Financial Services Legislation Amendment Bill

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Financial Services Legislation Amendment Bill

Government Bill

291—1

Explanatory note

General policy statement

This Bill is an omnibus Bill that makes amendments to the Financial Markets Conduct Act 2013 (the FMC Act) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the FSP Act). It also repeals the Financial Advisers Act 2008 (the FA Act) and revokes associated regulations and notices.

The purpose of this Bill is to ensure that financial services are provided in a way that promotes the confident and informed participation of businesses, investors, and consumers. To achieve this, it makes amendments to ensure that the conduct and client-care obligations of financial service providers and the regulation of financial markets remain fit for purpose. It also addresses misuse of the financial service providers register (the FSPR) by offshore entities.

Creating a new regulatory regime for financial advice

The Bill creates a new regulatory regime for the provision of financial advice. The new regime has been designed in response to the findings of a statutorily required review of the operation of—

  • the FA Act, which regulates the provision of financial advice; and

  • the FSP Act, which sets dispute resolution and registration requirements for financial service providers.

The review found a number of problems with the existing regime for financial advice, which are hindering investor confidence, participation in financial markets, and informed decision making.

The new regime addresses those problems in a way that will—

  • ensure consumers can access the financial advice they need:

  • improve the quality of financial advice:

  • not impose any undue compliance costs, complexity, or barriers to innovation:

  • ensure access to redress.

The Bill—

  • enables the provision of more types of financial advice. Unlike the FA Act, the Bill is technology-neutral. This means that the existing restriction that some types of advice need to be given by a natural person will be lifted. This fully enables the provision of robo-advice (online advice) and helps future-proof the regime for technological developments. In addition, the Bill removes the existing distinction between types of financial advice services (for example, class and personalised services). This will make it easier for those giving advice to tailor the advice to the client, rather than be bound by regulatory boundaries:

  • establishes an even playing field and more proportionate conduct and competence requirements. The Bill requires all individuals and robo-advice platforms giving financial advice to place the interests of the consumer first. All those giving financial advice to retail clients will also be required to provide advice only where competent to do so, and be subject to a code of conduct that sets minimum standards of competence, knowledge, skill, ethical behaviour, and client care. While similar requirements exist under the FA Act, they only apply to authorised financial advisers who are a small subset of those who give advice:

  • requires that the code of conduct include minimum standards of competence, knowledge, and skill that apply to particular types of financial advice and products, recognising that the broadened application of the code will mean different and additional standards will be appropriate in some cases:

  • aligns the definition of a wholesale client with the FMC Act definition of wholesale investor. Wholesale clients are generally large or sophisticated clients such as banks, investment businesses, or high-net-worth individuals who do not require or benefit from the same degree of protection as retail clients. Aligning the definition in this way will reduce complexity and result in fewer individuals being classified as wholesale when they really need the protections of a retail client:

  • requires all those giving financial advice to retail clients (rather than just some advisers, as under the FA Act) to ensure their clients understand any limitations on the nature and scope of the advice provided. For example, how many products or how many providers they have considered:

  • requires anyone providing financial advice to retail clients to operate under a licence under Part 6 of the FMC Act. To ensure this does not impose undue costs on industry or government, licences will be able to be issued at the firm level. The specific licensing requirements will be set in regulations and by the Financial Markets Authority (the FMA). The requirements will be flexible depending on factors such as the size and nature of a firm and the services it provides, and whether a firm engages financial advisers or nominated representatives, or is a sole trader:

  • limits who can give regulated financial advice. The Bill requires that in order to give regulated financial advice an individual must be either a financial adviser or a nominated representative both of whom must be giving advice on behalf of a financial advice provider:

  • provides that financial advice providers will be subject to the FMC Act’s compliance and enforcement tools such as civil pecuniary penalties for various breaches, and licensed providers will be subject to licensing actions such as censure and the imposition of action plans. This introduces consistency in approach to enforcement for all licensed financial services:

  • maintains disciplinary measures for some individuals. Financial advisers will be subject to the financial advisers’ disciplinary committee (the Disciplinary Committee). If a financial adviser is found to have contravened any obligation, the Disciplinary Committee will be able to censure, impose conditions, require the adviser to undergo training, impose a fine of up to $10,000, or direct the Registrar of Financial Service Providers (the Registrar) to deregister, or suspend the registration of, the financial adviser:

  • requires disclosure of prescribed information to clients. The Bill requires those giving financial advice to disclose certain information to retail and wholesale clients. The content, timing, and manner of disclosure will be prescribed in regulations and may differ from the existing requirements:

