AFA Adviser Business Statement Guide June 2011

Contents

Introduction

The Financial Advisers Act 2008 introduces minimum standards of professionalism for financial advisers and gives the Financial Markets Authority (FMA) power to regulate people and entities who give financial advice.  The Act sets out who needs to be registered and authorised to provide financial adviser services in the new regulatory regime.

What is this guide for?

It's to help AFAs prepare an Adviser Business Statement (ABS).  This is a prerequisite for being authorised and must be maintained as part of an AFA's ongoing obligations.

The ABS is a short document (around 7-15 pages) where you describe your adviser business and the compliance arrangements you have in place so that your business operates professionally. You will need to maintain your ABS on an ongoing basis to meet your terms and conditions of authorisation.

This guide will assist an AFA in the new regime, including those advisers or nominated representatives who work for Qualifying Financial Entities (QFEs) who may need to be individually authorised, and advisers who are employed by an adviser business, as well as sole practitioners.

This second edition of the AFA Adviser Business Statement Guide reflects the Code of Professional Conduct for Authorised Financial Advisers approved by the Minister in September 2010 (the Code), the Standard Conditions for Authorised Financial Advisers (the Standard Conditions) and changes made to the Act after publication of the first edition of this guide.  It focuses on what you need to include in your ABS.  General information on authorisation is available on FMA's website.

We welcome any suggestions for later versions of this guide.

 

Adviser Business Statement (ABS) overview

What is an ABS?

Behind every successful professional is a well-ordered business with good systems and procedures.  As part of the authorisation application process you must prepare an Adviser Business Statement - or ABS. Your ABS is a snapshot of how you operate. It is a short, written document that sets out what adviser business you are in and what compliance arrangements you've put in place.  It explains the systems and procedures you have to ensure you conduct your business in a professional way.

The ABS is intended to be a helpful business tool.  It's your primary evidence that you've thought about your professional obligations and how your adviser business operates and that you have systems and procedures that are relevant to its size and nature.  Your ABS is an internal document - you don't need to make it public.

It's a living document.  The terms and conditions of your authorisation will require you to have an ABS and to keep up to date so it reflects any changes in your business and compliance arrangements and any changes in the requirements of the Act and the Code.  You must provide annual confirmation to FMA that your ABS is current and must provide a copy on request.

Your ABS will be a key source of information for FMA and must be prepared in accordance with this ABS Guide.  You don't need to attach your ABS to your application, but it must be available for us to see on request - both before and after authorisation.  It will help FMA to determine the level of regulatory monitoring appropriate to you.  As part of our ongoing regulation of the adviser profession we will carry out checks.  This could involve a visit to your office so you need to keep your ABS current and have it ready for inspection.

How do I prepare an ABS?

You need to develop an ABS before you go online to register and apply for authorisation.

The ABS consists of two parts:

Part 1 describes your adviser business. It helps you to think about your business in the context of the standards in the Code and the Act.  It helps FMA understand your business.  It also provides context for Part 2.  It should address the principles and contain the information detailed in the section of this guide Part 1: Your adviser business.

Part 2 explains the systems and procedures you have in place to comply with:

  • the Financial Advisers Act and its regulations
  • the Code of Professional Conduct for Authorised Financial Advisers
  • the terms and conditions of your authorisation.

    The section of this guide Part 2: Compliance arrangements sets out how to complete this part of your ABS.

Both sections include:

  • expected information, which is required
  • suggested information, to help you understand the sort of information which will help to show how you meet the principle or comply with the requirements.

You can structure and write your ABS in a form that suits your own business needs so it will assist you with operating professionally. You will need to include your FSP number on your ABS.

Your ABS is about you.  The length and complexity of your ABS will depend on the scope and scale of your adviser services. For most advisers we expect that the ABS will be around 7 to 15 pages. Your ABS is intended to summarise your approach, but should be comprehensive enough to explain how you oversee your business.

Part 1 may contain similar information to that included in your business planning process. For Part 2 we expect that you will be operating systems and procedures that already address some of the new requirements.  Any detailed guidance on using these procedures should remain in separate records or manuals, which the ABS can cross-reference. The ABS can indicate the topics covered in your records or manuals that are key to your compliance and consolidate topics from a number of sources into one place.

