1. Compliance
  2. Financial advice
  3. Care, diligence and skill

Care, diligence and skill

All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:

  • the nature and requirements of the financial adviser's client or clients
  • the nature of the service and the circumstances in which it is provided
  • the type of financial adviser

See more in section 33 of the Financial Advisers Act 2008. The Government has announced changes to how financial advice will be regulated in New Zealand. See MBIE’s website for more information.

Examples

The obligation to exercise care, diligence and skill and not act in a way that is misleading, deceptive or confusing applies to all people who provide financial adviser services.

In general, when providing advice, advisers must:

  • assess the product's suitability for the client's needs
  • explain the key features and any limitations of the product to the client
  • clearly articulate any limitations on the service being provided.

AFAs also have specific conduct and record-keeping requirements under the Code of Professional Conduct.

In the sections below we set out how these general principles apply in insurance and product replacement advice. The examples are not intended to be exhaustive comments on compliance with the care, diligence and skill obligation.

Record-keeping

Advisers should keep records to demonstrate how they have fulfilled the care, diligence and skill requirement in providing advice.

Advisers must also show how they have disclosed and managed any conflicts of interest arising from commissions or from their remuneration. These records should adequately record any limitations on the scope of service, see examples on product replacement advice below for more information.

Advice should be recorded and provided to clients in a way that can assist them with decision making.

Insurance advice

Insurance advice must be balanced - providing a clear explanation of both the benefits and the exclusions or limitations of the product's cover.

For personalised advice, consider the eligibility of the client for the product and the suitability of the product for that client.

For example, FMA expects an adviser to identify the key exclusions and limitations relevant to the client and to highlight these. An adviser may not be able to address all exclusions or limitations in a policy, but should at least consider the client's needs, unusual features of the product and any information on common reasons for claims rejections.

For more information on offering advice to those with existing insurance arrangements, see sections on product replacement advice and insurance replacement advice below. 

Payment protection insurance advice

If providing insurance advice in conjunction with another product, advisers providing personalised advice should establish whether the client needs the insurance. For example, for payment protection insurance on a loan, this will be more than the fact a client has a loan.

If the payment protection premium is to be added to the loan, as a minimum, the total cost of adding the protection insurance to the loan must be taken into account and explained to the client.

Product replacement advice

When advising a client to replace an existing product with a new one, an adviser should consider whether they are giving  - or the client might reasonably expect the adviser is giving - an opinion on the disposal of an existing product, as well as the purchase of a new product.

For personalised advice, the adviser should:

  • Make an appropriate comparison of the client's existing arrangements with the new recommended product. This will require knowledge of the terms of the client's existing product. The comparison should be clear, reasonable and balanced. It should not just focus on the benefits of changing, for example, "the new product is cheaper". Highlighting only the benefits could be misleading.
  • Or, if no comparison is made, inform the client of the limited scope of the service and that they are not providing advice on the client’s existing product. The adviser should explain that no comparison has been made, the types of adverse consequences which might occur as a result of changing products and that the specific consequences for the client have not been considered.

For AFAs, these points will assist with compliance with the Code requirements, including the standard for limitations on the service (Code standard 8).

Insurance replacement advice

If recommending replacement of an insurance policy, the comparison should include:

  • the material differences in the policies relevant to the client, including any loss of benefits such as value or type of cover
  • the specific adverse consequences of changing policy or provider.

The adverse consequences might include:

  • a reduction in cover, for example due to a change in the date from which pre-existing medical conditions or property subsidence will be excluded
  • the amount of fees charged to cancel the policy
  • a specific period of reduced cover, for example “redundancy cover will not be available for the first three months”.

If no comparison is made, the adviser should:

  • inform the client of the limited scope of the service and that advice is not being given on the client’s existing product, and
  • explain that no comparison has been made, the types of adverse consequences such as those above, and that the specific consequences for the client have not been considered. 

In considering whether suitable advice has been given, we will consider the frequency with which an adviser recommends that a customer replace a product. For example, we might expect that one year policy will only be renewed or replaced annually, unless there is a significant change in the client's relevant circumstances.

Debt consolidation advice

In deciding whether to recommend a product change, advisers should compare the total cost of the credit as well as the repayment instalment amount and should draw both to the client's attention.

Other elements of the comparison should include:

  • any material differences in the credit terms relevant to the client, including any changes in the security required for the credit
  • the specific adverse consequences of changing the credit agreement.

Adverse consequences might include:

  • a higher cost over the whole life of the new loan, although each repayment instalments is lower
  • fees or additional costs for early repayment of the credit.

If no comparison is made, the adviser should:

  • inform the client of the limited scope of the service and that advice is not being given on the clients existing product, and
  • explain that no comparison has been made, the types of adverse consequences such as those above, and that the specific consequences for the client have not been considered.

For example, "replacing a shorter loan with a longer loan lowers the repayment instalments, but as it takes longer to repay the loan, it will cost more in total".

A guide to the FMA’s view of conduct

Advisers need to be familiar with our publication A Guide to the FMA’s View of Conduct*. It provides insights to help providers understand our view of good conduct. At its core, good conduct means focusing on the customer, to deliver good customer outcomes.

Our guide to conduct signals how we will use conduct as a ‘lens’ when we look at how providers behave to meet their existing obligations. It covers five factors which are building blocks of the FMA's view of the principles of good conduct.

These are:

Listen to customers
Help customers understand products and services
Ensure good communication across whole organisation.



Have the skills and experience to provide the right products and services
Meet professional standards of care
Seek continuous improvements through training. 
 

Serve business and customer interests 
Disclose and discuss conflicts 
Explain related party arrangements.



Maintain systems to support good conduct
Seek out continuous improvement
Effectively manage complaints and disputes transparently. 

 

Act in the interests of customers
Treat customers honestly and fairly
Conduct expectations communicated clearly by leaders and understood by staff
Address poor conduct; recognise and reward good conduct.

 

* A guide to the FMA’s view of conduct applies to licensed and authorised finance service providers. While it does not strictly apply to registered financial advisers, we consider that they should be aware of the guide’s contents.

AFAs also have specific conduct and record-keeping requirements under the Code of Professional Conduct.