  • exempts some persons from the regulatory requirements. The Bill carries over the exclusions (or exemptions) from the FA Act, which exempt some persons from being subject to regulation even if they provide financial advice. This applies to some occupations if the financial advice they give is given in the ordinary course of carrying on that occupation. The Bill also introduces a limited exclusion for lenders giving advice reasonably for the purposes of complying with certain lender responsibility obligations under the Credit Contracts and Consumer Finance Act 2003:

  • carries over the regulation of brokers from the FA Act, but replaces that term with people who provide a client money or property service. No additional obligations are applied to this service, nor is a market services licence required to provide this service.

In addition to the key elements of the Bill outlined above, which seek to achieve the Government’s objectives for a financial advice regime in New Zealand, the Bill includes the following transitional provisions to expedite and simplify implementation of the new regime.

Transitional licences

The Bill requires industry participants to be engaged by a firm with a transitional licence on a date to be set by Order in Council (expected to be approximately 9 months after the code of conduct is approved). At this point, most elements of the new regime, including the legislative duties and enforcement mechanisms, would take effect. However, existing industry participants who do not meet the competence standards in the code of conduct will be protected by a safe harbour, recognising that it may take time for some to meet any new competence standards.

The transitional licensing process will require industry participants to satisfy a narrower set of entry criteria than the full licensing process. This will enable industry to move to the new regime quickly.

The Bill provides for transitional licences and the safe harbour to expire after 2 years. At this stage, all industry participants would be required to be engaged by a firm with a full licence and everyone would be required to meet the competence standards in the code of conduct.

Code working group

The Bill enables a code working group to prepare the code of conduct, as if it were the code committee (to be established under Part 4 of new Schedule 5 of the FMC Act), before the passage of the Bill. This enables the code of conduct to be developed earlier than would otherwise be possible, expediting transition to the new regime. The new code will replace the existing code of conduct, made under the FA Act.

Discretionary investment management services

The Bill requires authorised financial advisers who provide personalised discretionary investment management services (DIMS) under the FA Act to be regulated under the FMC Act if they wish to continue providing DIMS. This avoids DIMS being regulated in 2 slightly different ways under the same Act. To ensure minimal disruption the Bill enables the existing personalised DIMS providers to be automatically granted FMC Act licences, subject to conditions.

Requiring a stronger connection to New Zealand to be registered on FSPR

The Bill introduces more stringent requirements for entities wanting to register on the FSPR. Entities will only be able to register if they are in the business of providing financial services to persons in New Zealand or otherwise required to be licensed or registered under any other New Zealand legislation.

The Bill also introduces other mechanisms to reduce the risk of misuse of the register, such as providing a regulation-making power in relation to the statements that can be made about a provider’s registration, and providing a power for the Registrar to require information from persons other than the provider, such as a director of the provider.

Other amendments to FMC Act

The Bill includes other minor changes and improvements to the FMC Act as follows. These amendments address issues that have emerged since the implementation of the Financial Markets Conduct regime. The changes will help ensure that the policy of the Act is efficiently and effectively achieved and promote confident and informed participation of businesses, investors, and consumers.

In particular, the Bill—

  • provides for the approval of single person retirement schemes as a Schedule 3 scheme to be cancelled under specific circumstances including when retirement age is reached:

  • provides for redeemable shares issued by industrial and provident societies to be treated as equity securities (shares):

  • provides discretion for the FMA to delay publication of exemptions where a risk of commercial prejudice may arise from earlier publication:

  • makes a minor amendment to the same class exclusion for offers by way of sale, to ensure the exclusion properly reflects market practice in relation to issues of financial products conducted as secondary sales.

Departmental disclosure statement

The Ministry of Business, Innovation, and Employment is required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact statements

The Ministry of Business, Innovation, and Employment produced 3 regulatory impact statements, 2 on 29 June 2016 and 1 on 26 October 2016, to help inform the main policy decisions taken by the Government relating to the contents of this Bill.

Clause by clause analysis

Clause 1 is the Title clause.

Clause 2 provides for the commencement of the Bill. Most of the Act comes into force on a date or dates appointed by Order in Council. The reason for the deferred commencement is that regulations need to be made to give effect to some parts of the Bill (for example, prescribing matters relating to licences for financial advice services and prescribing requirements for trust accounts for client money or property services). In addition, a new code of conduct will need to be drafted, consulted on, and approved. The whole Bill must come into force no later than 1 May 2020.

