28 November 2017

Presentation by Derek Grantham and John Botica to the Navigating Regulation Advice Summit - FSC

Insights from the FMA – what’s ahead?

A presentation by Derek Grantham, Principal Consultant, FMA and John Botica, Director Market  Engagement, FMA.

Good morning and thank you Sharon for a great outline of the key elements of the new regime.  And thank you to Richard, and the team at FSC, for all your hard work in putting together the advice summit.


The background to John and my presentations today is that over the last 3 months we have been speaking with advisers and adviser groups about their perspective of the Financial Services Legislation Amendment Bill which gives effect to the new regulatory regime for financial advice.  There has been a lot of interest in this topic - which has been demonstrated again by the amount of attendees here today – and we are keen to continue that conversation ahead of what will be a busy period of regulatory consultation and development next year.

I will first outline our role as regulator, and the importance of all of us developing a good relationship. 

John will then talk about what you can expect in 2018 and beyond, and how you can prepare for the new regulatory regime.

We plan to talk for about 25 minutes.

What do we do?

It all starts - well least for me - in 2012.  That was when I made a big decision - a decision that may prompt some of you to say: “what on earth were you thinking?”

In January 2012 I decided to join the FMA.  At that time, my two children were aged 6 and 8.  They both wanted to know what their dad did for a job.  Their friend’s dads had jobs like a policeman, pilot, or financial adviser - kids get that and it sounds interesting.

Five to six years on, I thought I would test what my kids say about what I do.  So the other day I asked my youngest son what I do.  This is what he said: 


I wasn’t particularly pleased with that response. However my son was prepared to listen – being a willing complier – and I explained that just as in the school playground, you need someone to watch over everyone to make sure they are all playing safely, and any trouble is stopped before someone gets hurt.  That’s what we do for the financial markets.

 Of course, there’s a bit more to it than that: 

  • We licence businesses…by assessing their capability to provide a service
  • We monitor them to ensure they comply with their legal obligations – and we work with people to help them comply and ensure they understand what good outcomes are for their customers
  • And if something goes wrong we take action – in an “even handed” way

In fact, we are an independent Crown entity and one of the two main regulators of New Zealand’s financial markets - the other being the Reserve Bank of New Zealand.  Our purpose is to promote and facilitate the development of fair, efficient and transparent financial markets.  We have additional aims that we want to achieve too.  For example we want to:

  • Strengthen public confidence in financial markets
  • Promote innovation
  • Support growth of NZ’s capital base
  • Balance costs and benefits

One thing RFAs’ ask us a lot about is our approach to monitoring. The FMA undertakes its’ monitoring by taking a risk-based approach to supervision, which helps us allocate our resources to the areas of greatest need and ensure that we are able to identify and act on, as early as possible, any high risk conduct within the financial advice sector.  Our approach may be reactive to intelligence and information, for example from complaints or research, or proactive to address systemic issues or particular concerns. 
 Generally, the direct monitoring of financial advisers that are part of a QFE would be the exception rather than the rule. We tend to rely on the QFE’s oversight and control of its advisers, and to ensure that reliance is appropriate we do review and test the robustness of the QFE’s own monitoring.  Our approach to supervision of QFE’s may be a useful way of thinking about our possible supervisory approach to entity licensing in the new regime, where financial advice providers are responsible for the oversight and control of their financial advisers and in particular nominated representatives.
By the way, after I explained all this to my son I was met with a slightly better response.  He said: 


What we want to achieve – stronger relationships and good adviser decision making

We touched on how we want to work with businesses to help them comply. At FMA we understand that all interactions with us come at a cost.  There’s a direct cost where you pay a fee, and an indirect cost such as sitting here and listening to us today.  The costs imposed by regulation can make advice more costly and less attractive to consumers too, perhaps leading to fewer people either receiving or asking for advice about financial matters. That might mean for some, advice is seen as unaffordable, more commonly referred to as the advice gap.

We don’t want to see unnecessary barriers for financial advisers and firms.  And as we think ahead, we want to work on ways to minimise any disruption to your business if we can, and identify and address any unintended consequences of change.  To do this well, it’s important that we have a strong relationship with you.  This will help us to understand the cost drivers within your businesses and find opportunities to reduce or minimise those costs.

This is one reason why we’ve been actively talking to advisers and adviser groups over the past few months or so.  For instance, in September this year, as part of the IFA and PAA road-show, John and I went to 10 locations across NZ to talk to financial advisers about the regulatory changes.  They asked lots of questions and shared their insights with us.  We see this as just the start of our journey in working alongside you to help you with the changes ahead.


I also want to comment on the willingness of a number of parties to collaborate to help advisers with their decision making as they transition into the new regime.  Today is a good example of that collaboration, with the FSC and Providers, MBIE, FMA, CWG, compliance specialists, and all of you, in one room to talk about the reforms and what they mean for you and how we can work together.  This is in the spirit of wanting to see adviser businesses continue to be valuable, profitable and ultimately fulfilling, linking to a growing number of consumers who value the expertise of obtaining financial advice suited to their needs.

I’ll now hand over to John who will describe what’s ahead of us and what you can do to prepare…

What’s ahead of us?


I want to re-visit this slide that Richard showed us earlier – and in particular the idea that: there are known unknowns.  That is to say, there are things we know we don’t know.  The challenge for all of us to support you through these regulatory changes is to be clear about what we know, don’t know, and when we expect to know those things. 