Your employer or QFE can help you write your ABS, or a group of advisers might help each other. An employer or professional body might provide additional suggestions relevant to a particular business area. Your employer or QFE cannot require you to adopt a particular ABS, but the systems and procedures described in your ABS might be those your employer or QFE requires you to follow.  The ABS is your document to help demonstrate your professionalism so you are responsible for it. You are expected to be able to explain it to FMA or provide supporting documentation, if requested.

AFAs are responsible for meeting and maintaining the same professional standards, whether or not they work with a QFE.  A QFE sits between its advisers and FMA and is also responsible for their compliance.  Therefore, an AFA in a QFE can source some of the information required for their ABS from their QFE, for example, by including QFE-produced material describing the QFE's systems and procedures as an appendix to a shortened ABS.

How will AFAs be regulated?

In addition to authorising AFAs and periodically renewing their authorisation, FMA will monitor AFAs' compliance with their obligations and professionalism.

FMA will focus more resources on monitoring AFAs at higher risk of non-compliance with the Act and the Code of Professional Conduct.  We will use a range of information including:

  • the ABS
    • the nature, scale and extent of the AFA's business
    • the thoroughness of the approach to compliance procedures
  • whether a QFE is also responsible for the AFA's compliance with the Act and Code
  • periodic reports and notifications from AFAs about their activities
  • market intelligence
  • complaints.
  • whether a QFE is also responsible for the AFA's compliance with the Act and Code
  • periodic reports and notifications from AFAs about their activities
  • market intelligence
  • complaints.

Your ABS will help FMA to determine the level of regulatory monitoring appropriate to you.

As part of our ongoing regulation of the adviser profession we will carry out periodic checks. FMA may ask to see your ABS or other information at any time, interview you by phone or personally visit you to look at client files and ensure that you operate in accordance with your ABS. We may select you because:

  • we have received information that identifies your business as a potential risk for clients
  • we are investigating a particular theme across the industry, eg, a general review of advice on a particular product
  • we are visiting your town or have selected you for a random check.

FMA's approach is to work with the industry to encourage high standards of professionalism. We will deal with many issues through constructive dialogue, but will take action when standards fall below the required level.  This approach will help build consumer confidence in the industry as a whole.

Questions and further information

As a professional in the new regime you will need to be aware of your obligations under the Act and the Code.

If you have any questions, please check FMA's website first to see if there is information available to assist with your query.  The website includes helpful information on how to get licensed including the AFA Authorisation Guide and an Application Checklist. It also includes information about your obligations including the Standard Conditions for AFAs.

FMA's financial adviser helpline is open Monday to Friday 8.30am to 5.00pm, phone 0800 434 567 (+64 3 962 2698 for overseas callers).

We also recommend that you visit our website regularly to keep up to date on implementation of the new regulatory regime (or register to receive email alerts on financial adviser matters).

Your professional body, employer or QFE may also be able to help you or you may need to seek legal advice.

The following sites provide further useful information for financial advisers:

www.financialadvisercode.govt.nz - Code of Professional Conduct for AFAs

www.afacompetence.org.nz - The Skills Organisation information on competence standards and assessment

www.fspr.govt.nz - the Financial Service Providers Register

 

Part 1: Your adviser business

Overview of Part 1

Part 1 of your ABS must describe your financial adviser business.

Part 1 must address the principles and include the expected information set out in this section.

