Is this the defining moment?
The potential implications of the Financial Service Providers (Pre-Implementation Adjustments) Bill

It is fair to say that right now, there is a degree of confusion within the industry as corporates and individuals absorb this information, reassess their position and plan on how best to tackle the regulatory environment from here on in.

There is added confusion around a view that insurance and mortgage advisers will not be able to voluntarily become an AFA. The announcement on Friday 11 June should not be regarded at this early stage as being a 100% done deal. It is logical that some ‘push back’ may occur and the Government may have to further modify the bill.

Key changes from an adviser perspective

The key changes from an adviser perspective are:

• Any adviser dealing with retail, non-sophisticated clients and providing advice relating to investment products will still need to be an AFA.
• This AFA status will also apply to those who are investment advisers within a QFE.
• Those selling/advising on Kiwisaver and unit linked products will still need to be an AFA. There is no mention of the degree or quantum of investment products that an adviser advises on before they need to be an AFA. Therefore, one would assume it is an all or nothing situation. This means that an adviser will not be able to argue that they do not have to be an AFA as they only have, for example 5%, of their client base with Kiwisaver or unit linked products. At this stage, assume that if an adviser has just one client in that category, the adviser needs to be an AFA.
• If the adviser provides advice on mortgages or insurance, then they will not have to be an AFA but will still need to be registered. 
• The Code of Professional Conduct will not apply to insurance and mortgage advisers but it will be regarded as the base line for professional conduct. 

Implications for investment advisers

For those who are deemed to be investment advisers, then there is little tangible change. However, many must now be rubbing their hands with glee as they will be recognising the following potential opportunities:

• A number of insurance advisers may choose to totally ‘offload’ any clients that have Kiwisaver, unit linked or any other product that is deemed to be Category 1.
• Those risk advisers who do not want to deal with investments will probably be seeking referral relationships for their clients who have investment needs.
• The AFA qualification will immediately set the investment adviser above their insurance adviser peer. The Government via the registration and authorisation process and subsequent consumer education campaign, will effectively be promoting an AFA as being a more professional adviser.
• The informed consumer (and let’s face it, the consumer will be considerably more aware as time progresses) will want to deal with an adviser who is monitored by the government, has what is potentially perceived to be higher qualifications and has much greater liability on them. If an AFA provides advice on both investment and insurance, then they have the potential to win clients off an insurance adviser who is not an AFA.
• The potential for an AFA to grow their business will increase as some insurance advisers will realise that to grow and maintain credibility, they need to be able to offer investment advice. This may result in some insurance advisers joining an AFA business or being co-located with an AFA.

Implications for insurance and mortgage advisers

For those who are deemed to be investment advisers, then there is little tangible change. However, many must now be rubbing their hands with glee as they will be recognising the following potential opportunities:

• A number of insurance advisers may choose to totally ‘offload’ any clients that have Kiwisaver, unit linked or any other product that is deemed to be Category 1.
• Those risk advisers who do not want to deal with investments will probably be seeking referral relationships for their clients who have investment needs. 
• The AFA qualification will immediately set the investment adviser above their insurance adviser peer. The Government via the registration and authorisation process and subsequent consumer education campaign, will effectively be promoting an AFA as being a more professional adviser.
• The informed consumer (and let’s face it, the consumer will be considerably more aware as time progresses) will want to deal with an adviser who is monitored by the government, has what is potentially perceived to be higher qualifications and has much greater liability on them. If an AFA provides advice on both investment and insurance, then they have the potential to win clients off an insurance adviser who is not an AFA.
• The potential for an AFA to grow their business will increase as some insurance advisers will realise that to grow and maintain credibility, they need to be able to offer investment advice. This may result in some insurance advisers joining an AFA business or being co-located with an AFA.

Implications for insurance and mortgage advisers

Assuming that the comments regarding insurance and mortgage advisers not being able to voluntarily become an AFA are correct, then the insurance and mortgage industry may fall into two distinct camps:

1. This is salvation: This is the group of advisers who are planning to exit the industry in the next few years or those who felt there was no need to increase standards to meet the increased consumer expectation of what is expected from a professional financial adviser. Many of these advisers had not yet commenced the education journey and now see their stance of “waiting until all is fully known” as being the right one. These advisers will be rejoicing as for them, it means no change to the way they have always operated. A number of these advisers have unit linked products and some kiwisaver products but will potentially believe that since they are now below the regulator’s radar scope, there is no need to go down the AFA route.
2. This is nuts: This is the group of advisers who fully appreciated that in order to be perceived to be professional by the consumer, they needed to meet minimum education standards, abide by a highly publicised Code of Professional Conduct and deliver a quality service. These advisers may not like the costs, effort and penalties associated with becoming an AFA, but they appreciated why the Government was introducing the regulations and were prepared to undergo the short term pain to receive the longer term gain that has been apparent in other countries that have introduced a strong adviser regulatory environment.

If there is no change to what was announced on Friday 11 June, then the potential implications for insurance and mortgage advisers are:

• They immediately become the ‘poor cousins of AFAs’ unless they can somehow market themselves in a way that shows that their skills, experience, qualifications, compliance, processes and service are equal to or greater than an AFA who provides insurance and investment advice
• They will have to sell their investment clients 
• They will need to consider developing a referral relationship with an AFA so they can have comfort that the entity that advises their client on Kiwisaver, unit linked products, or any Category 1 product will not also take their insurance and mortgage business from them.
• They may potentially have to increase their marketing investment as they will need to be able to explain to a potential client why they should do business with them rather than an AFA.

The solution for insurance and mortgage advisers

There are certain inevitabilities that all insurance and mortgage advisers should consider right now:

• Over time, regulation will become more pervasive and more encompassing. If insurance and mortgage advisers are not ‘caught’ today, they will be in a few years time. The regulator will discover in due course those insurance and mortgage advisers who do have some Category 1 products in their book of business and have not become an AFA. It is not worth taking the risk. An adviser should either become an AFA so they can continue to service those clients or ensure they have removed themselves from any liability to provide advice to them.
• Kiwisaver will become a major driving force for the financial advisory industry. Within five years, it is estimated that the average Kiwisaver balance will be at a level that the investor will be seriously taking an interest in their fund and seeking advice on how to correctly position it for the future. All advisers that deal with wealth accumulators should seriously be considering providing advice on Kiwisaver. Those who do not provide Kiwisaver advice could see their client visiting an adviser who does provide that advice. 
• Many long standing insurance advisers currently have some unit linked products within their database. It may be better to become an AFA and retain those clients rather than be forced to sell them.
• Wealth accumulators are becoming increasingly ‘time poor’ and many are now seeking a ‘one stop’ solution for their financial needs. These prospects may prefer a financial adviser who provides insurance, mortgage and investment advice. 
• The public is now more discerning and skeptical than ever before. One way to help build trust and reduce the natural skepticism is to promote the fact that the adviser is subject to strong regulatory control and this provides a potentially better advice outcome with lower risk to the client. 
• It may be better for the insurance and mortgage adviser to become an AFA even if this is in anticipation of moving into the provision of Kiwisaver advice. Advisers should not use the recent changes to the Financial Service Providers (Pre-Implementation Adjustments) Bill as an excuse to pause in the move to becoming a true financial professional. Instead, professional advisors should use the announced changes as a way to differentiate themselves, expand their service offerings (through the provision of Kiwisaver) and continue on the journey to becoming an AFA.