Advisers must reveal commissions under new rules

Photo / Hawkes Bay Today

Consumers will soon have the right to sit down with their financial adviser and ask: What's in it for you?

The Financial Advisers Act (FAA), which comes into effect on July 1, will require advisers to fully disclose, among other things, whether they will benefit from the sale of a financial product they are giving advice on.

All entities that provide financial services must now be registered on the new Financial Services Provider Register, which will allow consumers to check on whom they are dealing with.

Every registered adviser is required to belong to one of four approved dispute resolution schemes.

The main types of advisers are: authorised financial advisers (AFAs), registered financial advisers (RFAs) and qualified financial entity (QFE) advisers.

An AFA qualifies through a mix of exams, existing qualifications and documentation to show good character. They will deal with so-called "category one" products - complex investment products such as shares, certain unit trusts, KiwiSaver products and insurance products with an investment component.

RFAs will be able to sell only "category two" products - generally simpler products such as insurances, mortgages and bank term deposits.

A QFE is a company that offers financial services and sells financial products. They will take responsibility for providing a prescribed level of training and supervision for their employees who offer financial advice to the public.

"AFAs must explain very clearly how they get paid - and this really goes to the heart of acting in the clients' interests - which is really the foundation stone of this regime," the Securities Commission's director of financial planning regulation, Mel Hewitson, told the Herald.

There was a debate about whether commissions here and overseas should be allowed at all, and some countries were in the process of removing them from investment products, she said.

"Before, you might have been sold a particular product with no assurance as to whether that product was chosen because it was the most suitable product for you, or because it happened to be the one where the adviser got the most commission."

Many advisers had moved to operate on a fee-only basis to remove all doubt.

"But it is a curly one."

Hewitson said the most important thing, at the early stages of this regime, was disclosure, so the client knew what the potential influences were that could comprise what they were getting.

She said the Securities Commission would be actively involved in surveillance of the new regime after July 1.