You may decide on the form and structure of your ABS, but complying with the following suggestions will minimise FMA queries:

  • Ensure your ABS can be clearly identified in case you are asked to submit it. Include your name, company name and FSP number.
  • Write your ABS in a way that helps you to think about your role and your business in the context of the standards in the Code and the Act.  It should also help FMA understand your business and provide context for Part 2.
  • Focus on the business that you do personally rather than the whole of your employer's or principal's business.
  • Address all relevant financial adviser services that you provide.
  • Think about the business that is relevant to the Act's objectives: to promote sound financial advice and to encourage public confidence in the professionalism and integrity of financial advisers.
  • Focus on the Code of Professional Conduct and the areas of your business most relevant to the Code.
  • Provide supporting quantitative information to show the relative importance of various business areas.  Give the best information that you can and the latest available (include the date and the period it covers). You may use forecast information, particularly if changes are expected.
  • Where possible, keep information in the ABS at a high level.
  • Provide enough information to allow us to assess your business.
  • Use the suggested information as a guide to the sort of information which may be helpful. Don't worry if you don't have all of the suggested information. Add other information if this better explains your adviser business.
  • Provide information that helps FMA to understand your business compared to other financial advisers, who include, for example, sales staff in large firms, tied advisers and advisers in independent firms.
  • Explain any changes to your business that are in progress or planned.

Role

Principle

Your ABS should:

  • describe your role, including an overview of the type of adviser business that you undertake.Your ABS should:describe your role, including an overview of the type of adviser business that you undertake.

Expected information

We expect your ABS to address this principle including, where relevant:

  • whether you provide opinions and recommendations, an investment planning service and/or a discretionary investment management service (sections 9 to 12 of the Act)
  • the method by which you provide services - face to face, internet, phone, postal or other means
  • if you work for a QFE, as an employee or nominated representative, state the name of your QFE and the nature of your relationship
  • if you are employed, state the organisation that you work for with a brief overview of its business, including the size of the adviser business, approximate number of advisers and the number in similar roles to yours.

Suggested information

The following may help your ABS describe your role:

  • the proportion of your time spent on your adviser business - outline any other business you undertake or specific responsibilities you have
  • a description of the various financial adviser services you provide, including whether you provide personalised and class advice.  State the relative proportion of your business that these represent
  • whether your role involves home or workplace visits or seminars
  • whether you supervise other advisers or trainees and the proportion of your time devoted to this.

Remuneration and reward

Remuneration and reward include all remuneration and monetary and non-monetary incentives that you receive for adviser services.

Principle

Your ABS should:

  • explain the way that you are remunerated or rewarded
  • explain any potential conflicts of interest arising from this.

Expected information

We expect your ABS to address this principle including, where relevant:

  • a breakdown of how you are remunerated or rewarded, including any base salary, bonuses, commission and fees.  You should include percentages, based on figures available for the last quarter or year, for example X% salary and Y% commission
  • the factors affecting how your remuneration may vary.

Suggested information

The following may help your ABS describe your remuneration and reward:

  • the proportion of your overall remuneration and reward derived from various sources, for example, from each product or product provider
  • how your fees are calculated, noting any circumstances where these fees can vary
  • an overview of any additional rewards that you may receive depending on performance, and the factors which determine whether you qualify for these
  • any preferential commission terms that you have in place with various providers, particularly any variations in commission rates based on volume
  • the proportion of clients who might be affected by each potential conflict of interest
  • an overview of how your reward from financial adviser services is affected by any dividends from your own financial adviser service company.

Business relationships

By a business relationship we mean any person or entity that is key to your business.  This might include your employer, employees, product providers and persons or entities you refer clients to or receive referrals from.

Principle

Your ABS should:

  • explain how your business is structured and your key internal and external relationships
  • explain any potential conflicts of interest arising from this.

Expected information

We expect your ABS to address this principle including, where relevant:

  • the nature of any exclusive or preferential terms that you have with any product or service provider
  • an overview of persons or entities whose services you employ who are key to your adviser business.

Suggested information

The following may help your ABS describe your business relationships:

  • the proportion of new clients who are introduced and the proportion of your business that each key source accounts for
  • the proportion of clients who might be affected by each potential conflict of interest
  • an overview of any contractual arrangements you have in place which could give rise to a conflict of interest. FMA may request additional information on contractual arrangements, if necessary
  • the roles, responsibilities and relevance of persons or entities who are key to your adviser business.

Products and services

Principle

Your ABS should:

  • outline the products that you provide advice on and the services you provide.  Focus primarily on personalised services to retail clients and products or services with the greatest consumer risk.