Various provisions come into force on Royal assent, including amendments relating to—

  • the regulation-making powers; and

  • applications for licences; and

  • the application of the Financial Service Providers (Registration and Dispute Resolution) Act 2008; and

  • transitional licences; and

  • other miscellaneous technical amendments to the Financial Markets Conduct Act 2013 (the FMCA).

Part 1Amendments to Financial Markets Conduct Act 2013

Clause 3 provides for Part 1 to amend the FMCA.

Clause 4 amends the overview provision (section 5) to refer to the regulation of financial advice services under Part 6 as a financial market service. It is also amended to refer to obligations for providers of a client money or property service (which was previously referred to as a broking service).

Clause 5 amends the interpretation section (section 6). Some key new definitions include financial advice, financial advice product, financial advice provider, financial adviser, regulated financial advice, and nominated representative. In summary,—

  • a financial advice provider is a person that provides a financial advice service. A person provides the service if, in the ordinary course of its business, it engages 1 or more individuals to give advice on its behalf or it gives advice on its own account:

  • a financial adviser is an individual who is registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 in relation to a financial advice service (but does not include a financial advice provider):

  • a nominated representative is an individual who is nominated by a financial advice provider under new section 431S.

The section also includes a definition of client money or property service, which was previously referred to as a broking service.

Clause 6 amends the definition of debt security in section 8 to remove a redeemable share in an industrial and provident society from being a debt security (it is instead an equity security).

Clause 7 amends the definition of managed investment scheme in section 9 to remove a reference to a discretionary investment management service (DIMS) supplied under the Financial Advisers Act 2008. There is no substantive change in effect because a DIMS is still not a managed investment scheme.

Clause 8 inserts new section 14A, which relates to transitional, savings, and related provisions set out in Schedule 4 and replaces section 597 (which is repealed by clause 53).

Clause 9 consequentially amends section 18 (which provides for interpretation in Part 2).

Clause 10 amends section 28 to provide that a contravention of new section 431O or 431X does not contravene Part 2. Those provisions relate to false or misleading disclosures by a person that gives regulated financial advice or provides a client money or property service. A contravention of those provisions may result in civil liability under section 449.

Clause 11 amends section 34 to provide an exception from the prohibition of offers made in the course of unsolicited meetings. The exception relates to offers made through a financial advice provider. It replaces the exemptions that previously applied for persons under the Financial Advisers Act 2008.

Clause 13 amends the overview provision for Part 6 (in section 386) to refer to financial advice services and client money or property services.

Clause 14 amends section 387, which relates to the territorial scope of Part 6. The Part applies to a financial advice service, a DIMS, or a client money or property service received by a client in New Zealand, regardless of where the provider is resident, is incorporated, or carries on business.

Clause 15 inserts new section 387A, which gives effect to new Schedule 5. See the description of new Schedule 5 in the note for clause 58.

Clause 16 amends section 388 to require a person who provides a financial advice service to hold, or be authorised under, a market services licence that covers that service. This is a key change. The Financial Advisers Act 2008 currently provides for financial advisers to be authorised by the FMA and for entities to be conferred with qualifying financial entity status. In contrast,—

  • this Bill requires providers of a financial advice service to operate under the existing licensing system in Part 6 of the FMCA. A person (A) provides that service if, in the ordinary course of A’s business, A engages 1 or more individuals to give regulated financial advice on A’s behalf or A gives regulated financial advice on A’s own account:

  • individuals who are engaged by a provider to give advice on behalf of that provider (for example, an employee) are not themselves providing the service and are not required to be licensed. In order to be a financial adviser, an individual must be registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. Alternatively, an individual may give advice as a nominated representative.

Clause 17 amends section 389 to provide an exemption where the service is not provided to any retail clients or where the service is exempted by regulations.

Clause 18 repeals section 392 (which defines discretionary investment management service). This definition is moved to new section 432A by clause 28.

Clause 19 amends the principles that guide the exercise of the FMA’s powers in section 393 to refer to the new purpose relating to financial advice services (see new section 431B).

Clause 20 amends section 395 to clarify how the FMA may specify the manner in which a person may apply for a licence.

Clause 21 amends section 397 (which relates to procedural requirements when the FMA makes licensing decisions) to omit concepts from the Financial Advisers Act 2008.

Clause 22 amends section 400 to provide for authorised bodies that are covered by a licence for a financial advice service. A key difference here is that an authorised body is not required to be a related body corporate of the licence holder.

