News
Working group raises FSLAB worries
Wednesday 28th of February 2018
FSLAB is being considered by select committee. Submissions on the new bill were open until the end of last week.
The code working group, tasked with devising the code that will apply to all advisers under the new rules, was one submitter.
It highlighted concerns about the exemption in FSLAB for financial advice that is provided by specified occupations, such as lawyers and accountants, in the ordinary course of business.
The group said because there was no "bright-line" test, the boundaries of what was acceptable under the exclusion were blurred.
"Writing or reviewing an investment plan for a family trust requires specialised competence, knowledge and skills. Yet it might be claimed that this activity is part of the ordinary business of a lawyer who advises on trusts and estate planning.
"Our concern is that this lack of certainty has the potential to undermine consumer protection – the consumer continues to be a 'retail client”' receiving 'financial advice' but the financial advice is not regulated to the standards of the code."
The submission said the group understood there was little monitoring of the delineation between the advice in those exempt situations and regulated financial advice.
"Consumer protection laws that are impractical or difficult to enforce are ineffective and could result in harmful outcomes for consumers. We have received feedback that some exempted persons do not have the requisite competence, knowledge and skills to provide suitable advice even where that is in the ordinary course of the relevant occupation or business.
"We recognise that in these cases the relevant occupational supervisory regime will have jurisdiction. However, that relies on a complaint first being made and will, almost always be after any harm has been done. Furthermore, the level of competence, knowledge and skill expected by each of the different occupational supervisors could be materially lower than that in the code."
Other changes the working group suggested included making it clearer that minimum standards of professional conduct could apply to entities as well as human advisers, expanding the definition of financial advice products and redefining "financial advice" to include advice in connection with things such as switching KiwiSaver funds and the design of a financial plan that was not investment.
"We note that a variation of the terms of a financial advice product is deemed to be a financial advice product. However, the exercise of an existing right under the terms of a financial advice product arguably is not a variation. Financial advice in connection with switching KiwiSaver investment funds is one of the most common and important advice situations. We think it is important that the new financial advice regime unambiguously applies to that advice."
Comments (16)
Brent Sheather
That is a good point about accountants and lawyers. Most are sensible and to be honest because they are most often not conflicted they give good advice but occasionally they are conflicted – some lawyer and accounting firms own shares in a mortgage trust thus often they direct their clients funds into that mortgage trust. Very naughty I thought. In addition when reviewing plans a couple of accountants have told their clients “don’t invest in international stocks as you will pay too much tax” and, about 10 years ago, “don’t buy long dated bonds as interest rates are going to go up”. Both of these latter mistakes are obviously not limited to accountants but do demonstrate a lack of knowledge and maybe a little arrogance.
Regards
Brent Sheather
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6 years ago
Simon Papa
As a lawyer I’ve never provided financial advice to clients. I think it’s worth noting that, except in limited areas of work (like court work), there are no restrictions on non-lawyers (including financial advisers) on providing legal advice, as long they don’t call themselves “lawyers” (and some other protected titles). The Law Society notes that “it is important for lawyers to not to take an overly technical approach to interpretation [of the exemption] but to consider their clients’ needs first and foremost, and their own competence to provide the [financial] advice.” I think the code committee’s scepticism about the role and skills of occupational supervisory regimes is somewhat unwarranted. Lawyers Standards Committees released 39 decisions in 2017 (which do not cover all complaints considered). In addition, the Lawyers & Conveyancers Disciplinary Tribunal released 27 decisions in 2017. Lawyers take their professional obligations seriously and the committees and the tribunal serve an important role in educating lawyers about the bounds of professional conduct and the consequences for not meeting them. As a lawyer I’ve never provided financial advice to clients. I think it’s worth noting that, except in limited areas of work (like court work), there are no restrictions on non-lawyers (including financial advisers) on providing legal advice, as long they don’t call themselves “lawyers” (and some other protected titles). The Law Society notes that “it is important for lawyers to not to take an overly technical approach to interpretation [of the exemption] but to consider their clients’ needs first and foremost, and their own competence to provide the [financial] advice.” I think the code committee’s scepticism about the role of occupational supervisory regimes is somewhat unwarranted. Lawyers Standards Committees released 39 decisions in 2017 (which do not cover all complaints considered). In addition, the Lawyers & Conveyancers Disciplinary Tribunal released 27 decisions in 2017. Lawyers take their professional obligations seriously and the committees and the tribunal serve an important role in educating lawyers about the bounds of professional conduct and the consequences for not meeting them. I note that, in contrast, the Financial Advisers Disciplinary Committee has released 9 decisions in 7 years, though it can only consider decisions on referral from the FMA and the FMA does take other actions against financial advisers.
