity, including when:
- describing themselves and their business
- publishing and sharing information with clients, prospective clients and the public
- interacting with the above and with colleagues, regulators and the media.
Acting with integrity includes: avoiding or appropriately managing conflicts of interest, and not doing anything that would, or would be likely to, bring the industry into disrepute.
Standard three – give financial advice that is suitable
The advice must be suitable for the client, in terms of its nature and scope. There must be reasonable grounds for it, so that a prudent financial adviser would consider it appropriate in the same context, including:
- any strategy supporting the advice
- any assumptions underlying the advice
- any financial product covered by the advice
- the client’s circumstances – e.g., financial situation, needs, goals, risk tolerance. The Code notes that, depending on the nature of the advice, this may require a detailed analysis of the client’s situation or it may be reasonable to make assumptions based on the particular characteristics of the client.
Product comparisons need to be based on assessments of each product, and advisers can rely on others’ assessments when reasonable.
Standard four – ensure the client understands
A person who gives financial advice must take reasonable steps to ensure that the client understands the advice, including its risks and consequences and the nature of any ongoing services. This includes being able to make timely and informed decisions on:
- whether the financial advice is based on valid assumptions about the client’s circumstances
- whether to follow the advice
- whether the fees and costs associated with following the advice are acceptable
- whether to seek additional advice.
Standard five – protect client information
A person who gives financial advice must take reasonable steps to protect client information against loss and unauthorised access, use, modification or disclosure.
Client information should be used, held or disclosed only in accordance with the law and for the purpose of providing financial advice or directly related purposes or as agreed by the client.
It should be kept only as long as is necessary and should be maintained under security, with access only to authorised personnel, and then either returned to the client or disposed of securely.
Part Two – competence, knowledge and skill
The competence, knowledge and skill requirements are set out in standards six to eight. In all cases, persons permitted to provide the service immediately before the commencement of the Code will be deemed to have met the criteria.
Standard six – have general competence, knowledge and skill
This can be demonstrated through:
- version 1 or 2 of the New Zealand Certificate in Financial Services (Level 5), or
- the National Certificate in Financial Services (Financial Advice) (Level 5), or
- giving the advice through an individual who satisfies any of the above.
The Code allows for alternatives, for example through their FAP’s procedures, systems and expertise. The Code states that people seeking to demonstrate competence, knowledge and skill by reference to an alternative qualification or experience should do so in “an objective, measurable and independently verifiable manner”.
Standard seven – have particular competence, knowledge and skill for designing an investment plan
The only difference between Standard six and Standard seven is that reference to the New Zealand Certificate in Financial Services (Level 5) or the National Certificate in Financial Services (Financial Advice) (Level 5) is to the investment strand. Higher qualifications may be required in the future.
Standard eight – have particular competence, knowledge and skill for product advice.
The only difference between Standard seven and Standard eight is that reference to the New Zealand Certificate in Financial Services (Level 5) or to the National Certificate in Financial Services (Financial Advice) (Level 5) is to the strand or stands most relevant to the product or products on which the advice is given.
Standard nine – keep competence, knowledge and skill up-to-date.
The continuing professional development requirement expects that individuals will, at least annually, plan for and progressively complete learning activities to ensure they maintain:
- the competence, knowledge and skill for the financial advice they give, and
- to the extent relevant, an up-to-date understanding of the regulatory framework for financial advice in New Zealand.
Entities must at least once a year review their procedures, systems and expertise to ensure they maintain the capabilities for the financial advice they offer.
Chapman Tripp comment
The revised Code has successfully laid out the key principles governing giving financial advice in a clear and effective manner. The approved version addresses many of the submissions made, including by Chapman Tripp, and is a significant improvement on the draft Code.