In my last Financial Services post, I made reference to product providers unilaterally deciding to interpret the legislation and to require FAPs to provide evidence of compliance with the providers' Fair Conduct Programmes – FCPs.
This item seeks to dig a little deeper and expand on the rationale underpinning my thinking on how CoFI, FAPs, and product providers interact.
The FCP requirement in CoFI met with some initial resistance from financial institutions, but from first-hand experience, I suspect subsequent adoption of a comprehensive FCP has highlighted some key strategic issues for product providers that might otherwise have been the subject of FMA intervention. In other words, creating an FCP has been a valuable and worthwhile exercise for many financial institutions, although some may be reluctant to admit this.
Since the Act is now due in full force by 1 March 2025, FCPs will become an intrinsic aspect of Financial Institutions compliance and governance practices.
The FMA's 2024 Report states –
"As of June 2024, more than $215 million had been returned to customers by banks and insurers from remediation activity, following the FMA and RBNZ's Conduct and Culture review of banks and life insurers."
It would seem that the introduction of an FCP regime has sufficient supporting evidence to justify its existence in the regulatory framework.
That CoFI should include Class 3 FAPs is a given. They operate on behalf of their preferred financial product provider, and, whether the regulator likes it or not, their relationship with the provider is wholly dependent on the volume of products they sell.
But the client experience is different with Class 1 and 2 FAPs and the provisions of the Code of Professional Conduct create a de facto (if not a de jure) fiduciary duty on these FAPs and their Advisers.
Prioritising client needs over their own, full and comprehensive disclosure of remuneration and of any conflicts of interest, are essential hallmarks of a fiduciary duty.
A definition of fiduciary duty can be summarised thus - A fiduciary duty involves actions taken in the best interests of another person or entity. Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
All of the above appears to be covered in the Code so, ignoring the position of Class 3 FAPs, it is reasonable to assume that Class 1 and 2 licensees and their Advisers have an obligation to act on behalf of their clients.
That being the case, a recommendation to acquire a product solution to an identified need should require the Adviser to be satisfied that the product provider is complying with the provisions of the enabling legislation, i.e. CoFI.
It follows that a diligent Adviser, acting on behalf of their client, should seek evidence of product provider compliance with their own FCP.
After all, the industry regulator operates on a "tell me, show me" basis, so should Class 1 and 2 FAPs in order to discharge their fiduciary duty to their clients.
Yours aye,
The Laird
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