Clause 23 amends section 403, which concerns conditions that the FMA may impose on a licence. The amendment allows a condition to state which types of financial advice may, or may not, be provided by financial advisers or nominated representatives on behalf of the provider.

Clauses 24 and 25 consequentially amend sections 410 and 414 to update cross-references.

Clause 26 amends section 426 (which relates to disclosure statements) to omit a reference to the Financial Advisers Act 2008.

Clause 27 inserts—

  • new subpart 5A of Part 6, which provides additional regulation of financial advice and financial advice services; and

  • new subpart 5B of Part 6, which relates to client money or property services (currently known as broking services).

New subpart 5A regulates financial advice and financial advice services for the purpose of ensuring the availability of financial advice for persons seeking it, and the quality of financial advice and financial advice services (see new sections 431A and 431B). In summary,—

  • new sections 431C and 431D define the terms financial advice, regulated financial advice, and financial advice service:

  • new section 431E prohibits a person from giving financial advice on behalf of a financial advice provider unless the person is a financial adviser or a nominated representative:

  • new section 431F prohibits a person from falsely holding out that the person, or another person, is a financial advice provider, a financial adviser, or a nominated representative or is lawfully able to give financial advice or provide a financial advice service (either generally or in specific circumstances):

  • new section 431G explains the operation of new sections 431H to 431Q and sets out who is legally responsible if those provisions are not complied with:

  • new sections 431H to 431O impose duties on persons giving financial advice. In summary, the duties are—

    • to comply with the standards of competence, knowledge, and skill in the code of conduct and any prescribed eligibility criteria (new section 431H):

    • to ensure the client understands the nature and scope of the advice being given (new section 431I):

    • to give priority to the interests of the client (new section 431J). The current code of professional conduct under the Financial Advisers Act 2008 provides that an authorised financial adviser must place the interests of the client first, and must act with integrity (see standard 1 of that code):

    • to exercise care, diligence, and skill (new section 431K):

    • to comply with the standards of ethical behaviour, conduct, and client care required by the code of conduct (new section 431L):

    • not to recommend certain financial products if the product’s offer contravened the Act or regulations (new section 431M):

    • to make information available as and when required by the regulations (new section 431N):

    • not to make false or misleading statements in, or omissions from, that information (new section 431O):

  • new sections 431P and 431Q impose additional duties on a financial advice provider to ensure that the provider’s financial advisers and nominated representatives comply with new sections 431H to 431O:

  • new section 431R provides protection to a financial adviser or nominated representative who reports a contravention of a certain provision of the Act to the FMA:

  • new section 431S provides for the nomination of nominated representatives:

  • new section 431T limits the making of a pecuniary penalty order against a financial advice provider that is civilly liable for a contravention of a duty provision by a financial adviser if the provider took all reasonable steps to ensure that the adviser did not contravene the provision. Other civil liability orders (for example, compensatory orders) may still be made against the provider. There is no civil liability remedy against the financial adviser unless the adviser is involved in the contravention under section 533 (see new section 431G(4)(a) and (6)(a)).

New subpart 5B regulates client money or property services. These services are currently called broking services under the Financial Advisers Act 2008. The subpart is broadly similar to Part 3A of that Act (Brokers’ disclosure and conduct obligations). However, changes have been made to align the provisions with concepts in the Financial Markets Conduct Act 2013. In summary,—

  • new section 431U contains an overview of the regime for client money or property services:

  • new section 431V defines a client money or property service as being the receipt of client money or client property by a person and the holding, payment, or transfer of that money or property. The definition includes a custodial service. The service is regulated as a regulated service unless an exclusion in new clauses 19 to 23 of Schedule 5 applies:

  • new section 431W requires a provider to make disclosure in accordance with regulations before receiving client money or client property from a retail client:

  • new section 431X prohibits the making of false or misleading statements in, or omissions from, the disclosed information:

  • new section 431Y relates to the application of the conduct obligations. Generally speaking, the obligations apply to regulated client money or property services. Some obligations apply to a retail service of a DIMS licensee or to a client money or property service provided to a wholesale client if provided by the regulations:

  • new section 431Z requires a provider to exercise care, diligence, and skill:

  • new section 431ZA prevents a provider from receiving client money if an offer contravenes the FMCA or the regulations:

  • new section 431ZB requires that client money be paid into a separate trust account and that client property be held on trust. Some flexibility has been added to the requirement to hold client money or property separate from money or property held by a provider on its own account. Regulations may now prescribe circumstances where this does not apply:

  • new sections 431ZC to 431ZF relate to accounting for client money or property, records of the money or property, reporting on the money or property, and the use of the money or property:

  • new section 431ZG protects the client money or property from the provider’s creditors:

  • new section 431ZH clarifies who is responsible for obligations.

