Background, Introduction and General

Issue raisedResponse
 
A more prescriptive approach was suggested for the overall style of the Code, along with a further break down of paragraphs with more extensive numbering for ease of reference. The overwhelming feedback received was supportive of the principles-based approach adopted. However, a number of the Code Standards have been expanded with further guidance provided where it was felt this may assist in applying the relevant principle, or where further clarity was required. Whilst the Committee acknowledges that more extensive use of numbering would assist legal advisers and others when referring to specific provisions of the Code, it was felt that a minimal use of paragraph numbering in the body of each Code Standard rendered the Code more approachable for the benefit of both financial advisers and consumers.
Should insurance advisers and mortgage brokers be required to be authorised under the Code in order to 'raise the bar' across the entire industry? Insisting on insurance advisers and mortgage brokers becoming authorised, and crafting the Code accordingly, is beyond the powers of the Code Committee. A policy decision has been made at the legislative level to allow those solely involved with category 2 products to operate without being authorised, outside of the Code. However, the Committee has approached its task on the assumption that those solely involved with advising on category 2 products will be able to apply for an appropriate level of authorisation.
Should a distinction be made in terms of client care requirements between different categories of products? In particular, should AFAs be given the discretion to determine for themselves what is appropriate in terms of client care requirements for category 2 products? Code Standard 9 (explaining the basis of personalised advice for retail clients) has been limited to investment planning services and services involving category 1 products, to ensure an appropriate balance is struck and that the obligations placed on AFAs when advising on category 2 products are not unduly onerous when compared with the obligations on RFAs. For all other Code Standards it seemed inconsistent with the objectives of the Act to prescribe different standards of client care based on product categorisation.
It was suggested that the first paragraph of the introduction should be amended to read: 'The Code sets out Code Standards. Each Code Standard is followed by additional provisions. These comprise part of the Code and relate to the application of the Code Standards'. The Committee disagreed. This suggestion misconstrues the structure of the Code. The 'additional provisions' were also intended to form part of the relevant Code Standard, and this has been expressly stated in the Introduction. The use of an 'overarching principle' approach allows each Code Standard to be succinctly summarised, with the additional provisions of the Code Standard providing further detail as to how the overarching principle is to be applied in practice.
It was also suggested that reference to compliance with legal obligations be deleted from Background section A, and reference to additional provisions not limiting the application of the relevant overarching principle be deleted from Introduction section B. The Committee considered that the references identified were helpful in terms of reminding financial advisers that the Code should not be their sole source of reference for identifying their legal obligations. The guidance note in the Introduction ensures that the additional provisions within each Code Standard are placed in their proper context.
Support was expressed for specific provisions to be included in the Code in respect of trainee advisers. In particular, it was suggested that a separate designation should be included in the Code for trainee advisers such as a 'provisional AFA' or 'restricted AFA', with specific relief from various Unit Standard Sets where the trainee operated under the supervision of an AFA who took responsibility for their work and specific standards were imposed on AFA's acting in a supervisory role. The concern raised was that otherwise it will be very difficult to bring through new advisers, as Unit Standard Set C will be unattainable. Full AFAs may struggle to justify operating a true apprenticeship model in the face of regulatory restrictions on what the apprentice can say. The Committee considered this issue at length, both within the Committee itself and with various external stakeholders who raised the issue as being of concern to them. The Committee considered the limitations placed on the scope of activities that will constitute 'financial advice' when the Act was finalised at the end of June. On balance, it was felt that these limitations provided a sufficient opportunity for apprentice advisers to operate without needing a separate classification. Regardless, if a 'provisional' class of AFA were created, the Committee considered that extensive disclosures would need to be imposed in order to ensure the objectives of the Act were not undermined through such a classification. It seemed likely that the extent of those disclosures would render the classification unattractive. The Committee decided that on balance a 'provisional' classification should not be incorporated in the first version of the Code. 

The Committee understands that ETITO will shortly be issuing guidelines as to how new advisers entering the industry after June 2011 may satisfy the requirement to provide valid evidence to meet the standards in Standard Set C. The Committee notes that from 1 July 2011, individuals who have yet to attain authorisation will be unable to make a recommendation or give an opinion to a retail client in relation to acquiring or disposing of a category 1 product, although they will be able to provide guidance and pass on information and financial advice from an AFA.
Concern was expressed that including 'reasonableness' tests may open the Code up to differing interpretations as to what is 'reasonable' in any particular situation. The concept of 'reasonable' is the subject of an extensive case law, and is one with which most New Zealanders are familiar. The overwhelming feedback received was that the Code would be enhanced by introducing more references to conduct that is 'reasonable' in the particular circumstances, and the Committee has taken that feedback on board. With the Code Standards as finalised, the Committee is confident that a measured approach will be able to be taken in relation to their application. The version recommended to the Commissioner strikes a good balance between the risk of placing advisers in impossible situations where they are constantly at risk of being judged with the benefit of hindsight, and the risk of allowing advisers to 'get away' with acting inappropriately.
Should the Code include specific obligations in relation to money handling/broking service? Conduct obligations in relation to broking services are clearly spelled out in the Act. With 'investment transactions' no longer falling within the definition of 'financial adviser services' the Committee determined that it would be inappropriate for the Code to devise specific standards governing money handling and other broking services. The Committee saw no reason to change from the approach taken in the second draft of the Code.
Should the Code require AFAs to point out the opportunity for wholesale clients to opt out of that classification? Concern was also expressed that advisers may pressure clients to opt into a wholesale client classification. The Committee agreed that ensuring clients were aware of how they were classified under the Act is an important element of client care, and an appropriate provision has been included at the end of Code Standard 6. Given that any adviser can encourage a client to opt in to becoming a 'wholesale client', it was not considered appropriate to impose a specific code standard provision in that regard. However, Code Standard 1 will apply to ensure AFAs do not act inappropriately in this regard.
The Commissioner for Financial Advisers directed the Committee to amend the description of financial adviser services requiring authorisation to accord with changes to the Act that came into force on 1 July 2010. The Committee has updated the Code to more closely reflect the final form of the Act.