Expected information

We expect your ABS to address this principle including, where relevant:

  • an analysis of your business by high-level product types or classes, noting category 1 and 2 products separately
  • in what instances you handle client money or property, if any, the context in which this occurs and the extent of your involvement.

Suggested information

The following may help your ABS describe the products and services you offer:

  • any variation in the service provided by products or product groups, for example, whether class services are provided
  • any complex or unusual products or services, terms or arrangements that you advise on
  • whether you are tied to a particular provider, choose from a panel, or whether you are free to select openly from the market place.  If you are tied or use a panel, whether you select the providers
  • the proportion of business that is given to particular preferred providers
  • whether you provide an ongoing or one-off transaction service.

Clients

Principle

Your ABS should:

outline the types of clients that you deal with, distinguishing between retail and wholesale clients.

Expected information

We expect your ABS to address this principle including, where relevant:

  • the proportion of your business that each client group represents
  • how you attract new clients and the key sources of your clients.

Suggested information

The following may help your ABS describe your clients:

  • the business split between retail and wholesale clients giving the total number of retail clients in each product or service group, and the number of eligible investors (if any)
  • any specific client segments which might have a greater need for financial advice or be more vulnerable to poor advice, for example, older clients
  • if you are employed, please state the nature of the relationship you have with your clients, that is, whether their primary relationship is with you or with your employer or principal
  • the types of marketing and promotional activities for each client group and your involvement in these activities.

 

Part 2: Compliance arrangements

Overview of Part 2

Part 2 should explain how you take personal responsibility for complying with your obligations under the Financial Advisers Act (the Act).

It must explain your systems and procedures for ensuring that you meet:

  • the minimum standards set out in the Code
  • the obligations set out in the Act and its regulations
  • the terms and conditions of your authorisation (including standard conditions and any individual terms and conditions).

Part 2 must address these requirements and include the expected information set out in this section.

You may decide on the form and structure of your ABS, but complying with the following suggestions will minimise FMA queries:

  • Focus on your financial adviser services and how you carry out your role.  Your ABS is a document about you and your personal professionalism.  It is OK to explain that expected information is not relevant to your particular role.
  • Clearly address the requirements of the Code, Act and terms and conditions.  Part 2 highlights some of these obligations, but does not repeat them in detail.  It does not refer to any individual terms and conditions that may be specified in your authorisation.
  • Provide an overview of your relevant systems and procedures in each section, and describe any reliance on third parties for these.
  • Describe the compliance arrangements for your business and the checks that ensure that you are operating to the required standards. (Advisers will implement processes and controls in different ways, depending on the nature, scale and complexity of their services.)
  • Focus on how you ensure that professionalism is embedded in your daily role and activities.
  • If you employ staff or external parties within your business give an overview of how professionalism is embedded in their roles and activities.
  • Explain any changes to your systems and procedures that are in progress or planned.  Point out where these are new.

Use the suggested information as a guide to the sort of information which it may be helpful to provide.  Don't worry if you don't cover all of the things in the suggested information.  Add other information if this better explains your compliance arrangements or is more relevant.

You can provide information on how you exceed the requirements.  FMA can consider this in determining the level of regulatory monitoring appropriate to you.

Tables 1 to 3 on pages 26 to 29 are to help you find your way around how the requirements are covered in this Guide. They are not an exhaustive list of all the detailed requirements in the Code, Act and Standard Conditions for Authorised Financial Advisers.  If you are unsure about the requirements, please see the 'Questions and further information' section of this Guide.

Ethical behaviour

Requirements of the Code, Act and Standard Conditions

  • Code Standards 1 to 6
  • Section 34 of the Act
  • Standard Condition 3 - Notifications

Expected information

We expect your ABS to address these requirements including, where relevant:

  • the safeguards you have in place to identify, avoid or manage any potential conflict of interest.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • any relevant mission statement or client charter you publicise
  • any additional code of ethics or conduct that you abide by, for example, from your employer or professional body, stating the relevance to the requirements
  • any systems or procedures, or support, that help you maintain positive professional behaviour to assist the achievement of suitable client outcomes, for example, any mentoring arrangements
  • any ethical training you have undertaken
  • awareness that an adviser may report breaches of the Act (section 45A) or Code obligations by other persons to FMA.

