Financial advice requires specialised skills.  This means to give other professions an open-ended exemption from the FAA could jeopardise the quality of financial advice and undermine consumer confidence when seeking advice.  This commentary considers the exemption for lawyers and accountants and what restrictions apply (or should apply).

Is it financial advice?

The FAA sets the ground rules for when someone is giving financial advice.  There are several carve-outs where a person is not giving financial advice (section 10(3)) which include:

• Providing information (such as the cost or terms of a financial product)
• A recommendation about a class of financial products
• Making a recommendation about the procedure for acquiring or disposing of a financial product.

Here no one (including a lawyer) is giving financial advice if they make statements like “shares generally give better long term returns than bonds” or “you can buy or sell shares by phoning a broker but I think it’s easier to do this online.”  There is no financial advice here under the FAA (for lawyers or for anyone else).

When can lawyers give financial advice?

Section 13 of the FAA provides that financial advice is not given if that advice is incidental to a business (and that business is to principally a financial service).  There is no clear dividing line for what ‘incidental” means.  A lawyer whose practice principally provides legal (not financial) advice could rely on this exemption.

Section 14 provides an exemption to specific professions.  This includes teachers, lecturers, journalists, registered valuers, real estate agents, accountants and lawyers. In the case of lawyers and accountants the exemption applies if they are “providing a relevant service in the ordinary course of business of that kind”.

What is special about lawyers and accountants that allows them onto the exemption list? On the face of it their training and day to day workload are very unlikely to give them skills matching financial adviser qualifications, experience and training.

This has been described by many as an outrage – yet the exemption granted is unlikely to be very wide.  It would be a brave accountant or lawyer that freely dishes out financial advice to clients believing they are exempt.  The exemption may be very narrow indeed. 

What does the FMA say?

It is a struggle to find explicit guidance on this on the FMA website. Under the heading “Types of advice” they do give some useful pointers to consumers which appear to treat the lawyer exemption as very limited:

“Sometimes lawyers and accountants offer financial advice alongside the other services they provide. They’re allowed to do this, as long as they don’t just give you financial advice….. generally speaking, if someone is providing a recommendation or opinion on buying or selling a financial product, or providing financial planning services, they have to be an authorised or legally registered financial adviser.”

It is still pretty murky where the boundaries start and stop.  An ADLS article¹ from 2013 referred to examples provided by the FMA of when a lawyer (or accountant) is within the FAA exemption.  Here’s a couple:

• A lawyer who is administering a deceased estate notifies the beneficiaries of their cash inheritance. The lawyer suggests they place the inheritance in a bank term deposit until they have decided how to use or invest it, and also suggests if they are going to invest it to get the help of an authorised financial adviser.
• A lawyer who is setting up a company for a client advises the client to include an option to buy out her business partner’s shares in the event that he wishes to sell, and to agree the method for calculating the price of the shares.

The FMA also provided examples of when a lawyer (or accountant) is acting outside the exemption:

• A lawyer who has administered a deceased estate informs the beneficiaries of their cash inheritance and advises them to use the money to pay down their mortgage, or invest in a specific KiwiSaver Scheme.
• An accountant (or a lawyer) who has acted in the voluntary solvent liquidation of a company advises the shareholders to use the released equity to invest in shares in a specific company, which is about to list on the NZX.

The picture from the FMA’s examples is of a very narrow FAA exemption for lawyers and accountants.

What do lawyers think?

The New Zealand Law Society also published a Practice Briefing titled “Financial Advisers Legislation – implications for lawyers.”  They give a series of 7 scenarios and consider if a lawyer would be acting inside or outside the exemption.  The scenarios provide a few useful observations:

• It’s ok for a lawyer to tell someone to put funds from a property sale on call with a bank while the lawyer finalises how the funds should be distributed to family interests.  The advice (put the cash on deposit with Westpac) is a “stop gap” measure taken by the lawyer.
• It’s not ok for a lawyer to provide advice on a full range of financial products where the legal practice generates the majority of its fee income from providing such advice.  (Personally I would have thought the last part about “majority of fee income” isn’t needed – lawyers should not be providing advice on a full range of financial products unless they are an AFA).
• It is ok for a lawyer who is a trustee of a trust to make decisions about how to invest the trust’s money.  That is fine because they are acting in the capacity of a trustee (not because they have any special exemption as a lawyer).