Clause 28 defines terms relating to DIMS. Previously these definitions were in section 392.

Clause 29 replaces section 446, which currently requires DIMS licensees to comply with certain broker obligations under the Financial Advisers Act 2008. This is updated to refer to obligations for a client money or property service under new subpart 5B of Part 6.

Clause 30 amends section 449, which relates to civil liability under Part 6. The amendments impose civil liability for contraventions of new duties in relation to financial advice services or client money or property services.

Clause 31 amends section 451 to provide that a financial advice provider is not an FMC reporting entity merely because it holds a licence for that service. Clauses 12 and 32 consequentially amend sections 351 and 452.

Clause 33 extends the FMA’s stop order powers in section 462 to cases where disclosure documents under new subparts 5A and 5B of Part 6 are false or misleading (or otherwise non-complying).

Clause 34 allows the FMA under section 469 to direct the Registrar to deregister or suspend the registration of a financial adviser under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 if the adviser has contravened or is likely to contravene certain duties under new subpart 5A of Part 6. Clause 35 makes amendments to section 475 as a consequence of this change.

Clause 36 amends section 489, which relates to when the court may make pecuniary penalty orders (see also new section 431T).

Clauses 37 to 40 amend sections 499, 500, 501, and 503 (which relate to defences). Amendments are made to refer to new sections 431O and 431X. Sections 501 and 503 are also amended to refer to “all reasonable steps” (rather than “all reasonable and proper steps”) for consistency with the rest of the Act.

Clause 41 amends section 507 (which prevents a pecuniary penalty and fine under other Acts for the same conduct) to refer to the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Clause 42 amends section 511, which contains an offence of knowingly or recklessly contravening provisions relating to defective disclosure. The amendment extends the offence to new sections 431O and 431X.

Clause 43 amends section 518 to allow a banning order to extend to providing financial advice services or client money or property services.

Clause 44 inserts new sections 532A to 532C, which provide for appeals to the District Court against decisions of the disciplinary committee under clause 46 of Schedule 5.

Clause 45 amends an empowering provision in section 543 in relation to certain exclusions in Schedule 1 that currently refer to category 2 products (as defined in the Financial Advisers Act 2008). Instead, the products to which the exclusions apply will be prescribed in regulations.

Clause 46 amends section 546, which is the empowering provision for Part 6. The amendments allow regulations to be made in connection with the regulation of financial advice services and client money or property services. The amendments include allowing regulations to—

  • exempt services from the licensing requirement for providers of financial advice services:

  • specify activities that are not financial advice:

  • prescribe eligibility criteria for the purposes of new section 431H:

  • prescribe the information that must be made available for financial advice services and client money or property services:

  • prescribe the duties and obligations of providers of client money or property services in relation to client money and client property (in particular, in relation to trust accounts):

  • prescribe the procedure of the code committee and the disciplinary committee.

Clause 47 amends section 548 to provide for regulations in connection with certain defined terms (for example, to exclude matters from being financial advice).

Clause 48 amends section 550, which imposes procedural requirements for regulations relating to exemptions and exclusions. The amendments extend the requirements to cover the new regulations relating to these matters.

Clause 49 extends the FMA’s designation power in section 562 to allow the FMA to—

  • declare a person (or class of person) who would otherwise be a wholesale investor or client to be a retail investor or client:

  • declare advice to be, or to not be, financial advice or regulated financial advice:

  • declare a service to be, or to not be, a financial advice service:

  • remove an exemption from a licensing requirement.

Clause 50 amends section 563 to cover the procedural requirements for these new designation powers.

Clause 51 inserts new section 571A, which allows the FMA to defer its obligation to publish an individual exemption where this is proper on the ground of commercial confidentiality. This is similar to a power that the Takeovers Panel has under the Takeovers Act 1993.

Clause 52 consequentially amends a heading.

Clause 53 repeals section 597 (relating to transitional provisions). This is now covered by new section 14A.

