COMPLIANCE NEWS – INSURERS
FEBRUARY ISSUE | 2021
Happy New Year. This month we review the basic requirements of the new financial advice regime that comes into effect in March. We also provide our general update on relevant legislation.
NEW FINANCIAL ADVICE REGIME
The new financial advice regime commences on Monday 15 March 2021. The start date of the regime was delayed from 29 June 2020 to 15 March 2021 as a result of New Zealand’s lockdown response to the COVID-19 pandemic. We set out below the key points financial advice providers must be aware of, most of which we have already canvassed in previous newsletters.
From 15 March 2021, anyone giving regulated financial advice to retails clients must operate under a financial advice provider (FAP) transitional or full licence. The Financial Markets Authority began accepting FAP transitional licence applications on 4 November 2019. If you have not already applied for your FAP transitional licence, we recommend you do so immediately. After 15 March 2021 the FMA will only accept applications for FAP full licences.
The FMA has prepared a Financial Advice Provider Transitional Licence guide to assist applicants. All FAP transitional licences contain two standard conditions. The two standard conditions require licencees:
- to keep adequate records in relation to their financial advice service; and
- to have an internal process for resolving complaints relating to their financial advice service:
and are truncated versions of the standard conditions that will apply to FAP full licences (see below). FAPs with a transitional licence can operate under a transitional licence until 15 March 2023. After 15 March 2023, all FAPs must operate under a full licence.
The FMA has also prepared a Financial Advice Provider Full Licence guide to assist applicants. All FAP full licences will contain seven standard conditions. The seven standard conditions require all licensees:
- to create in a timely manner and maintain adequate records in relation to their financial advice service;
- to have an internal process for resolving client complaints relating to their financial advice service;
- to complete regulatory returns on their ongoing capability to effectively perform the financial advice service in accordance with the applicable eligibility criteria and other requirements;
- to ensure the provider of an outsourced system is capable of performing the service to the standard required to enable them to meet their market service obligations;
- to have and maintain a business continuity plan that is appropriate for the scale and scope of their financial advice service;
- to satisfy the requirements set out in section 396 and, if applicable section 400 of the FMCA; and
- to notify the FMA in writing within 10 working days of implementing any material change to the nature of, or manner in which they provide, their financial advice service.
The full standard conditions are much more prescriptive than the above list and include substantial explanatory material. FAPs should read and understand the standard conditions in advance of applying for a full FAP licence after 15 March 2021.
Full FAP licences will also include a condition that the licencee only provide the market services or class of market services to which the licence relates. The FMA may also impose specific conditions on a case-by-case basis.
The new financial advice regime restates FAPs’ duties and obligations. At a high-level, these are:
- to not give regulated financial advice to a retail client unless you:
- meet the standards of competence, knowledge, and skill in the Code of Professional Conduct;
- meet any prescribed eligibility criteria in relation to giving the advice:
- to not give regulated financial advice to a retail client unless you have taken reasonable steps to ensure the client understands the nature and scope of the advice being given, including any limitations;
- to give priority to the client’s interests by taking all reasonable steps to ensure the advice is not materially influenced by your own interests or the interests of a person connected with giving the advice;
- to exercise the care, diligence, and skill that a prudent person engaged in the occupation of giving regulated financial advice would exercise in the same circumstances;
- to comply with the standards of ethical behavior, conduct, and client care required by the code of conduct;
- to not recommend a product that contravenes legislation;
- to make prescribed information available in the prescribed manner (Disclosure Regulations); and
- to not provide false or misleading statements or omissions.
This list is not exhaustive and anyone providing regulated financial advice to retail clients should familiarise themselves with the new financial advice regime and in particular the duties in sections 431H to 431R of the updated FMCA.
Code of Conduct
The new Code of Professional Conduct for Financial Advice Services (Code) came into force on 1 June 2020. However, the obligation to comply with the Code does not arise until sections 431I and 431M of the FMCA come into force on 15 March 2021 alongside the rest of the new financial advice regime.
The Code contains nine high-level standards, split into two parts:
- Part 1: ethical behaviour, conduct, and client care; and
- Part 2: competence, knowledge, and skill.
The standards in Part 1 require:
- clients to be treated fairly;
- financial advice providers to act with integrity;
- financial advice to be suitable;
- financial advice providers to ensure clients understand the advice; and
- client information to be protected.
The standards in the Part 2 require persons giving various types of financial advice to meet different standards of competence, knowledge, and skill, and to keep their competence, knowledge, and skills up-to-date.
The Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020 (Regulations) will amend the Financial Markets Conduct Regulations 2014 to set out what and when information must be disclosed to clients. The amended Disclosure Regulations take effect on 15 March 2021 as part of the new financial advice regime.
The Ministry of Business, Innovation, and Employment published an overview of the disclosure regulations that explains the changes made.
At a high level, the Regulations require relevant information to be:
- made available on a website or on request;
- provided when the nature and scope of advice becomes known;
- provided when advice is given; and
- provided when a complaint is received.
Relevant information includes licence status and conditions, the nature and scope of the financial advice service, fees and expenses, and conflicts of interest.
Please contact us if you have any questions about the new financial advice regime.
New Zealand’s 53rd Parliament does not commence until 9 February 2021. There has been no significant legislative progress since 11 August 2020.
Financial Markets (Conduct of Institutions) Amendment Bill
The Finance and Expenditure Select Committee reported on the Financial Markets (Conduct of Institutions) Amendment Bill on 7 August. The Bill now awaits its second reading.
Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill
The Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill had its first reading on 21 July 2020. The Governance and Administration Select Committee is now accepting submissions on the Bill.
Fair Trading Amendment Bill
The Fair Trading Amendment Bill passed its first reading on 12 February 2020. The Economic Development, Science, and Innovation Committee is considering the Bill. Submissions closed on 26 April 2020. There has been no activity in respect of the Bill since 13 February 2020.
Insurance Contract Law Review
The Ministry of Business, Innovation and Employment is completing a review of New Zealand’s insurance contract law. The purpose of the review is to ensure insurance markets work well and enable individuals and businesses to effectively protect themselves against risk. The Minister of Commerce and Consumer Affairs Hon Kris Faafoi has explained he considers the review a priority.
There has been no visible activity in respect of the review since April 2019.
Disclaimer: The information contained in this newsletter is provided for general purposes only, and should not be construed as legal advice on any matter.
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