If your insurance broking business provides a FAS to retail clients, it will be a FAP and it will need to be licensed under the new Bill.
Welcome to the alphabet soup of the Financial Services Legislation Amendment Bill. This Bill if enacted will:
- Repeal the unloved Financial Advisers Act 2008,
- Amend the existing Financial Markets Conduct Act 2013 to include the new financial adviser regulatory regime, and
- Amend the Financial Service Providers (Registration and Dispute Resolution) Act 2008 to accommodate these changes and to eliminate overseas abuse of the Financial Service Providers Register.
Parliament is likely to pass the Bill into law later this year, but it will not go live until the Code of Conduct is finalised. Once it goes live, the FMA will issue transitional licences over a two-year period. After this period expires, the new regime will come into full force.
Overview of proposed changes
Unfortunately trying to follow the new Bill is still a Byzantine undertaking. Assuming some familiarity with the current Financial Advisers Act 2008, the key changes are as follows:
- Licensing will move from people (AFAs and RFAs) to legal entities employing them. Companies will become primarily responsible for compliance with the new legislation; they are referred to in the Bill as financial advice providers (FAPs).
- The old acronyms of RFA, AFA and QFE will go. Dividing financial products into 2 categories will also go.
- As well as the existing duties in the Financial Advisers Act 2008, the following new duties will be added:
- A duty to meet standards of competence, knowledge and skill (this duty will not apply over the transitional period),
- A duty to ensure clients understand the nature and scope of advice,
- A duty to give priority to clients’ interests,
- For FAPs, a duty to ensure that their employees who are financial advisers or nominated representatives (see below) comply with all the duties.
- The threshold for being a wholesale client is raised to clients with a minimum of $5M in net assets or a minimum of $5M in consolidated turnover, both over the preceding 2 years (presently $1M).
- The Code of Conduct is in the process of being completely rewritten.
Regulated Financial Advice
The key to whether the Bill will apply to your business is determining whether your business provides regulated financial advice to its clients, either directly (e.g. via the internet) or engages people to do so on its behalf. If it does, it is providing what the Bill calls a financial advice service (FAS) and the entity providing it is a financial advice provider (FAP).
What is regulated financial advice?
Before we come to that, we must first understand what financial advice is. In the context of a traditional insurance broker, a broker gives financial advice when he or she makes a recommendation or gives an opinion about purchasing or cancelling an insurance product. In order to clarify this, The Bill says doing any of the following does not amount to giving financial advice:
- Providing factual information about an insurance product. For example, information about the premium charged, the terms of cover or about how to go about purchasing or cancelling an insurance product.
- Merely carrying out an instruction given by a client to purchase or cancel an insurance product.
- Making a recommendation or giving an opinion about a kind of insurance product in general, e.g. recommending business interruption insurance, rather than recommending a particular insurer’s business interruption policy.
- Recommending that a person obtains financial advice.
- Merely passing on financial advice given by someone else.
- Giving or making available your disclosure documents or any other information the law requires you to make available.
If any of these exemptions applies, this is the end of the road, because your advice is not financial advice caught by the Bill.
Assuming your advice is financial advice, the next question is whether it is regulated financial advice. If a broker gives the advice in the course of his or her business as an insurance broker and none of a list of 11 exemptions apply, it is regulated financial advice. For a broker giving financial advice in the ordinary course of his or her insurance broking business, none of those exemptions is likely to apply. For other businesses, exemptions apply when:
➢ The financial advice is given as an ‘ancillary’ part of a business whose principal activity does not involve providing financial advice (note the subtle shift here from the current law, which uses the word ‘incidental’),
➢ A lender of money under a credit contract gives the financial advice and the advice is an ‘incidental’ part of a business whose principal activity does not involve providing financial advice.
Once we have established the financial advice is regulated financial advice, the Bill will apply to your business. This means:
- Your business entity is providing a financial advice service (but not your employees giving the advice, unless they are doing so on their own account and not as employees),
- Your business entity is a financial advice provider (FAP),
- If your business entity provides a financial advice service to any retail clients (any clients who are not wholesale clients), the business entity must be licensed under the Financial Markets Conduct Act 2013 and continue to belong to a dispute resolution scheme. Unless an insurance broking business is confident it does not presently give, and it will never in the future give, regulated financial advice to any retail client, it should become licensed.
- Employees of your business giving regulated financial advice fall into two categories:
- Financial advisers – these employees are registered in their own name as a financial adviser under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, and
- Nominated representatives – these employees are not so registered. The Financial Markets Authority must approve them and the FAP must keep an up to date record of them.
Here is a practical example of how this will work:
XYZ Insurance Brokers Limited (XYZ) trades as a small-to-medium sized general insurance broker with five employees giving advice.
During the course of its business, it gives advice to its clients about purchasing and/or cancelling specific insurance policies. It does this both directly (through its website) and indirectly (through its employees). Therefore, it is giving regulated financial advice (RFA) and when it gives that advice, it is providing a financial advice service (FAS). This means XYZ is a financial advice provider (FAP). As some of its clients are retail clients, it must be licensed under the new Bill and be a member of a disputes resolution scheme.
All of five employees provide regulated financial advice to clients. Although they do so personally, they are not providing it on their own account; they are providing it on behalf of the company. Therefore, none of them is providing a financial advice service (FAS) personally and none needs to be licensed.
Under the terms of XYZ’s licence granted by the FMA, only financial advisers may give certain types of advice. Therefore, two of the five who qualify have registered themselves personally as financial advisers under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 in order to qualify. The other three are restricted to less complex advice under XYZ’s licence. XYZ must nominate them as nominated representatives and control their activities. They don’t have to register under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, but XYZ must keep an up to date register of them.
Once you have read this example, all insurance brokers will, hopefully, have a better idea of what the new legal framework looks like and what compliance tasks lie ahead.
We will be providing further information once the Bill is passed into law and once the next iteration of the draft Code of Conduct is released.
In the meantime, please feel free to contact us if you require any further information.