Marketing and branding

Requirements of the Code, Act and Standard Conditions

  • Code Standard 3
  • Sections 20B, 30 and 35 of the Act
  • Standard Condition 7 - No endorsement

Expected information

We expect your ABS to address these requirements including, where relevant:

  • any approval process that you have in place for marketing activities and promotional and client-facing materials to ensure compliance.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • an overview of the records you keep in relation to marketing and promotional activity and approvals
  • where you rely on third parties for your marketing, an overview of your involvement in ensuring that the marketing is compliant
  • any examples of how you have remedied issues in the past where your marketing, branding or promotional activities have led to confusion.

Disclosure and information for clients

Requirements of the Code, Act and Standard Conditions

  • Code Standards 6 and 7
  • Sections 21 to 24, 27 to 30 of the Act and the Financial Advisers (Disclosure) Regulations 2010

Expected information

We expect your ABS to address these requirements including, where relevant:

  • how you design and approve your disclosure statements, and keep them up to date
  • your approach to providing disclosure to clients on a timely basis
  • the process that you follow to calculate and disclose fees and any commission for each client.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • the extent of your input to the design and content of your disclosure statements.  For example, are these based on a template provided by your principal?
  • if reliant on a third party for the development of disclosure statements, the extent of your involvement and the checks that you undertake
  • whether more than one secondary disclosure statement is used
  • whether initial disclosure is provided at the beginning of the relationship (and updated as necessary) or each time a financial adviser service is provided
  • if advice is given by telephone, how disclosure requirements are fulfilled
  • any periodic reviews you undertake
  • whether and how you test client understanding of the content of the disclosure statements
  • any amendments you have made to improve client understanding of your disclosure statements as a result of feedback
  • any other information that you provide to meet Code Standard 7.

Advice or service

Requirements of the Code, Act and Standard Conditions

  • Code Standards 5 to 10
  • Sections 33 and 38 of the Act
  • Standard Condition 6 - Supervising trainee advisers

Expected information

We expect your ABS to address these requirements including, where relevant:

  • any systems and procedures to help you to ensure the quality and suitability of your advice or service and related client communications.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • the research methods you employ and any reliance on third parties for these
  • your approach to collecting enough information to understand a client's requirements (within the scope of the service being provided), for example, any parameters or guidance you use or any checklists, forms or templates
  • your approach to setting out your advice for the client, for example, any templates you use
  • your approach when no suitable product or service is available
  • any differences in approach when dealing with different client types, products or services.
  • any differences in your approach when dealing with class advice
  • any "pre-check" of your advice or any periodic review of your work
  • any improvements you have made as a result of feedback from checks or from clients.

Complaints

Requirements of the Code, Act and Standard Conditions

  • Code Standard 11

Expected information

We expect your ABS to address this requirement including, where relevant:

  • how you deal with any complaints
  • the number of complaints received about your advice or conduct in the last 12 months and the number upheld
  • the proportion that were referred to any external mediation, complaints body or dispute resolution scheme or to any court in New Zealand or overseas.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • your involvement in resolving complaints about your work and whether an independent person is involved
  • your approach to the register of complaints, for example, whether your QFE or employer keeps this record, or you keep your own
  • your procedures for complying with dispute resolution scheme requirements for internal complaints handling
  • your procedures for assisting your dispute resolution scheme
  • the time taken to resolve complaints
  • any examples of how you have used complaint information to improve your advice or service.

Client money, property and information

Requirements of the Code, Act and the Standard Conditions

  • Code Standard 4
  • Standard Condition 5 - Client money

Expected information

Ensure that Part 1 explains whether you handle client money or property and the extent of your involvement.

We expect your ABS to address these requirements including, where relevant:

  • how you handle any client money, property or information
  • any checks that are carried out on your handling of client money and property, who carries them out and their relationship to you, if any.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • the name of the entity whose client trust account you use and your relationship to that entity
  • the name of the bank or entity that holds the trust account (and its location if not in New Zealand)
  • the name of any custodian, platform or other third party that you use to hold client property (and its location if not in New Zealand)
  • the results of any recent audit of the trust account that you use, the name of any independent chartered accountant who conducted the audit and any remedial action taken in response to it, where relevant
  • any other third party arrangements in place in relation to handling client money and property.

