AFA registration no quality assurance
Three people seeking to be registered as authorised financial advisers (AFAs) have been turned down after failing a good character test introduced to protect the public.
That doesn't seem very many considering the investment collapses we have witnessed over the last few years and subsequent revelations about the compromised independence of many of the country's investment advisers, and the poor quality advice they delivered.
We do not know how many people opted out of the industry and never applied for AFA certification, but the small number turned down does raise questions about how high the good character hurdle is set, and therefore the degree of confidence the public can have in someone who has achieved AFA registration.
I can tell you now, the AFA does not exclude advisers who have a dreadful track record in their advice. Nor does it force them to disclose their past failings.
One applicant, Sean Wood, was found by the Financial Markets Authority to have failed to disclose in his application that he had criminal convictions for breaches of the Building Act and then, when asked, displayed what the FMA considered an unsatisfactory attitude to obeying the law.
The judge at Wood's appeal accepted the FMA's view that Wood "revealed a tendency not to take responsibility for his actions" and "appeared to have the view that if the law was not being honoured by others then why should he comply with it?"
The judge found the FMA properly came to the conclusion that it did not have confidence that Wood "would comply with the onerous documentary, ethical and fiduciary obligations with which an AFA must comply".
The point established seems to go to the attitude an applicant has to the law even more than to whether they have in the past broken it.
It seems Wood rather offended the FMA when he admitted his failure to disclose his convictions was the result of not having gone through the application literature "with a fine tooth comb".
The FMA wants to see applicants who treat its processes with the seriousness and attention to detail they hope they will also bring to advising the public on where to put their money.
However, thanks to the Criminal Records (Clean Slate) Act 2004, AFA applicants do not have to disclose offences to the FMA in some cases, providing they did not receive a custodial sentence and paid all their fines. So AFA registration is no guarantee of a clean criminal record.
AFA applicants have to disclose:
A Having been dismissed from employment or asked to resign from a position of trust, fiduciary responsibility or similar.
A Having been investigated, charged, disciplined, censured, suspended or criticised by a regulatory or professional body, court or tribunal.
A Any current or pending disciplinary or criminal charges, or dispute resolution matters in New Zealand or overseas.
A Holding certain positions in a business which has gone into liquidation or receivership while the applicant was connected with that business, or within one year of that connection.
They must also disclose information suggesting:
A A lack of willingness to comply with legal obligations, regulatory requirements or professional standards.
A Obstructive, misleading or untruthful dealings with others.
A A breach of fiduciary obligation or other obligation involving trust.
A A failure to deal appropriately with conflicts of interest.
A Involvement in negligent, deceitful or otherwise discreditable business or professional practices, including being involved in the management or being a major shareholder of a company employing discreditable practices.
A Failure to manage business or personal debts or financial affairs satisfactorily.
The impression is that anyone who achieves an AFA registration must be quite some character, but having something adverse to disclose in one or more of those categories is, in itself, no reason for AFA registration to be withheld.
We can learn a lot from looking at the people who have achieved registration.
They include a large number of former Money Managers franchise holders and advisers. Money Managers was a franchise-based firm where franchisee/advisers were largely required to advise clients to buy related party products, many of which ended up losing investors substantial amounts of money.
These included products such as First Step, Orange Insurance, and Structured Finance, not to mention a fund that had a lot in common with the structured credit funds which got ANZ Bank into hot water.
The lesson to draw from Money Managers' advisers achieving AFA registration is that recommending terrible products - and the FMA is still investigating several of these - is no bar to being allowed to continue advising the public.
There are a good number of former Vestar advisers with AFA registration too, all of whom share some responsibility for placing clients' money into some truly dreadful finance companies and related party investments.
There's even one adviser who recommended Blue Chip who is now a registered AFA. It is also possible to find AFAs who have had fairly significant findings against them by industry bodies.
In short, AFA registration should not be taken to mean an adviser is trustworthy, has an unblemished record, or has never recommended elderly clients put money into hugely risky finance companies or property ventures.
Oh, and one last point: Any information AFAs handed in to the FMA in any of the above categories is not made public by the watchdog, and does not need to be made public by the AFA when talking to new clients.
The AFA regime is a good one. Registration can be removed, so advisers need to keep their noses clean. It has raised the stakes. But it is not, nor should it be mistaken for, a guarantee of quality.
- © Fairfax NZ News
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