The problem advisers face
Many advisers believe they are already meeting the duty to exercise care, diligence, and skill – but when the FMA asks for evidence, the gaps often become obvious. Missing records, unclear reasoning for product recommendations and limited explanations of scope can all lead to questions you may struggle to answer.
In short, the risk is not usually bad intent. It’s that the adviser thinks they have done the right thing but cannot prove it.
What the duty really requires
FAP disclosure documents list the duties that apply when providing regulated financial advice. One of these is the duty to exercise care, diligence, and skill. Under section 431L of the FMC Act, anyone giving regulated financial advice must exercise the care, diligence, and skill that a prudent person in the same occupation would use in the same circumstances.
In practice, the FMA considers that this duty includes:
- Maintaining adequate records to demonstrate compliance.
- Assessing the product’s suitability for the client’s needs.
- Explaining the key features and limitations of the product.
- Clearly articulating any limitations on the service being provided.
Failure to meet this duty can flow through to breaches of licence standard conditions, Code Standards and other obligations. This can lead to enforcement action, including censure, and significant reputational impacts for the FAP.
What recent FMA findings tell us
Although the FMA’s Update on the ongoing review of insurance replacement business and conflicted conduct (March 2018) refers to AFAs and RFAs, the themes still apply. The FMA continues to direct FAPs to this report, and the issues it highlights remain common in Strategi’s recent compliance reviews.
Key lessons from the report include:
- Record-keeping is not a tick-box exercise. It is central to delivering good client outcomes.
- Good care, diligence, and skill means documenting advice, the basis for recommendations and any client interactions that shaped the advice.
- When recommending a replacement policy, advisers should consider whether they are effectively giving advice on both the new and existing product.
- Clients reasonably expect advisers to compare products and explain the differences in cover, costs and benefits.
- Failing to explain the consequences of limiting the scope of service can leave clients exposed and unaware of the risks.
These issues often arise when advisers assume the client understands the advice process, but the client expects more than what was delivered or documented.
How advisers can meet this duty in practice
The good news is that meeting this duty is achievable with the right processes. Focus on the following:
- Keep clear and complete records of fact-finds, needs analyses, file notes and recommendations.
- Document why a product is suitable for the client, not just what the product offers.
- Explain key features and limitations in plain language and confirm this in writing to the client.
- Be explicit about the scope of advice – what is included, what is excluded and why.
- When replacing products, produce a written comparison and outline the implications of the change.
These steps not only support compliance – they protect clients and strengthen trust.
How Strategi can help
If you want confidence that your advice process meets the duty to exercise care, diligence, and skill, Strategi can carry out an independent review of your files, templates and procedures. This gives you a clear view of what’s working, what needs strengthening and how to close the gaps before the FMA identifies them.
Get in touch if you’d like support.