FMA’s Code of Professional Conduct for Financial Services Part 2 encompasses the three strands of Competence, Knowledge and Skill. For each of these there is a definition, albeit one can overlap another, as expected:
- Competence means having general competence, knowledge, and skill
- Have particular competence, knowledge, and skill for designing an investment plan
- Keep competence, knowledge, and skill up-to-date
The Code is all about conduct and competence. All people working in financial services providing advice and selling financial products to the general public (retail only) must adhere to the Code. It is expected that the wholesale/ institutional market will also adopt the Code. They should be doing that anyway under their own professional standards.
Before one can debate their merits and shortcoming one needs to understand what each of these terms mean. Every one of us have a different interpretation, often slanted, and tainted by life experiences.
So, what is competence? According to the dictionary competence is about “the ability to do something successfully or efficiently”. Under the Code, advice must not be given unless person meets the standard of general competence, knowledge, and skill. To demonstrate that skill you must:
- Hold version 1 or 2 of NZCFS (L5)
- Hold NCFS (Financial Advice L5)
- Was authorised adviser immediately before Code takes effect
- Give advice only through an individual two satisfies 1,2 or 3 above
What is knowledge? According to the dictionary knowledge is about “facts, information, and skills acquired through experience or education: the theoretical or practical understanding of a subject”. Under the Code, a person must not give advice that includes designing an investment plan unless the person meets the standard of particular competence, knowledge, and skill for designing an investment plan.
What is skill? Here again a dictionary definition, skill is about “ability to do something well with expertise”. Under the Code a person must not give advice that includes a recommendation or opinion about either:
- Acquiring or disposing of (or not acquiring or disposing of) a financial advice product
- Switching funds within a managed investment scheme (MIS)
- Person must meet standard of particular competence, knowledge, and skill for product advice
You must keep your skills current and relevant. A person giving financial advice must undertake CPD as follows:
- Annually plan for and progressively complete learning activities
- Maintain competence, knowledge, and skill for advice relevant to such advice given, an up-to-date understanding of regulatory framework for such advice in NZ
You must evidence your CPD achievements. There are a number of ways this can be done such as maintain an up-to-date understanding of NZ regulation for advice by completing after any material changes to that regulation, requirements for qualification outcome 4 of NZCFS (L5) V2.
Can skills be kept up-to-date by licence authorisation removal threat or is there something more to it? Building a solid understanding of your industry (inc. products and services), skills required to deliver professional advice to clients and sound working knowledge of regulatory rules are base requisites for life as a financial advisor. But as with all professions, successful people adopt a “way of life” approach to their chosen route. This is similar as the medical profession, committed lawyers and accountants. Dealing with clients is not transactional, if requires a holistic understanding about client circumstances, goals, and ambitions.
There has been much debate as to whether Level 5 NZQA qualifications are really enough in today’s complex, technology, and regulatory driven market? Australia has adopted the de minimis of degree level achievement before letting advisers lose on client assets. Other firms may insist on the Chartered Financial Analyst (CFA) qualification as a benchmark to evidence skillsets. However, whatever path one choses attitude, integrity, willingness to learn even into one’s dotage are essential qualities for success.
A paraphrased extract from Massey University Senior Lecturer Mike Naylor explains why NZQA Level 5 is not good enough for 2021 financial services and lead to likely failures of the new Code standards.
“There needs to be an explicit layering of skills, with an explicit requirement to refer up the chain if required. This can be compared to that operating in medicine, of nurse, GP, general specialist, advanced specialist, then national expert. Patients are initially assessed at the lowest level, then referred up depending on complexity.
The NZQA Level 4 curriculum is aimed mainly at administrative staff while Level 5 is aimed at advisers who can handle general cases, but who have higher-educated senior staff who they can refer difficult clients to. The Level 5 curriculum carefully excludes any areas requiring complex or skilled knowledge and visualises the clients of Level 5 educated advisers as middle-income families with limited complications. All complex or customised advice cases are then visualised by the NZQA framework as being referred to a Level 6 or 7 educated adviser within that organisation or via external reference.
