Financial Markets Authority Website:

Transcription

1

2 Financial Markets Authority Website: Auckland Office Level 5, Ernst & Young Building 2 Takutai Square, Britomart PO Box AUCKLAND 1143 Wellington Office Level 2 1 Grey Street PO Box 1179 WELLINGTON 6140 Revised June

3 About this Guidance Note... 4 Introduction... 5 Section A: Communicating with retail clients... 6 Clear, concise and effective... 6 Methods for communicating advice... 6 Written explanations of advice... 7 Section B: Record keeping

4 This Guidance Note is for Authorised Financial Advisers (AFA) who provide personalised advice services to retail clients. It is also relevant to QFEs and other entities that employ AFAs. This guidance covers our expectations about: communicating with retail clients (including providing a written explanation under Code Standard 9) keeping records about personalised services provided to retail clients. The guidance covers our communication and record-keeping expectations for all forms of personalised services including financial advice, investment planning services and discretionary investment management services. It does not cover requirements for class services. This guidance does not change the legal requirements for AFAs providing personalised services. It provides guidance on the Financial Markets Authority s (FMA) expectations and explains the approach we intend to take when monitoring compliance with relevant legal requirements. We have also provided examples in the guidance to help explain our approach. Depending on the services provided, we recommend AFAs read this guidance in conjunction with other guidance notes published by FMA, including Discretionary Investment Management Services (DIMS) and Limited personalised advice. 4

5 We know from our discussions with advisers during our monitoring visits and the feedback from the 2012 AFA survey that there are a vast range of approaches taken by advisers to the documentation required by the Code. This includes varying lengths of statements of advice, suitability analysis and records on client files. This Guidance Note outlines the more general documentation and record keeping requirements in the Code, which were intended to ensure that along with the required statutory disclosures, potential investors had enough information to help them make informed decisions before investing. This guidance is intended to clarify how we think advisers can efficiently balance the requirements in the Code whilst ensuring clients receive sufficient information to assist them with their decision making. 5

6 Clear, concise and effective 3. Code Standard 6 requires AFAs to behave professionally in all dealings with a client and communicate clearly, concisely and effectively. Communicating effectively means that an AFA has taken reasonable steps to ensure the client understands the communication. Clear, concise and effective communications will also assist AFAs in meeting their obligations not to engage in conduct that is misleading or deceptive under section 34 of the Financial Advisers Act 2008 (the Act). 4. Although clear and concise are not separately defined in Code Standard 6, these two concepts need to be considered in conjunction with the requirement to communicate effectively, because all three concepts qualify each other. 5. FMA has previously defined clear, concise and effective communications in the context of issuers preparing disclosure documents under the Securities Act 1978 and the Securities Regulations We have adapted concepts from that guidance note here. 6. Adviser communications with clients, whether verbal or written, are clear if they: use plain language are logically ordered and easy to follow highlight important information explain complex information in plain language and include a clear explanation of any necessary jargon. 7. Concise refers to the presentation of specific information rather than the overall length of the communication or document. For example, a longer but clearly written document, may take less time to read and understand than a shorter, but poorly written one. 8. Effectiveness involves an overall assessment of whether a communication provides adequate and accurate information for deciding whether to follow an AFA s recommendation. Clarity and conciseness help to achieve effectiveness. Methods for communicating advice 9. In general, the Code is neutral about the methods of providing financial adviser services. It focuses primarily on the conduct of advisers rather than the production of documents to ensure that information is communicated to clients in a manner that is clear, concise and effective. However, there are a few exceptions: 1 Guidance Note: Effective Disclosure Financial Markets Authority, June

