Regulatory returns
Following consultation last year, the Financial Markets Authority Te Mana Tātai Hokohoko (the FMA) released the questions that licensed financial advice providers (FAPs) must answer in their regulatory returns. The relevant regulatory returns questionnaire for each FAP licence class can be found on the FMA's website.
In its media release, the FMA reiterated that it considered industry feedback and proceeded with a balanced reporting option that includes fewer questions than previously proposed, as well as further refinements to certain questions. The FMA is of the view that this information will set the focus for its risk based monitoring approach and is necessary to effectively supervise FAPs in accordance with licence Standard Condition 3. Clare Bolingford, Executive Director for Regulatory Delivery, commented that:
“The balanced regulatory reporting returns will allow us to implement a more effective, risk based approach to monitoring Financial Advice Provider businesses. Overall, these regulatory returns support our supervision approach, so we can target our resources efficiently to identify those areas of highest potential risk of harming consumers."
All FAPs must complete and submit regulatory returns (via the FMA's website) by 30 September 2024, covering the period between 1 July 2023 and 30 June 2024. The FMA will notify all FAPs when it is time to complete and submit their regulatory returns.
FMA's guidance on Code Standard 3
In addition to the release of the questionnaires, the FMA also released its guidance titled Reasonable grounds for financial advice about financial products (the Guidance). The Guidance sets out the FMA's approach to applying and enforcing Code Standard 3 of the Code of Professional Conduct for Financial Advice Services (the Code) in circumstances where it is difficult (or impractical) to access information to support reasonable grounds for financial advice on an investment product, such as initial public offerings (IPOs) or small market capitalisation stocks. Code Standard 3 states:
Code Standard 3: A person who gives financial advice must ensure that the financial advice is suitable for the client, having regard to the nature and scope of the financial advice.
Commentary: Ensuring that the financial advice is suitable for the client should include having reasonable grounds for the financial advice. Reasonable grounds for the financial advice means those grounds that a prudent person engaged in the occupation of giving financial advice would consider to be appropriate in the same circumstances, such as those in relation to:
- Any strategy supporting the financial advice
- Any assumptions underlying the financial advice
- Any financial advice product covered by the financial advice
- The client’s circumstances that are relevant to the financial advice, such as their financial situation, needs, goals, and risk tolerance.
The FMA (via the Guidance) recognises the challenges financial advisers may face when advising on high risk, complex, or novel financial products where it can be difficult to access information to satisfy the requirement of "having reasonable grounds for the financial advice".
For example, financial advisers advising on IPOs or smaller market capitalisation stocks may not always have access to "expert research" to meet this requirement. The FMA is clear that the Guide is not intended to discourage financial advisers from giving advice not supported by "expert research". Instead, the FMA's view is that the requirement of "having reasonable grounds for the financial advice" is a flexible and adjustable standard, which depends on the nature and scope of the advice and the relevant circumstances of each case.
Advising on IPOs and listed equity securities
The FMA acknowledges that IPOs and listed equity securities (particularly small market capitalisation stocks) can have distinctive risks which often require time to:
- Identify and assess those risks
- Gain an adequate grasp of what the company does, including what drives its value, and its ability to manage the risks it faces.
When giving financial advice about IPOs and listed equity securities, the FMA expects advisers to consider fundamental information that is publicly available, including:
- IPOs: the product disclosure statement and/or information on the register entry (or equivalent overseas disclosure information)
- Listed equity securities: material information publicly released by the issuer, including information about the issuer and the information about the equities listed on the NZX (or other financial product market on which the equities are listed).
The FMA does not expect advisers to verify the above information
However, the FMA notes that advisers must determine whether additional information (or evaluation) is needed to meet the requirement of "having reasonable grounds for the financial advice". This includes whether the adviser needs to access (or undertake) research and, if so, the nature and extent of that research. The FMA recognises that research will not always be required – but is more likely to be needed to support advice on more "complex or novel financial products, including those that are higher risk". It is ultimately up to the advisers to exercise their professional judgement in the relevant circumstances and to ensure that good customer outcomes are achieved.
Key principles
The FMA has outlined the following key principles that the financial advisers should meet when giving financial advice:
- Meet professional responsibilities to clients as required by the Financial Markets Conduct Act 2013 and the Code
- Give financial advice that is within the scope of an adviser’s professional services, competence, knowledge and skill
- Exercise professional judgement
- Consider relevant, material and sufficient information to inform financial advice and support having reasonable grounds
- Consider the client’s relevant circumstances such as their financial situation, needs, goals and risk tolerance
- Communicate clearly with the client to ensure they understand the nature and scope of the advice given, including any limitations
- Keep adequate records in relation to the financial advice service that clearly demonstrates compliance with Code Standard 3 (good records are particularly important if the adviser has relied on limited information to give the financial advice).
Concluding comments
The FMA has now finalised the regulatory returns obligation under licence Standard Condition 3. FAPs will need to review the relevant regulatory returns questionnaire and ensure that they will be able to capture the required information from 1 July 2023, supporting their regulatory returns submission for the July 2023/June 2024 period.
The FMA (via its Guidance) has made it clear that the requirement to have reasonable grounds to support the financial advice under Code Standard 3 must be met at all times, although what is reasonable will depend in each case on the nature and scope of the advice and the relevant circumstances. We recommend FAPs that give financial advice on IPOs and/or small market capitalisation stocks to read the Guidance to ensure that they understand, and comply with, the FMA's expectations in relation to Code Standard 3.
If you have any questions on the regulatory returns or the Guidance, please get in contact with a member of our financial services regulation team.
