What’s happened?

Every day we are getting heaps of calls and emails from current authorised financial advisers and registered financial advisers asking all manner of questions - most of which should have been asked 12 months ago.

Financial Markets Authority (FMA) statistics indicate there are over 2500 financial advice providers (FAPs), the majority of which hold transitional FAP licences. A smaller number are unlicensed FAPs planning to operate under a FAP that holds a transitional licence.

The suspected 70 percent of the industry that we believe are underprepared are struggling with one or more of the following:

• understanding and becoming compliant with the legislation, regulation, code, conduct obligations, transitional FAP standard conditions, and (where applicable) new obligations contained in product provider agreements. All this needs to occur by 15 March 2021;
• putting in place agreements between the business and those who will provide financial advice;
• disclosing the remuneration they receive and any conflicts of interest, and justifying this to clients;
• getting the required education under their belts; and
• redesigning their advice processes and documents so as not to create unnecessary compliance burdens on both their clients and their own business.

Our assessment suggests there is only a small number of active non-compliers and disbelievers. Yes, you read it right - there are some advisers who believe all this compliance stuff will just go away and not impact them at all.

In our view, the vast majority have just been too busy to focus on getting ready for 15 March. They have had a bumper year with clients pouring in. Clients want to invest money, obtain mortgages, buy insurance etc. Almost every adviser we talk to reports unprecedented levels of new business. These are all good, decent advisers. They want to do the right thing by their clients and comply with the law, but are struggling to do both at once.  As a result, they have made a commercial decision to make money whilst the sun shines and then turn their attention to the compliance stuff once the FMA starts to flex its muscles.

We believe delaying compliance is not only riskier, but also more expensive in the long run.

The cost of compliance

One question we get every day is: “How much will my compliance cost?”  This is an impossible question to answer in a few seconds as we need to understand how the caller defines ‘compliance’ and how their business plans to operate in the new regime. We also need to know important things like the number of advisers, the range of products advised on, the level of adviser education, what inhouse compliance resources they may have…the list goes on.

What we can say with certainty, is that compliance is cheapest when you implement your processes well in advance and then test and adjust as you go. Compliance can become very expensive when things have gone wrong and the FMA is breathing down your neck. It then becomes a frantic scramble to put in place policies, processes, and controls, while also trying to recruit the necessary staff.

Compliance also becomes expensive when you do not fully understand the new regulatory regime before you. In this situation businesses can try to operate as they did before, but just add in more paper in an ill-informed bid to comply, generally adding more client signoffs and disclosures.

Compliance becomes much cheaper if there is:

• consistency of processes and documentation throughout the business;
• a high level of training for advisers and admin staff;
• good integration of technology throughout the business; and
• a genuine desire to do the right thing by the client.

From 15 March we will be operating under the Financial Markets Conduct Act 2013 (FMC). The reality is that the penalties if you get things wrong are higher than what they were under the Financial Advisers Act 2008. However, that should not cause undue concern if the business has spent the time reassessing how it wants to operate. This is borne out by two often overlooked purposes of the FMC Act, which are to:

• avoid unnecessary compliance costs; and
• promote innovation and flexibility in the financial markets. 

Compliance costs will be more expensive from 15 March and that is simply a factor of more obligations being placed upon all those providing regulated financial advice. Therefore, expect to pay more - but don’t unnecessarily increase your costs by having the wrong people operate under your licence, or by failing to have well documented policies, processes and controls in place. If everyone in your business understands your policies, understands the regulatory regime, has good technology to work with, and you have slick advice processes, then your compliance costs will be manageable.