  1. This is important because you have a number of choices to make over the coming 12- 18 months, including whether:
  • you may personally choose to apply for a licence as a sole adviser business
  • you form an entity to hold that licence
  • you operate under someone else’s licence  - either your brand or the entity’s brand


Before you make those choices, it’s important to know what information will be available to you, when it will be available to you, and who can help.  And in talking to advisers across the country, there are broadly four things on their mind:

  1. The time-line to implementation - Sharon has touched on this already.   We would only add, after speaking to large numbers of financial advisers across the country, that it’s the desire of many advisers to approach these changes rationally, though there is a lot of noise for them to contend with - such as the strategic re-positioning of some existing players and changing legislative timeframes.   Notwithstanding this noise, your continuing engagement is vital to the success of implementation, and this is why it is important to understand the time-frames and what’s important at each stage.
  2. The new competency requirements - which we will leave to Angus / Paul to discuss
  3. What are all the moving pieces and when should we pay attention?
  4. And finally, what can you do now to prepare for the new regime?

The jig-saw puzzle


Looking ahead to 2018, we can see that it is very much about “completing the picture”, so you have enough information to be able to make an informed decision about the choices ahead of you.

The bill - A corner-stone piece is the “bill” itself.   We won’t have complete certainty until the bill has worked its way through the usual parliamentary processes and becomes law.

Fees and levies - We know licensing fees and levies will apply, but we don’t yet know what these costs will be.  MBIE understand that this is an important part of the puzzle for adviser decision making, and intend to consult with you early next year.  This will be a good indication of their thinking.  By the end of next year those fees are likely to be finalised.

Timing of implementation - From the date that the new Code is approved by the Minister, financial advice providers, as currently proposed, will have approximately 9 months before they need a transitional licence and before the new regime takes effect.

NB: it is 9 months by which time you must be operating under a transitional licence to continue providing services.

The precise dates for implementation aren’t known for certain. Once the Bill is passed (and Code of Conduct is subsequently approved) the precise implementation dates will be communicated.

Code (competency) - The CWG determines the competency standards and (continuing professional training), which will be set out in the Code of Conduct. 

Code (other minimum standards) - Anyone giving regulated advice to retail clients will be subject to a Code of Conduct. The Code must include minimum standards of professional conduct that must be demonstrated when financial advice is given, including minimum standards:

  1. of ethical behaviour, and
  2. of conduct and client care

Disclosure - new client disclosure will apply to all giving financial advice.  MBIE will be consulting on the proposed disclosure requirements sometime in the first half of next year, and the requirements will be set in regulations by end of next year.
Transitional licensing - It is the intention that the transitional licence application process will be straightforward. We don’t yet know what will be in the application form, but are mindful of keeping this as simple and pragmatic.
On-going compliance and requirements - as well as the specific legislative duties that apply to financial advice providers, you will have to comply with any conditions of your licence. 
Full licence - For a full licence, there will be minimum standards you need to meet and some qualities you need to demonstrate to become fully licensed as a financial advice provider.

Based on the AFA Information Returns, as a proxy for business types, then we know that around 24% of AFAs are self - employed.  If we apply this percentage to RFAs, then a back of the envelop calculation suggests there may be as many as 1,600 RFAs that work for themselves.

So in designing our approach to full licensing, we know a one-size fits-all approach will not work.  And, that is certainly backed by our experience with FMC Act licensing to date.

But having said that, we are not in a position to design our approach to full licensing because the bill has not yet been passed, and regulations and the new Code are not yet developed.  This means that right now we don’t know how you will be assessed when applying for a full licence. 

What we do know is that the FMC Act requires the FMA to issue a licence if it’s satisfied, amongst other things:

  • that any prescribed eligibility criteria have been met
  • directors and senior managers are fit and proper to hold their respective positions
  • the applicant is capable of effectively performing the service
  • there is no reason to believe the applicant is likely to contravene the licence obligations, and so on

This provides the broad back-drop against which we must develop our approach. But we will talk to you more about this closer to the timer.

Once you have put all the pieces of the jig-saw together, you will be well placed to think about the choices ahead of you.

Start a conversation


If you are thinking that you may personally choose to apply for a licence as a sole adviser business, or form an entity to hold that licence, then why not start a conversation about your business now with the people (here) that can support your decision making.  You could, for example, be thinking now about:

  1. the structure of your business and business channels, including reward structures and practices and how they drive appropriate adviser behaviours and advice standards
  2. the products and services your business offers, and your target customer segments
  3. the right sized governance and compliance arrangements for your business, including ensuring you give clear, timely,  information that helps your clients make informed decisions, and you have processes that ensure you can consistently recommend or guide clients towards suitable products
  4. and having robust compliance arrangements for all aspects of your business, whether outsourced or not


Five things you can do over the coming months:

1) Find out more about the key elements of the new regime and indicative timelines for key milestones.

2) Think about what these changes may mean for your businesses and clients, i.e. opportunities and challenges etc

3) In light of the above, consider your medium –long term business plan (strategy), e.g. succession planning

4) Identify and engage the best resources to help you with your decision making, e.g. adviser associations and product providers etc

5) Stay tuned to any regulatory developments, as well as staying connected to the Code Working Group as they consult with the market.  Keep an eye out on our website for any updates on licensing.

Finally, thank you for the opportunity to talk to you today.  What’s next for all of us is to make the framework a success – and we look forward to working with you all to do exactly that.

NOTE FOR READERS: These are speaking notes. The speech delivered may differ slightly from these notes.