All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:
See more in section 33 of the Financial Advisers Act 2008. The Government has announced changes to how financial advice will be regulated in New Zealand. See MBIE’s website for more information.
The obligation to exercise care, diligence and skill and not act in a way that is misleading, deceptive or confusing applies to all people who provide financial adviser services.
In general, when providing advice, advisers must:
AFAs also have specific conduct and record-keeping requirements under the Code of Professional Conduct.
In the sections below we set out how these general principles apply in insurance and product replacement advice. The examples are not intended to be exhaustive comments on compliance with the care, diligence and skill obligation.
Advisers should keep records to demonstrate how they have fulfilled the care, diligence and skill requirement in providing advice.
Advisers must also show how they have disclosed and managed any conflicts of interest arising from commissions or from their remuneration. These records should adequately record any limitations on the scope of service, see examples on product replacement advice below for more information.
Advice should be recorded and provided to clients in a way that can assist them with decision making.
Insurance advice must be balanced - providing a clear explanation of both the benefits and the exclusions or limitations of the product's cover.
For personalised advice, consider the eligibility of the client for the product and the suitability of the product for that client.
For example, FMA expects an adviser to identify the key exclusions and limitations relevant to the client and to highlight these. An adviser may not be able to address all exclusions or limitations in a policy, but should at least consider the client's needs, unusual features of the product and any information on common reasons for claims rejections.
For more information on offering advice to those with existing insurance arrangements, see sections on product replacement advice and insurance replacement advice below.
If providing insurance advice in conjunction with another product, advisers providing personalised advice should establish whether the client needs the insurance. For example, for payment protection insurance on a loan, this will be more than the fact a client has a loan.
If the payment protection premium is to be added to the loan, as a minimum, the total cost of adding the protection insurance to the loan must be taken into account and explained to the client.
When advising a client to replace an existing product with a new one, an adviser should consider whether they are giving - or the client might reasonably expect the adviser is giving - an opinion on the disposal of an existing product, as well as the purchase of a new product.
For personalised advice, the adviser should:
For AFAs, these points will assist with compliance with the Code requirements, including the standard for limitations on the service (Code standard 8).
If recommending replacement of an insurance policy, the comparison should include:
The adverse consequences might include:
If no comparison is made, the adviser should:
In considering whether suitable advice has been given, we will consider the frequency with which an adviser recommends that a customer replace a product. For example, we might expect that one year policy will only be renewed or replaced annually, unless there is a significant change in the client's relevant circumstances.
In deciding whether to recommend a product change, advisers should compare the total cost of the credit as well as the repayment instalment amount and should draw both to the client's attention.
Other elements of the comparison should include:
Adverse consequences might include:
If no comparison is made, the adviser should:
For example, "replacing a shorter loan with a longer loan lowers the repayment instalments, but as it takes longer to repay the loan, it will cost more in total".
Advisers need to be familiar with our publication A Guide to the FMA’s View of Conduct*. It provides insights to help providers understand our view of good conduct. At its core, good conduct means focusing on the customer, to deliver good customer outcomes.
Our guide to conduct signals how we will use conduct as a ‘lens’ when we look at how providers behave to meet their existing obligations. It covers five factors which are building blocks of the FMA's view of the principles of good conduct.
These are:
Listen to customers
Help customers understand products and services
Ensure good communication across whole organisation.
Have the skills and experience to provide the right products and services
Meet professional standards of care
Seek continuous improvements through training.
Serve business and customer interests
Disclose and discuss conflicts
Explain related party arrangements.
Maintain systems to support good conduct
Seek out continuous improvement
Effectively manage complaints and disputes transparently.
Act in the interests of customers
Treat customers honestly and fairly
Conduct expectations communicated clearly by leaders and understood by staff
Address poor conduct; recognise and reward good conduct.
* A guide to the FMA’s view of conduct applies to licensed and authorised finance service providers. While it does not strictly apply to registered financial advisers, we consider that they should be aware of the guide’s contents.
AFAs also have specific conduct and record-keeping requirements under the Code of Professional Conduct.