Under the incoming regulatory regime the FMA confirms it will place a stronger focus on financial advice providers to detail their process for handling conflicts of interest, which includes receiving gifts.
The regulator says that when advisers receive gifts or other incentives, they should consider whether the gift might distort their recommendation of products to retail customers and disclose this accordingly.
Under the Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations 2020, a commission or other incentive (e.g. gift) needs to be disclosed if “a reasonable client would expect to, or to be likely to, materially influence the advice given by” the adviser.
An FMA spokesperson said: “There is no specific financial value threshold for disclosing gifts. However, advisers need to consider what would be reasonable and provide appropriate levels of clarity as set out in the disclosure regulations.
There is no specific financial value threshold for disclosing gifts…
“As part of our monitoring of Financial Advice Providers, we will seek details of a FAP’s process for handling conflicts of interest, which will include gifts and appropriate disclosure.
“We note that advisers are also under a general duty to ensure the customer’s interest is prioritised. The Code of Conduct also stipulates that advisers should avoid or appropriately manage any conflict of interests.
“Additionally, where incentives, adviser remuneration and product charges become blurred or bundled together, this tends to result in reduced transparency.”
Under the current regime, advisers already have an obligation to “…exercise care, diligence and skill and not act in a way that is misleading, deceptive or confusing”.
The regulator has previously outlined its concerns about soft commissions in its Conflict Remuneration report. It says up-front commissions, or soft commissions, may lead advisers into a conflict of interest.
The 2018 report said insurers spent $34 million on soft commissions with almost half being related to sales targets. And of the total amount, $18 million was spent on 29 holidays for groups of advisers to places such as Queenstown (pictured), Australia and the UK.
The report said: “We encourage insurers to consider the number and nature of soft commissions that they provide to advisers, to ensure that where they provide these incentives, risks to customers from conflicted conduct are minimised.”