The Financial Markets Authority (FMA) has released new guidelines for advisers when financial advice is given on financial products purchased for investment purposes.
Called Code Standard 3 of the Code of Professional Conduct for Financial Advice Services (the Code), the guidance notes the challenges financial advisers may face when giving financial advice about high-risk, complex or novel financial products where it can be difficult to access information to support reasonable grounds.
The key principles in the Code include:
Meeting professional responsibilities to your clients
Advisers are held to professional standards under the Financial Markets Conduct Act 2013 (FMC Act) and the Code. As such, you are responsible for ensuring your advice is suitable for your client, considering the nature and scope of that advice. This includes ensuring there are reasonable grounds for your financial advice in the relevant circumstances.
Giving financial advice that is within scope of your professional services and competence
You must not give regulated financial advice to a retail client unless you meet the standards of competence, knowledge, and skill (including any continuing professional development requirements) provided in the Code for giving the advice.
Some advisers may not have time, capacity, or resources to provide financial advice on more complex or novel types of financial products. In such situations, an adviser should make it clear to any client seeking advice that the scope of their services does not cover those products.
Exercising professional judgement
You need to apply cogent reason – not irrational or uninformed factors – to the formulation of your financial advice. Exercise your professional judgement based on your competence, knowledge, and skill. You should be able to explain your reasoning and the factors you took into consideration, and why the grounds for the financial advice you give are reasonable in the circumstances.
Research is one input that may support reasonable grounds. If you rely on someone else’s assessment of a financial advice product or strategy, you should be able to demonstrate that it is reasonable to rely on their assessment. This also requires the exercise of professional judgement.
Considering relevant, material, and sufficient information
You will need to apply your professional judgement to determine what information is relevant, material, and sufficient to inform your financial advice and support having reasonable grounds, considering the nature and scope of your advice and the relevant circumstances.
Considering your client’s relevant circumstances
To give financial advice that is suitable (including being based on reasonable grounds), you need to consider your client’s circumstances that are relevant to the financial advice, such as their financial situation (including, for example, any existing portfolio of investments), needs, goals and risk tolerance.
You need to decide if a detailed analysis is required or if it is reasonable to make assumptions about the client’s circumstances based on their particular characteristics. The nature and scope of the financial advice you are giving will determine the extent of the analysis of the client’s circumstances that is required.
Communicating clearly with your client
You must take reasonable steps to ensure your client understands the nature and scope of your advice, including any limitations on the nature and scope of your advice. Limitations might include, for example, that:
• You had limited time to prepare your advice;
• Limited information about the financial product was available;
• You relied on another person’s assessment; and
• Your advice is limited to a specific financial product.
Keeping adequate records
Financial advice providers must create and maintain adequate records in relation to their financial advice service, as a condition of their licence. These records should clearly demonstrate how their advice met Code Standard 3. For example, the records should generally:
• Record the nature and scope of the advice and the relevant circumstances; and
• Explain why you are satisfied that the advice is suitable for your client (including that there are reasonable grounds for the advice).