In practice this means that Level 5 graduates will not be able to handle areas like business insurance, commercial property insurance, insurance involving complex underwriting, the selection of shares or the creation of portfolios, commercial lending, etc. The pedagogy of Level 5 is focused on teaching of knowledge with a limited amount of conceptualisation and application. This means that a key aspect of teaching Level 5 graduates is to ensure that they can recognise clients who have needs which require more advanced advice and therefore should be referred.
Any code which sets Level 5 graduates as the accepted level will therefore ensure that advice remains at the extremely basic level. The idea of Level 5 graduate offering insurance advice to a business or doing more in the investment field than making a mutual fund recommendation is fraught with danger, as they are not aware of what they do not know, of what additional advice may be required.
A current issue in the industry is that often Level 5 advisers or QFE staff are not being aware of what they are not advising on, especially if an issue only occurs within a limited number of clients (the unknown unknowns). Even organisation trainers are often unaware of the complications.
Within a university setting of Levels 5 to 7, (years one to three) we create a ladder of skills; starting with teaching basic subject knowledge, including terminology in year one, teaching specialist skills and concepts at year two, and then using that acquired expertise to develop application skills to case studies in year three.
Even at year three (Level 7) an implicit assumption is made that markets work well, and exceptions can be ignored. It is only within a Masters’ course (Level 8/9) is discussion of areas of market failure and how to handle these by referring to current research introduced.
What this means is that the kind of skills required to be an upper-level financial adviser and to be able to handle advanced analysis has to be taught at Level 7.
Any attempt to teach conceptualisation of non-standard cases at Level 6 runs into NZQA restrictions on what that Level means and does not match what is actually taught at Level 6 e.g. portfolio creation is only taught at Level 7, so a Level 6 graduate would only be able to compare mutual funds. Any attempt by a Level 6 graduate to exceed this is problematic as they have not been taught the exceptions to the general rules.
Only a Level 7 graduate has the conceptualisation skills to oversee a team of Level 5 or 6 staff and see the rarer issues which their staff may be missing. There is an obvious need for a Level 9 graduate within larger organisations.
Massey also considers that financial advisers should be required to belong to professional bodies. This is required for two reasons:
- Knowledge requires frequent updating, which is best handled by CPD, and by interacting with their peers and actively engaging with the community.
- Providing good advice requires a professional mind-set, a combination of theoretical knowledge, technical skill, practice management, commitment to ethical and professional behaviour. All successful examples of professional advice occur a framework which requires professional body membership.
Massey also considers that accountants and lawyers should not get an automatic exception from code education requirements. While these professionals are members of high-level professional associations with strong ethics rules, there is nothing in their training which meets the requirements of personal financial advice, and the professional bodies do not currently offer relevant CPD credits. These professions should not be granted exemptions outside areas strictly defined as within accounting or legal advice.
One of the major issues with the current AFA education requirements is that it is tending to lead to a lower level of skill in the industry than was the case before regulation. Prior to the code the better financial advisers were aiming to obtain a Level 7 qualification, via a Graduate Diploma and CFP/ CLU. The current requirement that Level 5 is all that is needed to become an FA. This low benchmark discourages new entrants from continuing onto the Level 7 qualification and up the scale leading to better outcomes for their clients.
Therefore, a Level 5 qualification, however, is only acceptable as an interim measure. One of the lessons of the recent financial crisis and the collapse of finance companies is that the level of theoretical expertise required of an investment and/or financial advisers has to be at a high level. The level of technical competency displayed by Level 5 New Zealand advisers has in general been low. Examples of this were the inability of some advisers to understand the relative performance of assets over a business cycle or to tell the difference between a fixed-interest rate mutual fund and a CDO mutual fund, and the scarcity of advisers able to handle business personal insurance correctly. In the medium-term investment, and comprehensive, advisers need to be subject to a Level 7 qualification. This is increasingly the base requirement internationally.
So, there you have it. To be really good and look after your clients you need to continually review your skills and knowledge. Widely read people and those with an “open mind” often make the best fund managers and advisers. There is much evidence to support this especially in times of market stress such as GFC, Asian currency meltdown, Dot.com turbulence and especially important today, where asset prices driven by central bank monetary policies have driven values up to unsustainable levels.
Thinking outside the square, challenging conventional thinking and about how you manage client relationships during a downturn, that is when you as an adviser will be tested. Are you up for the challenge and will you make the grade?