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New Zealand Securities Commission |
Last Updated: 16 November 2014
This guidance document was withdrawn following the passage of the Financial
Service Providers (Pre-Implementation Adjustments) Act on 23 June
2010.
Guidance Note:
Distinguishing the boundary between a financial planning service and advice
29 March 2010
About this Guidance Note
1. The Financial Advisers Act 2008 places obligations on advisers who
provide a financial planning service, and requires them
to be authorised by the
Securities Commission.
2. This guide is designed to help those affected by the Act
to meet their obligations when it comes into force.
The Securities Commission
is providing it in response to industry concerns about the boundary between
advising on products that require
registration (category 2 products and for QFEs
some category 1 products) and providing a financial planning service
(which
requires registration and authorisation).
3. An important part of giving good advice is an adviser’s
consideration of the client’s nature and requirements,
and the nature of
the service the adviser is performing. A financial planning service involves
similar considerations of a client’s
current financial situation, goals
and options.
4. This guide sets out the Securities Commission’s
interpretation of nature and requirements in the context of section 33 of
the Act. It outlines how the Commission will assess whether a financial
adviser’s consideration
of nature and requirements in a particular
situation meets the definition of a financial planning service.
5. The guide applies to all financial advisers, including
registered-only advisers, advisers working for a qualifying financial
entity
(QFE) and authorised financial advisers (AFAs).
The law
6. Section 33 of the Act requires an adviser to “exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances, taking into account, but without limitation, the nature and
requirements of the financial adviser’s client and the nature of the service
performed for the client”.
7. Section 5 defines financial planning service as “a service
that analyses an individual’s current financial
situation, identifies his
or her financial goals, and develops financial options for realising those
goals”.
8. An adviser must be licensed as an AFA before providing a financial
planning service. Registered-only advisers, and advisers (other than
AFAs) working for a QFE are prohibited from providing a financial planning
service.
Considering nature and requirements
9. Each time an adviser gives advice, consideration of their
client’s nature and requirements in the context of
the service being
provided will help them satisfy their legal obligation to exercise care,
diligence and skill.
10. In any advice situation, the Commission expects an adviser to be
able to demonstrate that at the time of providing the advice
they:
a. had the appropriate level of skill for giving that advice, and
b. considered their client’s nature and requirements in the context
of the nature of the service to be performed.
11. The level of skill required depends on the situation, including the
client’s objective in seeking advice. The Commission
will consider the
relevance of an adviser’s qualifications and experience in relation to the
products, markets or services
they are dealing with. The more comprehensive the
service, the more the Commission will expect advisers to be able to demonstrate
they have the breadth of skills and knowledge to consider alternative products
or strategies for their client.
12. The extent to which an adviser should consider their client’s
nature and requirements depends on the circumstances:
it should be greater when
the advice is more complex or comprehensive.
13. For example, when advising on a standard car insurance product, an
adviser is likely to need to ask only a few basic questions
to determine the
most suitable product. The client’s nature and requirements are
straightforward: the client wants good-value
insurance for a single asset. The
nature of the service being performed is to direct the client to the most
appropriate product for
their needs. The client’s current financial
situation and goals are unlikely to be relevant to their advice requirements or
to the service being performed, particularly as the options are within a single
product range.
14. In situations like this, where the significance of the advice does
not warrant analysis of a client’s current financial
situation, a
financial planning service is not, and does not need to be, provided.
15. The Commission will consider the significance of the advice to a client’s current financial situation and goals when assessing whether a financial planning service has, or should have been, provided. It will also consider the
nature of the service being performed for the client. Where the advice is
significant to a client’s current financial situation,
or where the
performance of the service necessarily involves an analysis of the
client’s current financial situation, it is
likely to result in the
provision of a financial planning service as defined by the Act.
16. For example, an adviser advising a client on a home equity release
product as a way of structuring the client's post-retirement
financial situation
will generally be providing a financial planning service. In exercising
care, diligence and skill in
these circumstances, consideration of the
client’s nature and requirements must necessarily extend to an analysis of
the client’s
current financial situation and goals. This is
necessary in order to advise them properly, not only in relation to the
product sought but also in terms of other options for realising those
goals.
17. What skills and how extensive an analysis each particular
circumstance requires is a matter for an adviser’s
professional judgement.
The nature of the service being offered or that the client can
reasonably expect is directly relevant
here.
18. What is unacceptable is deliberately limiting the areas of inquiry
required to meet the standard of care diligence and skill
Section 33 demands in
order to avoid crossing the boundary into providing a financial planning
service.
Formalising considerations
19. Generally, it is good practice, each time an adviser gives advice,
to formalise and document consideration of the client’s
nature and
requirements in the context of the nature of the service; this is also referred
to as a suitability analysis. There are
two situations, below, where the
Commission does not expect a suitability analysis to be conducted.
20. The Commission does not expect advisers to conduct suitability
analyses when they make it clear to clients that they are
providing only
non-personalised financial advice which is not tailored to the clients’
current financial situation or goals.
21. The Commission does not expect advisers to conduct a suitability
analysis when a client declines to provide the information
necessary for one.
However, in situations like this, the Commission expects advisers to
make clear to clients the risks
of not providing that information, and keep a
record of the clients’ instructions.
22. For AFAs, these two exceptions will be subject to the standards set
out in the AFA Code of Professional Conduct. QFE advisers
will be subject to the
terms and conditions of the QFE licence.
Status of this Guidance Note
23. This guide does not constitute legal advice. The Commission encourages advisers to seek their own professional advice on how the Act and other applicable laws apply to them – it is an advisers’ responsibility to determine
their obligations. The Commission will keep this guide under review and may
publish further comments or guidelines.
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URL: http://www.nzlii.org/nz/other/NZSecCom/2010/4.html