7 (a) Code Standard 7 requires AFAs to provide sufficient written information to enable clients to decide whether to use their services; (b) Code Standard 9 requires AFAs providing an IPS or a service that relates to a category 1 product to provide a written explanation of the service that is sufficient to enable the client to make an informed decision about the suitability of the service; (c) Code Standard 12 requires AFAs to record and maintain adequate written records about personalised services provided to retail clients. 10. Although the Code does not prescribe the way that financial adviser services are provided, the Code recognises the use of technology by AFAs We consider that you can provide financial adviser services by post, telephone, , internet, video conferencing, face-to-face, or in any combination of these or other ways. 12. The way we regulate advice is the same, regardless of the way that you deliver the advice. This is because, in general, the same rules apply to all advice, regardless of how it is delivered. However, different modes of communication may give rise to different challenges about whether a client understands the advice they are being given, and what the limitations of the advice are. Regardless of the method used, adequate records in accordance with Code Standard 12 are required. Section B sets out how we think advisers can comply with this requirement. 13. It is up to AFAs to determine how they choose to deliver financial adviser services to clients. Factors to consider include the complexity of the advice provided, the range of advice topics being considered, the client s understanding of investing and whether your client has chosen any preferred method of communication. Written explanations 14. Code Standard 7 states that an AFA must ensure retail clients have sufficient information to enable them to make informed decisions about whether to use the AFA s services. This includes written information about the scope of the financial adviser services, the basis on which they are provided, fees and conflicts of interest. 15. The requirements of Code Standard 7 may be satisfied in whole or in part by providing disclosure documentation. However, in some circumstances clients may need more information. Many AFAs provide a scope of service, a terms of business and/or a client agreement to give the client more information. 16. Code Standard 9 states that where an AFA provides a personalised service to a retail client, that is an investment planning service or that relates to a category 1 product, an AFA must provide a written explanation of the service provided that is sufficient to enable the client to make an informed decision about the financial adviser service. 2 For example, Code Standard 13 allows records of information and documents required under the Code to be kept in electronic form, provided the records are readily retrievable. 7

8 When must a Code Standard 9 written explanation be provided? 17. The extent of any explanation required by Code Standard 9 is determined by what a retail client would reasonably require in the circumstances for the purpose of deciding whether the service is suitable. The Code applies to advisers across a wide range of roles and businesses. When a Code Standard 9 written explanation is required will differ depending on the client, the situation and the service being provided. 18. The table below provides some examples of when FMA expects that a Code Standard 9 written explanation will be provided, assuming that the advice or service relates to an investment planning service and/or category 1 product for a retail client. 19. Where a written explanation is not required, you should consider whether to note the reliance on previous written explanations in the client file. Table 1: Examples of advice and whether a Code Standard 9 written explanation is needed When is advice given? The first time the AFA provides a personalised service to a retail client (Financial advice, DIMS or Investment Planning Service (IPS)) Is a written explanation needed? Yes 8

9 When is advice given? Financial advice is provided, consistent with the written explanation already provided to a client Is a written explanation needed? A new written explanation may not be required where the advice is: to purchase a financial product that shares most of the key features (in relation to both product features and strategy), risks and benefits with one already included in an explanation is consistent with: - an asset allocation which is part of an ongoing service - the client s risk and asset profile and the client would reasonably expect this to be taken into account. The AFA should consider whether the previous explanation is sufficient to rely on and how they can demonstrate that the client has been made aware of the benefits and risks of the particular product. The AFA should consider the particular circumstances and information requirements of the client. For example, where a written explanation has not been provided for some time, it may be appropriate to issue an updated explanation. The AFA is providing an ongoing DIMS No as long as the decisions are consistent with agreed parameters for the portfolio management e.g. asset allocation. 9

10 When is advice given? The client s circumstances change, including needs, goals or risk profile Is a written explanation needed? Code Standard 8 requires advisers to take reasonable steps to ensure that they have an up-to-date understanding of the client s circumstances and risk profile. Where a material change occurs, we would expect to see an AFA provide a written explanation to the client about the impact or consequence of the change to the advice or service. Depending on the nature of this change, this may be a brief written communication or a fuller revision of the advice/plan/management service with a revised written explanation. The AFA does not provide a personalised service No What should a Code Standard 9 written explanation cover? 20. Code Standard 9 requires you to sufficiently explain your service to the client so that the client can make an informed decision about the service and whether it is suitable. The extent of any written explanation is determined by what a retail client would reasonably require in the circumstances to make an informed decision, including: sufficient information to enable the client to make an informed decision as to the suitability of the financial adviser service provided by the AFA, and a concise description of the principal benefits and risks relevant to any financial advice provided as part of the AFA s financial adviser services, having regard to the characteristics of those services. 21. The language, structure and presentation of your written explanation should be clear, concise and effective to help the reader. Examples of techniques to use include using short sentences to describe each idea and using headings to draw the reader s attention to important information. 22. One approach you could consider is to: set out the topic of advice in the title of the explanation 10