Clause 54 amends Schedule 1, which relates to exclusions from disclosure under Part 3. The amendments include—

  • making a technical adjustment to clause 19 relating to offers by way of sale of products that are of the same class as quoted products. The amendment better aligns the clause with market practice:

  • extending clause 41 (the eligible investor test) to allow it to apply in the context of who is a wholesale client for a financial advice service:

  • making other consequential amendments as a result of the repeal of the Financial Advisers Act 2008.

Clause 55 consequentially amends Schedule 2 (which relates to registers) as a result of the repeal of the Financial Advisers Act 2008.

Clause 56 amends the provisions relating to Schedule 3 schemes to allow the trustees of such a scheme to apply for its approval as a Schedule 3 scheme to be withdrawn. Schedule 3 schemes have the purpose of providing retirement benefits to only 1 person.

Clause 57 amends Schedule 4 to insert transitional provisions relating to this Bill. The main transitional provisions are as follows:

  • the FMA is empowered to issue transitional licences to cover financial advice services. The grounds for issuing the licence are similar to those that apply under section 396. However, the FMA is not required to be satisfied that the applicant is capable of effectively performing that service. The licence may remain in force for only 2 years after commencement:

  • under a transitional licence, individuals may be nominated as nominated representatives only if the licensee (or authorised body) was a qualifying financial entity (QFE) or a member of a QFE group under the Financial Advisers Act 2008. New competency requirements will not prevent these nominated representatives from providing certain advice during the 2-year transitional period:

  • new competency requirements do not prevent a person from providing certain financial advice. For example, a person may continue to provide advice if the person was previously an authorised financial adviser or registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. This ceases to apply 2 years after commencement. The provider that engages the person is not required to ensure that the person complies with the new competency requirements during the transitional period (to the extent that the person is permitted to act):

  • certain financial advisers are treated as holding a market services licence to provide a discretionary investment management service:

  • a code working group is authorised to prepare the new code of conduct before commencement:

  • the current disciplinary committee is continued under the FMCA.

The transitional provisions also include a power to make transitional regulations to deal with unforeseen issues that might arise during the transition. This power, and any regulations made under it, may remain in force for only 3 years after commencement.

Clause 58 inserts new Schedule 5. New Schedule 5 provides for matters relating to—

  • financial advice services; and

  • client money or property services.

Part 1 of new Schedule 5 identifies when a client is a retail client or a wholesale client. This determines whether a financial advice provider needs to be licensed under Part 6 and whether certain duties apply. A licence is not required if the financial advice service is not provided to any retail clients.

The wholesale client test is different from the test under the Financial Advisers Act 2008. The new test has been more closely aligned with the wholesale investor test in Schedule 1 of the FMCA.

Part 2 of new Schedule 5 sets out situations when financial advice is not provided and when financial advice services are not regulated under the Act. Most of these are similar to those that existed under the Financial Advisers Act 2008. The situations when a person does not give financial advice include—

  • providing factual information:

  • carrying out an instruction to acquire or dispose of a financial advice product:

  • giving advice about a kind of financial advice product in general:

  • recommending that a person obtain financial advice:

  • passing on financial advice given by someone else:

  • giving information that the person is required by law to give:

  • carrying out an activity prescribed by the regulations.

The exclusions from being regulated financial advice include advice given—

  • as an ancillary part of carrying on a business the principal activity of which is not the provision of a financial service, in the ordinary course of certain occupations (for example, lawyers, accountants, and real estate agents), or by a director of an entity in his or her capacity as director:

  • by a lender under a consumer credit contract or insurance contract for the purpose of complying with the lender’s responsibilities under section 9C(3)(a) to (e) of the Credit Contracts and Consumer Finance Act 2003 (this is a new exclusion, not one carried over from the Financial Advisers Act 2008):

  • by certain Crown-related entities, trustee corporations, or not-for-profit organisations:

  • by an employer to an employee in relation to a workplace financial product:

  • to the provider of a financial advice product:

  • in circumstances governed by other regulatory frameworks or prescribed by the regulations.

Part 3 of new Schedule 5 sets out situations when client money or property services are not regulated under the Act. The exclusions are similar to those that apply under section 77C of the Financial Advisers Act 2008 (exemptions from being a broking service). The exclusions include—

  • giving the service in the ordinary course of carrying on certain occupations (for example, lawyers, accountants, and real estate agents):

  • services given by Crown-related entities:

  • giving the service as an operator of a designated settlement system:

  • giving the service as a derivatives issuer:

  • an employer giving the service to an employee in connection with a financial product made available through the person’s workplace:

  • other circumstances prescribed by the regulations.

