As the new financial advice regime is implemented, anyone giving regulated financial advice to retail clients will have to be engaged by a licensed financial advice provider. Licensing will occur in two phases:
- A transitional licence; and
- A full licence.
The Financial Markets Authority (FMA) released transitional licence requirements on 25 July 2019. We await full licensing requirements. The FMA released proposed standard conditions for full licences on 16 June 2020.
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Financial advice providers must apply for and receive a transitional licence by 15 March 2021. The process is entirely online. As the deadline approaches, it may take time for transitional licences to be issued, so don’t delay applying.
All transitional licences become effective on the same day, 15 March 2021. On that day, the old regime ends, and the new regime begins. From that day, anyone not engaged by a licensed financial advice provider may not give regulated financial advice to retail clients.
Before you begin:
- you will need a RealMe login;
- you will need to know how your business will be structured for licensing.
Step 1: the financial advice provider must be registered on the FSPR:
- if the licence will be for a company or other entity that is not an individual, the entity will need its own FSP number;
- for the entity to be licensed, you will need to select “Licensed Provider – transitional licence” or “Authorised Body – transitional licence” on the FSPR;
- if you have a company with one financial adviser, you may be entitled to the sole adviser levy relief;
- after registering or making changes on the FSPR, you must wait at least overnight before you can apply for your transitional licence.
Step 2: apply for a transitional licence on the FMA website:
The process involves fit and proper tests of the applicant’s directors and senior managers. There are also some questions about the business. Questions the FMA will ask in the online application include:
- Will you engage authorised bodies?
- What services and products will you provide regulated financial advice to retail clients on?
- How many financial advisers and nominated representatives will give regulated advice under your licence?
- Will your business provide financial advice to retail clients directly?
- Will you provide regulated financial advice to another business’s retail clients on their behalf?
- Will another business (or its staff) with a financial advice provider licence provide regulated financial advice to retail clients on your behalf?
- Do you, or the directors or senior managers of your entity, have any criminal convictions, or have they had any regulatory action against them?
Entities with a transitional licence must meet all the requirements of the new regime by 15 March 2021. Financial advisers do not have to meet the competence requirements in the Code of Conduct until 15 March 2023 (there is a competence safe harbour for financial advisers during the transitional licensing period).
During the transition period, if an entity extends the range of financial advice products on which it provides financial advice beyond what its advisers can give advice on under the existing regime, it must apply to the FMA to modify the conditions of its transitional licence.
Transitional licence standard conditions
The FMA issues transitional licences subject to standard conditions. Individual licences may also have specific conditions, and there are other obligations in the Financial Markets Conduct Act and Regulations. The standard conditions are:
1. Record keeping
You must create in a timely manner and maintain adequate records in relation to your financial advice service. Your records:
- must be kept in a form (which may be electronic) that maintains the integrity of information, and can be inspected and reviewed by the FMA conveniently;
- may be in any language, but must have a summary in English, and must provide translations to the FMA if requested (at your cost and by a translator the FMA approves);
- must be available for inspection by the FMA at all reasonable times;
- must be kept for at least 7 years after the date it is made or relied on (whichever is later).
2. Internal complaints process
You must have an internal process for resolving client complaints relating to your financial advice service that provides for:
- complaints to be dealt with in a fair, timely and transparent manner; and
- records to be kept of all complaints and any action taken in relation to them including the dates on which each complaint was received and any action was taken in relation to that complaint.
Other conditions on transitional licences include:
- under the licence, you can only provide the service to which the licence relates (financial advice);
- you can only engage nominated representatives or interposed persons if you meet specified requirements before 9 April 2019;
- you must report certain matters to the FMA if and when they occur.
Types of financial advice provider full licences
The FMA propose three classes of financial advice provider licence:
- Class A, a financial advice provider with only one financial adviser (who is also a director if it is a company), and may also provide advice directly to clients. Class A explicitly does not permit the use of interposed persons, authorised bodies, multiple financial advisers, or nominated representatives.
- Class B, a financial advice provider that may have authorised bodies and multiple financial advisers. A Class B licence does not allow the licence holder or authorised bodies to engage nominated representatives or entities to provide advice on its behalf. Interposed persons are only permitted with the FMA’s approval.
- Class C, a financial advice provider that can engage authorised bodies, financial advisers and nominated representatives, and any structure permitted by the Act. Interposed persons are only permitted with the FMA’s approval.
The proposed licence classes are incremental, so a Class B licence includes everything permitted in a Class A licence, and a Class C licence includes everything permitted in Class A and B licences. However as proposed, if a business changes beyond its current licence class, it would have to apply for a new licence of the appropriate class. This suggests that the requirements would be different (probably more onerous) as the licence class increases.
The FMA seeks feedback about whether and why you agree with these licence classes, and whether they create a barrier to enter the market. Submissions close on 7 August 2020.
Full licence requirements
Financial advice providers must apply for and obtain a full licence during a two-year period between 15 March 2021 and 15 March 2023.
Requirements for a full licence are presently unknown. They have not been released by the FMA.
The FMA has the power to require entities to apply for a full licence at particular times during that period.
There are nine existing licence types issued under the Financial Markets Conduct Act 2013. These license types require applicants to meet minimum requirements in five areas:
- Fit and proper (see transitional licensing, above);
- Operational infrastructure;
- Financial resources; and
Licences are usually issued with standard conditions, and may also have specific conditions.
Full licence application process
The FMA have not released details about the process to apply for a full licence. The process is expected to be online, and licensing fees suggest that the FMA should spend few hours evaluating most applications. They will spend more time on complex applications.
Full licence standard conditions
The FMA is considering eight standard conditions that licence holders and those authorised under a licence must comply with. These are:
- Record keeping – a requirement that adequate records must be retained in relation to the financial advice service, in a form that ensures the integrity of the information, in English, available for inspection and kept for a minimum of seven years. This is the same as the record keeping condition for transitional licences.
- Internal complaints process – a requirement that there is an internal process for resolving client complaints that provides for complaints to be dealt with in a fair, timely and transparent manner and records to be kept of the complaints. The standard condition wording is the same as that applied to other licences under the Act.
- Regulatory returns – a requirement that all information is provided to the FMA that is necessary to monitor the adviser’s ongoing capability to effectively perform the financial advice service in accordance with the applicable eligibility criteria and other requirements with the Act. The standard condition wording is the same as that applied to other licences under the Act.
- Outsourcing – if a system or process is outsourced there is a requirement that arrangements are in place to meet the adviser’s market service licensee obligations. The purpose of this requirement is to ensure that outsource providers and associated arrangements are regularly reviewed.
- Professional Indemnity Insurance – a requirement that professional indemnity is taken out that is appropriate for the provision of the financial advice service to ensure that retail clients can be compensated for financial loss as a result of a breach of professional duty by the adviser.
- Business continuity and technology systems – a requirement to have and maintain a business continuity plan that is appropriate for the scale and scope of the financial advice service to ensure that they are able to manage disruptions in the business.
- Ongoing eligibility – a requirement to meet section 396 and, if applicable, section 400 of the FMCA which specify the matters in respect of which the FMA must be satisfied in order to grant a licence, or authorise an entity as an authorised body.
- Notification of material changes – a requirement to notify the FMA in writing within 10 days of commencing to implement material change to the nature of, or manner in which the financial advice service is provided.
The FMA seeks feedback about each proposed standard condition including whether you agree with it, what compliance costs and other adverse impacts it would add to your business, and whether the proposed condition creates a barrier to enter the financial advice industry. Submissions close on 7 August 2020.
Read the guides on the FSPR:
and from the FMA: