On Friday 25 May, Financial Advice New Zealand made its submission on the Disclosure Consultation Paper, calling for accurate transparency and one rule for all.
“We see new disclosure rules as an opportunity to enhance trust with the public through transparency; to ensure that consumers are in a position to make an informed decision; to give advisers a tool to clearly communicate the value of advice and their services; and to dispel confusion as to what advice actually costs,” said Sue Brown, Chair, Financial Advice New Zealand. “As a general principle, we would like to see a simplification of disclosure to make it easier for clients to understand.”
Outlined below are three key themes of the Financial Advice New Zealand submission on Disclosure.
Commission versus cost to consumer
In its submission, Financial Advice New Zealand argued against prescriptive regulation regarding the disclosure of commissions. Instead, the association has recommended the disclosure of Embedded Costs – for example, the margin (expressed as percentage) that an insurer adds to the premium to cover the costs of using adviser distribution:
The main aim of these commission disclosures is to highlight actual and perceived conflicts of interest. However, clients often get confused that they are paying these commissions and additionally confused as to whether they are paying extra premiums for their insurance.
For example, an insurance premium quoted without commission doesn’t reduce it by the upfront commission. Instead it reduces by about 12-15%. This is what it costs the consumer to obtain advice.
“Commissions in isolation could dominate a more useful disclosure between the client and adviser. We do not believe that with the right compliance measures, processes and disclosure in place commissions lead to poor client outcomes. We want to see a much more meaningful disclosure of the cost of advice to ensure consumers are fully and accurately informed, and that advisers can have an accurate ‘value conversation’ with their clients,” says Sue.
One rule for all
In its submission, the association stated its firm position that there should be one rule for all – including Vertically Integrated Organisations and Lenders – when disclosing costs to consumers.
Consumers ought to have the same rights to disclosure under a VIO Financial Advice Provider (FAP)…The acquisition/distribution cost embedded in the product should be disclosed in the same manner as that proposed above for adviser commissions.
Consumers may deal directly with the Bank and their salaried employees. In these circumstances the mortgage provider should be required to disclose the embedded advice costs of their own in-house products.
“One rule for all individuals and entities providing advice will ensure a level playing field and importantly, provide the client with a meaningful comparison of alternatives,” says Sue.
Disclosure and management of conflicts of interest
“We believe a principles-based rather than a prescriptive approach to disclosure of potential conflicts is in the best interests of both the client and adviser.”
A ‘principles-based’ approach provides a high duty of care on financial advice providers, advisers and their supporting financial advice processes without the limitations of a prescriptive approach.
An adviser must adopt and follow business practices reasonably designed to prevent material conflicts of interest from compromising the adviser’s ability to act in the client’s best interest.
“The intent of disclosure is to ensure consumers have all information required to make an informed decision – which includes either accepting or rejecting potential conflicts of interest. To achieve this, we must arrive at a framework that ensures that advisers, through providing ‘sufficient specific facts’, can accurately represent potential conflicts and importantly, how these are managed as relevant to their individual advice business. A principles-based approach will achieve this, whereas a prescriptive approach risks adding complexity for both the consumer and adviser,” says Sue.
To view the full submission and wider recommendations proposed by Financial Advice New Zealand, please click here.
“Financial literacy levels in New Zealand are such that often the adviser’s time is spent educating clients as to what their options are so that they can make informed decisions. There is immense value in this. We must arrive at a framework that both ensures clients have all information they need to make a fully informed decision, but also that supports advisers’ ability to provide this crucial service to more New Zealanders,” says Sue.
*Please note: Comments in italics are statements drawn from Financial Advice New Zealand’s submission.