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6 years ago
Murray Weatherston
@Simon Papa
The fact that you do not provide financial advice yourself does not disprove the allegation that some layers provide financial advice.
People doing similar things should surely be regulated similarly
We at SIFA are delighted that the CWG has publicly lifted the veil off the lawyers' and accountant' exemptions in the way they have.
Maybe officials might listen to them. here's hoping.
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6 years ago
Brent Sheather
Thanks for your comments Simon. Do you think that lawyers who direct some or all of their clients savings into a high risk mortgage trust which they have a financial interest in would meet the definition of “considering their clients’ needs first and foremost”? The situation is further complicated by the fact that often the lawyer is a trustee and thus a trusted expert. This is a clear conflict of interest in my view and might become relevant if the mortgage trust ever gets into trouble.
Regards
Brent
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6 years ago
Simon Papa
My point Murray was that the exemption doesn't affect me at all.
It's not an "allegation"- it's a simple fact that some lawyers provide financial advice & it's quite legal for them do so. There's no "veil" to be lifted- the exemption was carefully considered when the law was passed and is widely known, and MBIE asked for submissions on it as part of the law reform process.
It doesn't automatically follow in my view that people doing similar things need to be regulated similarly e.g. immigration advisers give legal advice but don't have to be lawyers to do so. It's not up to officials now but to the MPs on the select committee and ultimately Parliament.
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6 years ago
Brent Sheather
Hi BGW
Thanks for that. With due respect whether lawyers have a duty to act in a client’s best interest or put client’s needs first doesn’t make much difference if instead of recommending a balanced fixed interest portfolio as per best practise they instead say “let’s invest the money in a mortgage trust”. That’s demonstrably wrong and not consistent with either putting client’s interests first or “putting clients’ needs first”. Everything else is just “noise” and my point was lawyers might know about the law but they might not know what a properly diversified fixed interest portfolio looks like.
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6 years ago
Murray Weatherston
@BGW
Four comments and a question
1. Agreed lawyers have fiduciary duty to their clients (as do trustees to their beneficiaries). Both are "status fiduciaries"
I would however take issue with your statement "many financial advisers will also have fiduciary duties imposed upon them under the common law".....I agree some might be held to be a fiduciary at law but I would not think it would be "many". ie it will be the exception rather than the rule
2. The statutory duty under FSLAB will be (if unchanged) "Give priority to the client's interest" and not put the interests of the client first. In some people's minds they are not the same - giving priority is narrower (and more easily understood - hallelujah to that)
3. (Second bullet) The Code Working Group and the Code Committee are two different beasts and there is no earthly reason there needs to be consistency between their views and statements. Code Committee is responsible for the present Code of Professional Conduct for AFAs. CWG is writing the Code to apply in the future to all advisers caught under FMCA.
4. Key point of your last bullet point is surely that where a fiduciary is involved, mere disclosure of a conflict is not enough, the client has to actively consent to the fiduciary making a profit.
5. My question - In second bullet, why do you say "which, thankfully, only afflicts financial advisors under the FSLAB". What are the fishhooks you see?
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6 years ago
Natasha Silvestri
oh dear! the word fiduciary duty is bandied about with abandon. For those who believe lawyers have a fiduciary duty please provide your legal authority for this comment, in New Zealand or any other jurisdiction. Trustees have fiduciary duties imposed on them by,inter alia, hundreds of years of English (and other jurisdictions) common laws, confirmed in Judgements by the highest courts. Lawyers, accountants, financial advisers, architects, builders, used car sales men do not owe fiduciary duties. Fiduciary duties are very onerous and while these people owe duties of various sorts they are not fiduciary duties in the sense the law regards a fiduciary duty.
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6 years ago
James Sheridan
Interesting that Lawyers have a fiduciary duty yet accountants and other professions do not.
But do lawyers have an obligation to provide disclosure both before and after advice, in particular detailing remuneration and conflicts of interest?
Do they have an obligation to be suitably trained by a specified series of CPD?
Do they have a stated obligation to provide competency and skill?
Will they have an obligation to be on a register that shows they are accredited to provide financial advice.
Will they be going through a detailed and complex licensing arrangement that constantly requires checks on competency, financial strength, training and compliance assurance?
I think we know the answers.
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6 years ago
Murray Weatherston
@Tash
Does the following statement from NZ Law Society webpage provide sufficient authority. The third obligation is the apposite one.
Client care
The Rules of Conduct and Client Care for Lawyers came into effect on 1 August 2008. They are based to a large extent on the four fundamental obligations of lawyers set out in s4 of the LCA.
Every lawyer who provides regulated services must, in the course of his or her practice, comply with the following fundamental obligations:
to uphold the rule of law and to facilitate the administration of justice in New Zealand
to be independent in providing regulated services to his or her clients
to act in accordance with all fiduciary duties and duties of care owed by lawyers to their clients
to protect, subject to his or her overriding duties as an officer of the High Court and to his or her duties under any enactment, the interest of his or her clients.
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6 years ago
Natasha Silvestri
Thanks Murray and BGW. However, the laws and rules you quote apply in cases where lawyers take on fiduciary duties, if they accept appointment as a trustee for example. The rule does not impose a general fiduciary duty on lawyers in all dealings with clients.
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6 years ago
Murray Weatherston
@Tash
There is no kind way to say this but you are plain wrong. You have clearly done not even basic research on the topic.
Have you ever heard the terms status fiduciaries and fact based fiduciaries?
As BGW and I both told you above, the lawyer-client relationship is a status fiduciary. BGW told you where to find the lawyers' law. I quoted the NZ Law Society
If you want some distinguished judicial authority, try Tipping J in the NZ Supreme Court in Fay v Chirnside [2006] NZSC 68 at pars 73 and 75
[73] Many cases, textbooks and articles in learned journals have considered when and against what criteria the courts will find that a relationship gives rise to fiduciary
duties. In essence, there are two situations in which that will be so. In the first, the relationship is of a kind which, by its very nature, is recognised as being inherently
fiduciary. Most cases involving a breach of fiduciary duty are of this kind. They fall into one of the recognised categories of relationships which are inherently fiduciary. These include the relationships of solicitor and client, trustee and beneficiary,
principal and agent, and doctor and patient.
[74] ...{not quoted here because it is extraneous to the main point...]
[75] The second situation in which a relationship will be classed as fiduciary depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so lassified. No single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories is such that the parties owe each other obligations of a fiduciary kind. The literature in this field is voluminous. No useful purpose would be served by an attempt at a general survey.
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6 years ago
Natasha Silvestri
Murray - yes sorry, brain fade. I was referring to a trustee's fiduciary duties - not the same as a lawyers'
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6 years ago
Murray Weatherston
Hi Tash
Tipping J's judgment that I quoted above says that both lawyers and trustees have the same fiduciary duty to their client and beneficiary respectively.
Both lawyers and trustees are automatically status fiduciaries.
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6 years ago
Natasha Silvestri
Hi Murray. I don't read it that way, but are you telling me lawyers have an over-arching duty to look after their clients interests and take steps to protect them even if this is outside their mandate?
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6 years ago
Murray Weatherston
What I am saying is that a lawyer has a general fiduciary duty to their client in whatever they do for the client.
Google - lawyer fiduciary - and you will get hundreds of hits that will tell you that.
Similarly a trustee has a general fiduciary duty towards their beneficiary
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6 years ago
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