Part 4 of new Schedule 5 provides for a code of professional conduct for financial advice services and for the establishment and operation of a code committee. The provisions are broadly similar to those in the Financial Advisers Act 2008. The key changes include—

  • extending the functions of the code committee to include liaising from time to time with certain persons about the development, review, and implementation of the code:

  • providing for the Minister (rather than the FMA) to appoint members and adjusting the required qualifications for appointment:

  • adjusting the required content of the code to include matters of both general competence and particular competence:

  • providing for the code to apply whenever financial advice is given (rather than just applying the code to certain financial advisers):

  • allowing the code to provide for matters of transition and for the ways in which competence, knowledge, and skill may be demonstrated:

  • providing for the Minister (rather than the FMA) to approve the code.

Part 5 of new Schedule 5 provides for complaints and disciplinary proceedings against financial advisers. The provisions are broadly similar to equivalent provisions in the Financial Advisers Act 2008. The key changes are as follows:

  • the FMA is given a discretion (rather than a duty) to refer a complaint to the disciplinary committee. This is because the FMA may have other enforcement options that it considers are more appropriate (for example, to make a direction order under subpart 1 of Part 8):

  • complaints and proceedings may relate to any of the duties in new subpart 5A of Part 6. Currently, the provisions primarily relate only to breaches of the code of conduct:

  • the disciplinary committee’s powers to discipline a financial adviser have changed. The powers now include directing the Registrar of Financial Service Providers to deregister the person, or suspend their registration, under the Financial Service Providers (Registration and Dispute Resolution) Act 2008:

  • various provisions relating to the disciplinary committee have been aligned with legislation relating to other similar bodies. For example, provisions relating to when a person ceases to be a member of the committee, delegation by the chairperson, determining proceedings on the papers, how summons are issued, and contempt of the committee.

Part 2Amendments to Financial Service Providers (Registration and Dispute Resolution) Act 2008

Clause 59 provides that Part 2 amends the Financial Service Providers (Registration and Dispute Resolution) Act 2008. The key changes are—

  • to strengthen the provisions relating to the application and territorial scope of the Act. Currently, the Act applies to a person who is ordinarily resident in New Zealand or has a place of business in New Zealand, regardless of where the financial service is provided. The amendments will require the person’s financial services to be provided to persons in New Zealand. In addition, the Act may not apply if the extent to which the financial service is provided to persons in New Zealand is less than a threshold prescribed in regulations:

  • to enhance the Registrar’s ability to ascertain whether a person is in the business of providing a financial service to persons in New Zealand:

  • to allow regulations to specify warnings that must be included in advertising for a financial service (for example, a warning that registration under the Act does not mean that the provider is subject to active regulation or oversight):

  • as a consequence of the amendments to the FMCA, allowing a financial adviser to be registered even though he or she is not in the business of providing a financial advice service under the FMCA. Under the FMCA, financial advice providers (generally speaking, an entity) must register. However, an individual who is engaged by a provider (for example, as an employee) is not required to be registered unless he or she wants to be a financial adviser.

Clause 60 amends section 4, which relates to interpretation.

Clause 61 amends the meaning of financial service in section 5—

  • to recognise financial advice services and client money or property services as financial services:

  • to reorganise the descriptions of other financial services (for example, to group various financial services involving licensed providers under the description of being a licensed provider):

  • to allow subcategories of financial services to be defined by regulations.

Clause 62 consequentially amends section 6.

Clause 63 amends section 7, which currently relates to the application of the Act. The amendments narrow the scope of the section to only describe persons who are not in the business of providing financial services.

Clause 64 inserts new section 7A to deal with the application of the Act. The new provision carries over the territorial scope matters currently found in section 8A (which is replaced by clause 65). The key changes are—

  • clarifying the requirement for the financial service to be provided to persons in New Zealand. The Act will not apply if the extent to which the service is provided to New Zealanders is less than a threshold prescribed by regulations:

  • allowing the application of the Act to financial services to be extended by regulations where this is necessary to promote the purposes of the Act and to protect the integrity or reputation of New Zealand’s financial markets (see the empowering provision in clause 84(1) and (3)).

Clause 65 replaces section 8A with a provision relating to transitional and savings provisions. See new Schedule 1AA.

Clause 66 amends section 10 (which relates to registration) to include a reference to the new suspension provision in new section 22B.

Clause 67 amends the heading to subpart 1 of Part 2 as a consequence of the change to section 11.

Clause 68 amends section 11 to express in positive terms the primary duty to be registered under the Act.