11 explain the scope of the advice by describing the subject matter of the advice, the topics of advice covered within that subject matter and the relevant topics that are not covered summarise the client s relevant circumstances state your recommendation and give reasons for making that recommendation summarise the principal benefits and risks to the client in following the recommendation. 23. It is very important that the scope of your advice is clearly communicated in your written explanation. Your written explanation should include: key facts about the client and the client s relevant circumstances relating to the subject matter of the advice being sought what personal advice is and is not being provided and the implications of this. Explain any limits to the scope of your advice in such a way that a reasonable person would understand the limitations of this advice. a list of possible topics of advice not being provided to the client. Note, you do not need to list every possible topic of advice not being provided, but explain any topics of advice you are not providing, if they are relevant to the client and subject matter of the advice being sought how the proposal matches the client s requirements and relevant circumstances. 24. When providing a written explanation that is intended to be sufficient to cover personalised services provided to the client in future, you may also want to consider including some or all of the following in your explanation: the extent to which recommended products have been supported by written research a brief explanation about the circumstances in which the advice will no longer apply and need to be revised. This should be brief and relate to changes in the client s circumstances. whether you will provide reporting on recommended financial products whether you will monitor the performance or any material changes to the recommended financial products, and if so, whether they will inform the client about any changes to their initial recommendation 25. You should use your professional judgement when preparing your written explanation to ensure it achieves a balance between being clear, concise and effective (as required under Code Standard 6) and has sufficient information for your client to make a decision about whether to follow your advice. Benefit and risk information 26. Code Standard 9 requires AFAs to provide an outline of the principal risks and principal benefits involved in following any financial advice provided as part of the AFAs financial adviser services, having regard to the characteristics of those services. The AFA should also consider the information requirements of the client. 11

12 27. An Investment Statement (or similar document containing a description of the risks) provides potential investors with a description of all the risks of the particular investment. However relying on an Investment Statement alone is unlikely to fulfil an AFAs obligations. You should consider the following: retail clients that receive personalised services may expect an adviser to explain the relevant benefits and risks of any recommended products to them some clients may have difficulty reading an Investment Statement, or fully understanding what the information on benefits and risks means for them and their investment if providing personalised financial advice on a portfolio of investments to retail clients, you are also likely to need to comment on the risks and benefits of the portfolio in aggregate some Investment Statements can be lengthy and therefore you may need to highlight information to a client that is relevant to the subject matter of the advice. 28. In addition to the written explanation of the service provided that is sufficient to enable the client to make an informed decision about the financial adviser service you may consider meeting the requirements of Code Standard 9 by having a face-to-face meeting or telephone conversation with your client. Delivering the written explanation 29. Code Standard 9 requires the explanation to be given in writing at the time the service is given or as soon as reasonably practicable after that time. The Interpretation Act 1999 provides that: writing means representing or reproducing words, figures, or symbols in a visible and tangible form and medium (for example, in print). 30. FMA considers that any of the following methods of delivery will be acceptable for providing a written explanation under Code Standard 9: (a) (b) (c) post fax (where the sender s fax machine has generated a record of the transmission of the written explanation to the fax machine of the recipient) , or by other electronic means (where the machine used to transmit the written explanation has not generated a record that the written explanation has failed to be transmitted). 31. You must retain copies of the written explanation (however sent), as required under Code Standard 12. Client instruction that a written explanation is not required 32. A client may instruct an AFA, verbally or in writing that the client does not need to be given a written explanation under Code Standard 9 or that an explanation need not be in writing. This instruction 12

13 must be clear and driven by the client not the AFA. However, an AFA is able to let the client know that opt-out possibilities exist. 33. Where an AFA relies on a client opt-out FMA expects to see information about the opt-out clearly documented including notes about any verbal explanation provided (Code Standard 12). In our monitoring, it is likely we would look at the circumstances around why the client decided to decline an explanation. 13

14 (a) Code Standard 12 requires AFAs to record in writing adequate information about any personalised services provided to a retail client. The information to be recorded under Code Standard 12 must be sufficient to demonstrate compliance with Code Standards Code Standard 12 also requires AFAs to retain copies of all information and documents provided to, or received from, the client in writing, in connection with the AFA s personalised service. 35. Adequate information that is sufficient to demonstrate compliance with Code Standards 5-9 does not mean all information known or held by the AFA about the relevant matters. The level of information that needs to be recorded and retained will depend on the relevance of the information to the advice given. 36. In general, most client interactions are likely to be relevant to the advice that is given and should be recorded clearly by the AFA. The level of record keeping will vary in each case depending on the nature of the services being provided, for example, for advice that is more transactional in nature, AFAs would not be expected to retain trade confirmations of all financial products acquired, if the AFA regularly receives statements of holdings from the issuer. 14

15 Financial Markets Authority Website: Auckland Office Wellington Office Level 5, Ernst & Young Building Level 2 2 Takutai Square, Britomart 1 Grey Street PO Box PO Box 1179 AUCKLAND 1143 WELLINGTON 6140