Newsletter December 2010

December 1, 2010

Financial Advisers Regulation

I wrote last month about the Code of Professional Conduct for Authorised Financial Advisers, and the need for all financial advisers to be authorised by July 2011. The initial deadline was December 2010, and early on I set that as a goal to have all the compliance dealt with. I’m pleased to say I have passed the exam that all financial advisers must sit in order to become authorised. The exam covered the following legislation:

  • The Financial Advisers Act
  •  The Financial Service Providers (Registration & Dispute Resolution) Act
  • The Fair Trading Act
  • The Consumer Guarantees Act
  • The Trustees Act
  • The Code of Professional Conduct for Authorised Financial Advisers
  • Financial Advisers (Disclosure) Regulations

I have also had to submit a 300 page portfolio of evidence to ETITO, the body charged with assessing competence in relation to the authorisation of financial advisers. The final part of that process is a competency interview, which I completed last week with a recommendation from the assessor that I be awarded the standard needed to complete the authorisation process.

Part of the new legislation is the requirement for every financial adviser to belong to an external disputes resolution scheme. The service is free to consumers, and is available if a complaint is not dealt with internally to the satisfaction of a client. I have joined the Insurance and Savings Ombudsman’s disputes resolution scheme( I will give further information about the disputes resolution process in future newsletters, but would encourage investors to visit the Insurance and Savings Ombudsman’s website for some general information.

I have also had to register as a Financial Services Provider with the Companies Office. The register is a public database of financial service providers in New Zealand, and anyone can search the register to check the status of their adviser.

The Code of Professional Conduct for Authorised Financial Advisers

I’ve discussed the Code previously, however I think it’s worth covering the eighteen standards in some detail. The Code contains minimum standards of competence, knowledge and skills, of ethical behaviour, and of client care. It also specifies minimum requirements for continuing professional training. Over the next few months I will comment on each of the Code Standards.

Code Standard 1An AFA must place the interests of the client first, and must act with integrity

No comment needed here really – I think I can comply with that without too much further training!

Code Standard 2 – An AFA must not do anything or make an omission that would bring or would likely bring the financial advisory industry into disrepute

A bit ambiguous in my view – if I back a company that goes broke, am I breaching the standard?

Code Standard 3 – An AFA must not state or imply that the AFA is independent, or that any financial adviser services provided are independent, if a reasonable person in the position of a client would consider that the AFA or the services provided are not independent

I’m not sure why this is deemed necessary really, because all sources of income and how they are paid are required to be disclosed under the new disclosure regulations. I class myself as independent in the sense that I don’t have an obligation to sell certain products, and I have no restriction on the type or number of products I can offer. Under the new legislation, however, I won’t be able to refer to independence due to the fact I receive brokerage from fixed interest issuers such as Auckland Airport and Goodman Fielder, and commissions from the likes of UDC, Marac, and ING. I have no problem, however, complying with this standard.

Code Standard 4 – An AFA must not borrow from or lend to a retail client

No problems with that.

Code Standard 5 – An AFA must not provide financial advice to a retail client in relation to a financial product that is not offered to the public if the AFA is a related person of the product provider of that financial product

If my brother was trying to sell shares in a commercial building (privately) I would not be able to offer the opportunity to my clients. There are conditions that would allow me to do so; however they are particularly strict, and rightly so, are designed to protect the interests of the investor. No problem complying with that one.

Code Standard 6 – An AFA must behave professionally in all dealings with a client, and communicate clearly, concisely, and effectively

Under this standard I can only give advice in areas I have the competence, knowledge and skill to provide. I have to provide my services and perform my obligations in a timely way, and I must transparently manage any conflicts of interest that may arise. “Communicating effectively” requires me to take reasonable steps to ensure clients understand any advice I give. If I pass on advice (research) of another person I must take reasonable care to ensure that person has an appropriate level of competence, knowledge and skill to provide that advice.

Code Standard 7 – An AFA must ensure each retail client has sufficient information to enable the client to make an informed decision about whether to use the AFA’s financial adviser services, and/or to follow any financial advice provided by the AFA

This standard requires me to provide clients with information about any limits on the scope of my services, my qualifications to provide those services, the fees the client must pay, the benefits I may receive, and any conflicts of interest I may have in relation to the advice I am giving. All of this should be satisfied by complying with the disclosure obligations under the Act.

You will notice the code standards sometimes make reference to “retail clients” and it’s important to understand the definition of a retail client, and how that differs from a “wholesale client”, and an “eligible investor.” The abridged definitions from the Financial Advisers Act are as follows:

Retail Client – a client of a financial adviser or broker who is not a wholesale client

Wholesale Client – has a full page definition, however in relation to our clients would be someone whose principal business is the investment of money, or someone with assets exceeding $1 million, or with turnover exceeding $1 million per annum, or someone who certifies that they are an eligible investor

Eligible investor – a client who certifies that they have sufficient knowledge, skills, or experience in financial matters to assess the value and risks of financial products, and the merits of the service to be provided

It is important investors are aware of their status when dealing with a financial adviser. Wholesale clients have the ability (by providing a signed notification) to opt out of having that status, and instead would be treated as a retail client. By doing that, all the code standards in the Code of Professional Conduct for Authorised Financial Advisers would apply to them. Eligible investors can only attain their status by certifying in writing that they have sufficient knowledge, skills, or experience in financial matters to assess the value and risks of financial products, and the merits of the service to be provided. By doing so they are, in effect, limiting the protection afforded to them under the Code.

Vital Healthcare Property Trust

Vital (formerly ING Medical Property Trust – and before that Calan) have issued rights to existing unit holders. They are seeking to raise $150 million to fund the purchase of twelve healthcare properties in Australia. The offer is a renounceable offer; meaning holders are able to sell their rights if they wish. The company has provided stable long-term returns, with a good yield and a steady capital gain. The question investors need to ask however; is “do I want to double my investment?” The offer closes on December 13th, with the rights trading closing on December 7th. Call the office if you would like to discuss your situation.


Infratil has announced an offer of up to $50 million of unsecured, unsubordinated, convertible bonds, with the ability to accept oversubscriptions of $25 million.

  • Maturity Date – June 16th 2016
  • Interest paid quarterly
  • Minimum investment – $5,000
  • Interest rate – 8.50%
  • Closing date – May 2011 (or earlier at the issuer’s discretion)

Holders of Infratil bonds maturing in May, 2011 are being offered the ability to exchange those bonds for these new bonds. The bonds are convertible, which means at maturity Infratil has the ability to issue shares to bondholders, rather than pay them out in cash.

Equitable Mortgages

It was surprising to hear last Friday that Equitable Mortgages had called in the receivers. The directors have decided the business is not sustainable, so have opted out before the tough regulatory regime comes into play on December 1st. The Government Guarantee may have helped keep the company viable, but in the long-run has been a significant factor in their demise. Investors have been reluctant to invest past the December 2011 Government Guarantee, which makes it almost impossible for the company to lend with any confidence. I said in the October newsletter “I think the remaining non-bank deposit takers will need to look at various alternative sources of funding (outside short-term retail deposits) until an adequate level of confidence returns. This might take years, not months.” Equitable clearly weren’t in a position to source their funding elsewhere. Other finance companies are no doubt grappling with the same issues.



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