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Financial Services Legislation Amendment Bill introduced to Parliament

Home Insights Financial Services Legislation Amendment Bill introduced to Parliament

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Published on: August 10, 2017

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On Friday 4 August, Minister of Commerce and Consumer Affairs Hon Jacqui Dean introduced the Financial Services Legislation Amendment Bill to Parliament (Draft Bill). This comes after industry and public consultation on an Issues Paper and Options Paper released by the Ministry of Innovation, Business, and Employment in 2015. Following those rounds of consultation, the Minister sought views on an Exposure Draft of the Financial Services Legislation Amendment Bill (Exposure Draft) earlier this year.

A new framework

The Draft Bill creates a new framework for giving financial advice by amending the Financial Markets Conduct Act 2013 and the Financial Service Providers (Registration Dispute Resolution) Act 2008, and repealing the Financial Advisers Act 2008. Under the new regime, Financial Advice Providers (being any person carrying on a business of giving financial advice) will be required to be licensed by the FMA to give advice to retail clients.  Any person giving financial advice on behalf of a Financial Advice Provider will need to be either engaged (employed or otherwise) by a Financial Advice Provider or registered as a financial adviser under the Financial Service Providers (Registration Disputes Resolution) Act 2008. 

The Draft Bill also implements conduct and competence requirements for all those giving advice (both firms and individuals). The requirements include a duty to put the client's interests first and an obligation to disclose specific information to clients. Anyone giving financial advice to retail clients will be subject to a new Code of Conduct that is currently being developed by a recently appointed Code Working Group. The Code will set standards of competence, knowledge and skill, ethical behaviour, and client care.

What has changed since the Exposure Draft?

Most of the differences between the Exposure Draft and the Draft Bill are minor drafting changes to ensure that the legislation achieves its policy intent. However, three variations are worth attention, which are:

  • changing the regulation of wholesale clients compared with retail clients;
  • amending the civil liability of Financial Advice Providers; and
  • introducing a limited exclusion for lenders under consumer credit contracts and credit-related insurance contracts.

Wholesale and retail clients

The Exposure Draft included a 'retail service' model for financial advice. Under the retail service model, Financial Advice Providers who had a mix of retail and wholesale clients would have been required to treat all clients as retail clients, which has more onerous requirements. This would have been the case even if just one of those clients were a retail client. Many submitted that this would be a confusing and inefficient model. The Draft Bill therefore:

  • drops the 'retail service' model from the new regime of financial advice;
  • aligns the definition of 'wholesale client' with the narrower definition of 'wholesale investor' in the Financial Markets Conduct Act (to apply to fewer clients); and
  • includes a designation power for the FMA to classify a client as 'wholesale'.

Civil liability of Financial Advice Providers

The Exposure Draft introduced civil liability for Financial Advice Providers who breached a duty, including where a Financial Adviser caused the breach. The Draft Bill provides that Financial Advice Providers should not be liable for pecuniary penalties set out in the Bill in cases where a Financial Adviser has contravened a legislative duty if the Financial Advice Provider took all reasonable steps to ensure the Financial Adviser complied with their duties. This would not restrict consumers from seeking redress from Financial Advice Providers through the FMC Act (for example, compensatory orders for losses and damages). Under the Draft Bill, individual advisers will also be subject to disciplinary action through the Disciplinary Committee.

Limited exclusion for consumer credit

The Exposure Draft applied the financial advice regime to advice for all financial products, including investment, insurance, and credit products. There was concern among submitters that lenders under consumer credit contracts and credit-related insurance contracts should not be subject to the regime. The Draft Bill therefore includes a limited exclusion from the financial advice regime for lenders of credit and credit-related insurance products. The exclusion covers situations where advice is given for the purpose of complying with lender responsibilities in the Credit Contracts and Consumer Finance Act 2003.

Timing of the Bill – when do I need to transition to the new regime?

From here, the Draft Bill will have its first reading in Parliament and then be referred to the Commerce Select Committee where a round of public consultation will take place and further amendments might be included. While the timing and substance of the Bill is subject to the priorities of the newly elected Government on 23 September, we anticipate that the substance of the Bill will have cross-party support. The table below sets out the provisional timing for the implementation of the Bill:

   

Mid 2018

Bill passed but not yet in force.

August 2018

New Code of Conduct approved by the Minister of Commerce and Consumer Affairs.

November 2018

Transitional licensing opens for existing industry participants. Industry participants will have approximately six months to apply for a transitional licence.

May 2019

New financial advice regime, including Code of Conduct, comes into effect.

Transitional licences come into effect. To provide advice, industry participants must have a transitional licence granted by the FMA.

A competency safe harbour comes into place for existing industry participants who do not meet the competency requirements set out in the Code of Conduct.

May 2021

All Financial Advice Providers who give advice to retail clients must have obtained a full licence by the FMA.

 

The Draft Bill is available here.

MBIE's final report is available here.

The Accompanying Cabinet Paper is available here.

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