The regulatory and legislative framework for delivering financial advice in New Zealand is continually evolving, and the laws governing financial advice are changing from 15 March 2021.
Under the new regime, FAP licensing doesn't only incorporate regulatory requirements. Other variables can very well impact potential business structures, and having Professional Indemnity (PI) cover is one of those.
The FMA specifies three licence classes for financial advice providers (FAP) for the purposes of full FAP licensing: Class 1, Class 2 and Class 3.
Class 1 FAP's are simple and will remain similar to the current regime. However, it gets more complicated with Class 2 and 3 licenses and Authorised bodies.
Although both MBIE and FMA have assured small advisory firms that they will be able to operate under the new licensing regime, PI providers haven't fully digested the new regime and still have to adapt. Naturally, the policies and wordings in relation will be required to adapt also.
Last week, professional indemnity insurer NZI quashed those assurances with a letter sent from Andrew Jollands, National Relationship Manager – Liability for NZ.
The letter shows a hard reversal from the insurer's previous position on providing PI covers for financial advisers:
"Following our earlier advice that NZI would no longer underwrite financial adviser's liability, we have reconsidered our position. We will now underwrite class 2 licensed Financial Advice Providers with some conditions."
"As originally advised, we were concerned at the significant exposure generated from multiple individual advisers' limits of indemnity for the minimal premium generated. In addition, uncertainty surrounding the future of financial adviser claims arising from the new regulatory environment meant we could not effectively measure future exposure."
"NZI will only insure type two adviser businesses licensed as financial advice providers (FAP), with three or more advisers.“
“Our concern is, with the level of compliance required under the new regulations, a one or two adviser firm will not have the capacity to maintain their advice levels, their ongoing education, along with all the compliance."
This means that effectively NZI has restricted single or dual adviser FAPs from accessing professional indemnity insurance under the new regime.
The move does not bode well for smaller adviser FAPs. It also highlights how how insurers will potentially influence the shape of the market under the new regime.
TripleA Advisers Association outgoing chief executive Wayne Smith says NZI's decision is "completely inconsistent" with the consultation around the new regime and totally at odds with what the FMA and MBIE have been saying.
He has stated advisers may end up exiting the industry or amalgamating into bigger groups. However, there are no assurances that PI insurers won't change the rules later and increase the minimum adviser firm size from three.
Some financial advisers and FAP’s may seek to self insure, although the quantum and nature of the reserve funds required to be held on their respective balance sheets is unknown and will only be known as the regulator commences audits from April 2021. A little known fact amongst participants is that from the 15th of March, all obligations under the legislation and regulation fully come into effect regardless of the licence type (transitional vs full).
John Botica from FMA told Good Returns that although the announcement was surprising he does not see it as heralding the doom of the single adviser FAP. Well run businesses that understand the psyche of their clients should not have any great levels of fear from these changes. There are no hurdles here that can’t be overcome.
Katrina Shanks, CEO of Financial Advice New Zealand, has said that this move will have large repercussions across the industry.
"We know that over 50% of those who applied for transitional licences are single adviser firms, and 28% have less than five advisers."
To any small financial advice firms feeling this squeeze, Shanks says: "I believe that these companies provide an invaluable service to New Zealanders. I think that they will be here providing financial advice in the long term. They are the ones that have a trusted relationship with clients; they are the ones that will be very successful in the new environment."
Overall, Shanks is optimistic that this move will not cause an exodus of single advisory FAPs. "I don't think that one provider saying they will not provide PI insurance will drive financial advisers out of the sector. I think we are going to see new providers come in with new products and that is exciting for advisers."
An Overview of the NZ Professional Indemnity Insurance Market by Compliance Refinery
The market is made up primarily of NZ based insurers; NZI Liability, Vero Liability, Chubb, AIG, Zurich, QBE, Berkshire Hathaway and then MGA’s (managing general agents) who write business through overseas placements.
This is compiled with the likes of Lloyds or other overseas-based insurers; Delta, DUAL or ANDO.
The market for financial advisers is very limited due to the appetite of insurers. The NZ Market is primarily NZI Liability (who acquired Lumley 6 years ago) and DUAL, with other insurers participating on very selective individual accounts. Product Providers Risk Appetite is limited due to insurers/reinsurers poor experience in overseas markets. Lloyds markets are seeing large exposure to COVID related losses, and capacity to the market is becoming more restricted. Several Lloyds syndicates have withdrawn from the PI market.
Insurers and reinsurers (effectively insurers own insurers, who provide treaty reinsurance) look to industry sectors to reduce capacity or look for large premium increases with more restrictive terms. Such industries are financial institutions, financial advisers and other industries with occupations exposed to volatile such as valuers and engineers etc.
Looking at the Aussie-market, the days of tick box renewal applications are over, insurers are rationing capital and are being selective in who they back.
Finzo has worked diligently for two years to secure its group PI cover. We have been assisting quality boutique advisory practices for seven years with CRM, Platform and client portal solutions. Under the new FAP regime, we will extend our available service offerings to include compliance support and PI cover.