If your insurance broking business provides a FAS to retail clients, it will be a FAP and it will need to be licensed under the new Bill.
Welcome to the alphabet soup of the Financial Services Legislation Amendment Bill. This Bill if enacted will:
Parliament is likely to pass the Bill into law later this year, but it will not go live until the Code of Conduct is finalised. Once it goes live, the FMA will issue transitional licences over a two-year period. After this period expires, the new regime will come into full force.
Overview of proposed changes
Unfortunately trying to follow the new Bill is still a Byzantine undertaking. Assuming some familiarity with the current Financial Advisers Act 2008, the key changes are as follows:
Regulated Financial Advice
The key to whether the Bill will apply to your business is determining whether your business provides regulated financial advice to its clients, either directly (e.g. via the internet) or engages people to do so on its behalf. If it does, it is providing what the Bill calls a financial advice service (FAS) and the entity providing it is a financial advice provider (FAP).
What is regulated financial advice?
Before we come to that, we must first understand what financial advice is. In the context of a traditional insurance broker, a broker gives financial advice when he or she makes a recommendation or gives an opinion about purchasing or cancelling an insurance product. In order to clarify this, The Bill says doing any of the following does not amount to giving financial advice:
If any of these exemptions applies, this is the end of the road, because your advice is not financial advice caught by the Bill.
Assuming your advice is financial advice, the next question is whether it is regulated financial advice. If a broker gives the advice in the course of his or her business as an insurance broker and none of a list of 11 exemptions apply, it is regulated financial advice. For a broker giving financial advice in the ordinary course of his or her insurance broking business, none of those exemptions is likely to apply. For other businesses, exemptions apply when:
➢ The financial advice is given as an ‘ancillary’ part of a business whose principal activity does not involve providing financial advice(note the subtle shift here from the current law, which uses the word ‘incidental’),
➢ A lender of money under a credit contract gives the financial advice and the advice is an ‘incidental’ part of a business whose principal activity does not involve providing financial advice.
Once we have established the financial advice is regulated financial advice, the Bill will apply to your business. This means:
Here is a practical example of how this will work:
XYZ Insurance Brokers Limited (XYZ) trades as a small-to-medium sized general insurance broker with five employees giving advice.
During the course of its business, it gives advice to its clients about purchasing and/or cancelling specific insurance policies. It does this both directly (through its website) and indirectly (through its employees). Therefore, it is giving regulated financial advice (RFA) and when it gives that advice, it is providing a financial advice service (FAS). This means XYZ is a financial advice provider (FAP). As some of its clients are retail clients, it must be licensed under the new Bill and be a member of a disputes resolution scheme.
All of five employees provide regulated financial advice to clients. Although they do so personally, they are not providing it on their own account; they are providing it on behalf of the company. Therefore, none of them is providing a financial advice service (FAS) personally and none needs to be licensed.
Under the terms of XYZ’s licence granted by the FMA, only financial advisers may give certain types of advice. Therefore, two of the five who qualify have registered themselves personally as financial advisers under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 in order to qualify. The other three are restricted to less complex advice under XYZ’s licence. XYZ must nominate them as nominated representatives and control their activities. They don’t have to register under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, but XYZ must keep an up to date register of them.
Once you have read this example, all insurance brokers will, hopefully, have a better idea of what the new legal framework looks like and what compliance tasks lie ahead.
We will be providing further information once the Bill is passed into law and once the next iteration of the draft Code of Conduct is released.
In the meantime, please feel free to contact us if you require any further information.
Crossley Gates, Frank Rose or Peter Napier