Record keeping

Requirements of the Code, Act and the Standard Conditions

  • Code Standards 12 and 13
  • Standard Condition 4  - Records

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • the key documents you keep that demonstrate your compliance with the Code, the conduct and disclosure obligations in the Act and the terms and conditions of your authorisation
  • an explanation of your involvement in record keeping
  • if you rely on a third party for your record keeping, an overview of their systems and procedures stating how these address your requirements under the Code
  • the length of time that advice records are kept if in excess of seven years, and any variations between products
  • the back up and disaster recovery arrangements for essential client records, and whether those arrangements are tested on a regular basis.

Competence, knowledge and skills and continuing professional training

Requirements of the Code, Act and Standard Conditions

  • Code Standards 6(a), 14 to 18

Expected information

We expect your ABS to address these requirements including, where relevant:

  • how you are satisfied that you have the competence, knowledge and skills for the specific services you provide
  • how you maintain and test your competence on an ongoing basis
  • the process you follow when you do not have the competence, knowledge or skills to provide a professional level of service to a client.

Suggested information

The following may help your ABS show how you meet or exceed these requirements:

  • any relevant qualifications which exceed the minimum Code requirements
  • how you develop your professional development plan, for example, involvement of mentors, supervisors, client feedback or complaints information.  The role of any third party in delivering the plan
  • arrangements to maintain competence, knowledge and skills in the light of product developments and changes
  • arrangements to maintain competence, knowledge and skills in the light of developments in professional practice.

Table 1: Overview of Code Standards in the ABS Guide

Code Standard

Overview of Standard

ABS section

1

Placing client interests first and acting with integrity

Ethical behaviour

2

Obligation not to bring the financial advisory industry into disrepute

Ethical behaviour

3

Use of term "Independent"

Ethical behaviour

Marketing and branding

4

Borrowing from or lending to a client

Ethical behaviour

Client money

5

Restrictions that apply where AFA is related person of provider

Ethical behaviour

Advice or service

6

Behaving professionally

Ethical behaviour

Advice or service

7

Ensuring retail clients are able to make informed decisions

Disclosure

Advice or service

8

Suitability of personalised services for retail clients

Advice or service

9

Explaining the basis of personalised services for retail clients

Advice or service

10

Providing class service to retail clients

Advice or service

11

Complaints processes

Complaints

12

Keeping information about personalised services for retail clients

Record keeping

13

Record retention

Record keeping

14

Overarching competence requirement

Competence

15

Adequate knowledge of Code, Act and laws

Competence

16

National Certificate in Financial Services (Financial Advice) (Level 5) and alternative qualifications

Competence

17

Professional development plan

Competence

18

Undertaking continuing professional training

Competence

Table 2: Overview of Financial Advisers Act conduct and disclosure obligations in the ABS Guide

Act section

Overview of Act requirements

ABS section

21 to 24

Disclosure obligations

Disclosure

27 to 30

Disclosure obligations

Disclosure

30

Advertising must refer to disclosure document

Marketing and branding

33

Must exercise care, diligence and skill

Advice or service

34

Must not engage in misleading or deceptive conduct

Ethical behaviour

35

Advertisement must not be misleading, deceptive or confusing

Marketing and branding

37

Must comply with Code

All sections

38

Must not recommend securities if offer for subscription illegal

Advice or service

45

Must comply with terms and conditions of authorisation

All sections

Table 3: Overview of Standard Conditions for AFAs in the ABS Guide

Condition

Overview of the Condition

ABS section

1

Requirement to have and maintain an ABS

 

2

Reporting

 

3

Notifications

Ethical behaviour

4

Records

Record keeping

5

Client money

Client money

6

Supervising trainee advisers

Advice or service

7

No endorsement

Marketing and branding

The Standard Conditions came into force in November 2010.  Copies are available on FMA's website.  Each Authorised Financial Adviser will receive his/her terms and conditions on authorisation.

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