Clause 69 amends section 12 (which relates to falsely holding out) to ensure that it applies to a person even if the Act would not otherwise apply to the person.

Clause 70 amends section 14 (which provides for disqualifications that prevent registration) to provide that a person is disqualified if, in the past year, the person has been a director or senior manager of an entity that has been deregistered under new section 18(1)(ca) (see clause 74).

Clause 71 amends section 15 to require a financial adviser’s application for registration to include information about the financial advice provider that they act for. This information is included in the register under section 16 (as amended by clause 72).

Clause 72 also amends section 16 to allow the Registrar to require a financial service provider to supply information for the purpose of confirming that they are in the business of providing a financial service. If the information is not supplied in accordance with the regulations, the provider can be deregistered. Notice of intention to deregister still applies in this case. However, clause 75 amends section 20 to provide that the only valid objection to deregistration is that the information was in fact supplied.

Clause 73 amends section 17 to require a financial advice provider to notify the Registrar if a financial adviser is engaged by the provider or is no longer engaged by the provider.

Clause 74 amends section 18 (which relates to deregistration). The key changes are—

  • to provide for deregistration if a provider is not required to be registered. Clause 77 consequentially amends section 22 (relating to reregistration):

  • to provide for deregistration if a provider has failed to comply with certain new regulations. The Bill does not change the position that registration does not result in active regulation or oversight (such regulation or oversight may be covered by other legislation). However, the regulations may now require a provider to include warnings in advertising or other information that registration does not mean that the provider is subject to active regulation or oversight (see clause 84(2)):

  • to broaden the circumstances in which a person may be deregistered for providing false or misleading information to the Registrar or the FMA:

  • to provide for deregistration as a result of a direction from the FMA or the disciplinary committee under the FMCA.

Clause 76 amends section 21 to require notification of deregistration to include information about appeal rights under the FMCA.

Clause 78 inserts new sections 22A to 22C. The key changes are as follows:

  • new section 22A prevents reregistration in the case of certain directions:

  • new section 22B provides for suspension of registration in relation to financial advice services:

  • new section 22C provides for the registration of financial advisers. Conditions on a financial advice provider’s licence may state that certain types of financial advice may not be given by a nominated representative. That advice would then need to be given by the provider itself or by a person who is registered under new section 22C as a financial adviser.

Clause 79 amends section 27 to provide for the register information for a financial adviser to include information about the financial advice provider that they act for.

Clause 80 makes a consequential change to section 29 (which relates to amendments to the register).

Clause 81 amends section 34 to allow information to be shared with the disciplinary committee.

Clause 82 amends the Registrar’s inspection powers in section 37 to strengthen his or her ability to ascertain whether financial services are provided to New Zealanders. In particular, a director of an entity may be required to give information about the entity or to confirm information supplied by the entity.

Clause 83 amends section 42 (which relates to appeals) to allow an appeal from a registration decision under new section 22C and to clarify the relationship of the provision to appeal provisions under the FMCA.

Clause 84 amends the regulation-making powers in section 44. The new powers include power to—

  • define subcategories of financial services:

  • prescribe matters relating to the application of the Act (additional circumstances in which providing a financial service is covered by the Act and thresholds below which the Act does not apply):

  • prescribe information to be provided under new section 16(1A) (see clause 72):

  • prescribe warnings or other information that a registered person may need to include in advertising or other documents.

Clause 85 inserts new section 48A to give an exemption to financial advisers from the duty to be a member of an approved dispute resolution scheme when they are engaged by a financial advice provider who is a member.

Clause 86 consequentially amends the definition of retail client in section 49. Section 49(2)(c) and (d) is repealed to better align the definition with the definitions of retail investor and retail client in the FMCA.

Clause 87 replaces section 67, which imposes on dispute resolution scheme providers a duty to co-operate and communicate information to other authorities. The main change is to clarify when matters must be communicated. The duty now requires a scheme provider to disclose all material complaints rather than just a series of material complaints. In addition, the duty also arises when the scheme provider believes a member has contravened, may have contravened, or is likely to contravene relevant legislation.

Clause 88 inserts new Schedule 1AA, which provides for transitional and savings provisions.

Clause 89 consequentially amends the list of licensed providers in Schedule 2.

Part 3Repeals and amendments to other Acts

Part 3—

  • repeals the Financial Advisers Act 2008 and revokes various instruments made under that Act:

  • provides for consequential amendments in Schedule 4.