On 26 May 2022, the Financial Markets Authority (FMA) published an information sheet (Guidance) that provides guidance to financial advice providers (FAPs) under the Financial Markets Conduct Act (FMC Act) on how they can demonstrate compliance with their record keeping obligations under their FAP licence.
In this article we set out the common areas of non-compliance with record keeping obligations identified by the FMA, summarise the FMA's two key principles for a FAP to consider when reviewing its record keeping practices, and highlight some of the examples in the Guidance of how a FAP can demonstrate compliance in particular situations.
If you would like advice on your record keeping obligations or, generally, on your obligations as a FAP, please contact a member of our financial services regulation team.
Background
In September 2020 the FMA published findings from a monitoring review of regulated entities in its Supervision Insights report (Report). The Report highlighted several examples of non-compliance with record keeping obligations under the previous financial advice regime, including:
- A lack of policies, procedures and controls to assist the advisers to comply with record keeping obligations
- A failure to retain sufficient evidence to demonstrate key processes had been followed (eg not documenting the rationale for financial advice given to a client, failing to show that the scope of service had been communicated to the client and failing to document what information, disclosure documents and financial advice were provided to the client)
- Incomplete or insufficient records of discussions with clients, including agreements reached in those discussions.
The Financial Advisers Disciplinary Committee (FADC) conducts disciplinary proceedings arising from complaints (referred by the FMA) regarding financial advisers. The FADC's decisions also highlighted issues such as a reliance on the long-standing nature of client relationships rather than retention of adequate records and insufficient records of research on the state of the market.
Review of a FAP's record keeping practices
A FAP's record keeping obligations are set out in a FAP's standard licence conditions (Standard Conditions) as well as in the FMC Act and the Code of Professional Conduct for Financial Advice Services.
Standard Condition 1 states that "you must create in a timely manner and maintain adequate records in relation to your financial advice service".
The Guidance asks FAPs to consider two key areas when reviewing their record keeping practice:
- Development of arrangements for record keeping
- Maintaining oversight of record keeping arrangements.
Development of arrangements for record keeping
The Guidance notes that a record keeping "arrangement" includes the processes, systems and controls a FAP maintains for keeping records. The Guidance notes that:
- Arrangements will differ depending on the complexity and business model of each organisation
- Arrangements should not be overly complex or inappropriate for each type of organisation
- FAPs should also note their obligation under Standard Condition 1 to maintain the "integrity" of information - for example, if records are stored electronically on an online server, a FAP's record keeping arrangement should "detail how these records will be secured and maintained in the event of a cyber incident or problems arising with a third-party storage provider".
Maintaining oversight of record keeping arrangement
The Guidance sets out that "a regular review of the record keeping arrangements will ensure that information is accurately recorded and adequate for meeting the requirements of Standard Condition 1".
Additionally, the FMA notes the importance of maintaining control and oversight over outsourced reporting, and notes this may have implications relating to outsourcing obligations under the Standard Conditions.
Examples in the Guidance
The Guidance provides examples that illustrate how a FAP can demonstrate compliance with the Standard Conditions in particular circumstances. The Guidance includes the following:
When giving financial advice
The Guidance states that, to determine what records must be kept, a FAP must understand the purpose of maintaining the record.
The Guidance provides a non-exhaustive list of types of information that should be kept when giving regulated financial advice to retail clients.
The Guidance also sets out that this information could be captured in multiple ways eg in documents or a digital tool. The adequacy of record keeping is contingent on the relevance of the information, and nature and scope of services provided.
Ongoing advice
When ongoing advice is provided, the FMA expects adequate information about this to be created and maintained.
For example, the Guidance notes that "where financial advice is given that may result in a material change to the client’s initial financial advice, we expect to see a record of the explanation given to the client about the impact or consequence of the change on the original advice, and evidence to demonstrate that the client has understood and agreed to the change".
Advice relating to product replacement
The Guidance states that the FMA will review whether records are available to show that the "risks, benefits and any conflicts" were clearly communicated to the client in relation to both a product replacement and product cancellation.