An article published by a member of the NZ Law Society’s Commercial and Business Law Committee² expressed a wider view.  This argued that Parliament excluded lawyers from the scope of the FAA regime because lawyers’ professional conduct rules provide sufficient regulation already.  The reasoning here is that lawyers can only provide financial advice when they are competent to do so – they need to comply with their duty of care to clients.  On this reasoning they can provide more than the “stop gap” deposit advice if they feel they’re competent to do so.

Anyone else have a view?

The sorted.org.nz website gives common sense advice to consumers around their finances.  Under the heading “Legal Advice” it suggests consumers should talk to a lawyer, accountant or community law service for tax matters, setting up a family trust or for legal advice.  Under the heading “Investing advice” it suggests consumers speak to financial advisers and sharebrokers for advice around shares, bonds, “sometimes property” and for finding the right mix of investments.  They don’t suggest consumers should go to their lawyer or accountant for financial advice.

Barry Read from IDS Limited provides a couple of useful examples of when lawyers get involved in financial advice and on the face of it they are acting beyond the FAA’s “incidental” exemption:

• An AFA prepares a full plan for a client who in turn provides it to their lawyer for comment. Their lawyer says “don’t do this” to the overall plan or parts of it. Saying “don’t do this” is financial advice.
• A lawyer sees a client’s financial accounts and queries some insurance costs by saying “you’re paying a lot for insurance, do you really need it? You should just do without it.” Again, this is financial advice.

These examples go beyond a lawyer acting in a way that is “incidental” to the business of being a lawyer. 

Final thoughts

To finish up it is worth noting that the NZ Law Society Practice Briefing seems to accept that most forms of financial advice will be outside a lawyer’s skill set:

“Lawyers should consider whether to secure an AFA status…The fact lawyers may be able to rely upon an exemption does not necessarily mean that they should. It may be the case that the client is actually better served by referral to a professional adviser who is competent to deliver the services required.” 

In the Law Society’s 2016 submission³ to MBIE on the FAA Options Paper they state that a financial adviser should not provide financial advice services “unless the financial adviser is competent to provide that service.” They also argue that lawyers being regulated under the Lawyers and Conveyancers Act 2006 must have competence for services they provide.

The FAA exemption for lawyers should be interpreted narrowly.  It should only apply where (a) the financial advice is clearly incidental to the business of being a lawyer, for example “stop gap” deposit advice and (b) the lawyer can demonstrate they have the competence to give that financial advice.  Moving beyond the simple “stop gap” examples and into more detailed financial advice, an AFA designation should be the only way to demonstrate appropriate competence.

John Berry is co-founder of Pathfinder Asset Management Limited, an independent director of Punakaiki Fund Limited and a member of the Code Working Group.

Notes:

¹ Frank Chan:  “When is a Lawyer a Financial Adviser? A timely reminder of the need for caution” http://www.adls.org.nz/for-the-profession/news-and-opinion/2013/11/29/when-is-a-lawyer-a-financial-adviser-a-timely-reminder-of-the-need-for-caution/

² Rebecca Sellers and Luke Leybourne: “Putting clients’ interests first: Financial Advice”   https://www.lawsociety.org.nz/practice-resources/commentary/legislation-and-regulations/putting-clients-interests-first-financial-advice

³ http://www.mbie.govt.nz/info-services/business/business-law/financial-advisers/review-of-financial-advisers-act-2008/options-paper/options-paper-submissions/NZ-Law-Society-Parts12.pdf