NZ CFS L5 Core cheat sheet

The Financial Markets Conduct Act 2013 (FMCA) governs offers of financial products, market conduct, disclosure and the licensing of financial advice providers in New Zealand.

Financial advice is regulated under the Financial Services Legislation Amendment Act 2019, which replaced the Financial Advisers Act 2008 and took full effect from 15 March 2021.

A Financial Advice Provider (FAP) must hold or operate under a transitional or full FAP licence issued by the FMA; individual advisers operate as nominated representatives or advisers under that licence.

The Code of Professional Conduct for Financial Advice Services has two standards: ethical conduct (client interests first, integrity, transparency) and client care (suitability, competence, record keeping).

Disclosure requirements are set by the FMCA and regulations: initial disclosure before advice, and ongoing disclosure of material changes; disclosure must be in writing and understandable.

The Fair Dealing provisions (FMCA Part 2) prohibit misleading or deceptive conduct, false or misleading representations, and unsubstantiated representations in relation to financial products and services.

Anti-money laundering obligations arise under the AML/CFT Act 2009: customer due diligence (CDD), enhanced CDD for PEPs and high-risk customers, suspicious activity reports to the FIU, and record retention.

The Privacy Act 2020 governs collection, use, storage and disclosure of client personal information, including the Information Privacy Principles and mandatory breach notification.

Other relevant statutes include the Financial Service Providers (Registration and Dispute Resolution) Act 2008, the Credit Contracts and Consumer Finance Act 2003, and the Financial Markets Authority's licensing and supervision powers.

Standard 1 of the Code requires advisers to prioritise the client's interests, act with integrity, and avoid or manage conflicts of interest.

A conflict of interest exists where an adviser's or provider's interest could reasonably be expected to influence the advice given; it must be disclosed, avoided, or managed.

Common conflicts include commission-based remuneration, volume or trail payments from product providers, ownership links to a product manufacturer, and referral fees.

Disclosure of conflicts does not by itself discharge the duty; the adviser must still give advice that prioritises the client's interests.

Incentives that could reasonably be expected to influence advice should be identified, recorded and disclosed in writing to the client.

Confidentiality: client information may only be used for the purpose for which it was collected, unless the client consents or disclosure is required by law.

Gifts and hospitality from product providers should be logged and assessed against a documented threshold; excessive benefits create an unmanageable conflict.

Advisers must not accept instructions that would place them in breach of the law, the Code, or their FAP's policies, and must escalate suspected misconduct.

Discovery should establish: personal circumstances, dependants, income and expenses, assets and liabilities, existing insurance and investments, goals, time horizon and risk tolerance.

A fact find is the documented record of discovery; it should be dated, signed or acknowledged by the client, and retained.

Needs analysis converts goals into quantified needs: for insurance, sum insured = debts + income replacement + education/final costs − existing cover − assets available.

For retirement, the funding gap = required retirement income − expected NZ Superannuation and other guaranteed income, capitalised over the expected retirement period.

Expense analysis uses either a budgeted (line-by-line) or a benchmark approach; the chosen method should be recorded.

Existing cover should be reviewed for adequacy, cost, exclusions and duplication before recommending new products.

Material changes in circumstances (marriage, children, job change, mortgage, health) should trigger a review of the fact find.

Information gaps must be documented; advice given on incomplete information should state the assumptions and limitations.

Risk tolerance (willingness) and risk capacity (ability) are distinct; a recommendation must be suitable for the lower of the two.

Risk capacity is driven by time horizon, liquidity needs, income stability, debt levels and dependants; risk tolerance is behavioural and assessed via a validated questionnaire.

Suitability requires the recommendation to match the client's goals, financial situation, risk profile and needs, and to be the product most likely to meet those needs.

Asset allocation should reflect time horizon: short horizons favour cash and fixed interest; longer horizons can support growth assets.

Diversification reduces unsystematic risk; systematic (market) risk cannot be eliminated through diversification.

For insurance, suitability considers sum insured, policy wording, exclusions, waiting periods, premium affordability and the client's health disclosure duties.

The advice record should state why the recommendation was made, alternatives considered, and the consequences of not following the advice.

Replacement of an existing product requires a comparison of costs, benefits, exit penalties and loss of grandfathered features.

Cash and fixed interest offer lower volatility and known income; bond prices move inversely to interest rates and are exposed to duration and credit risk.

Equities offer growth and dividend income with higher volatility; returns come from capital gain plus dividends.

Property investment exposes the investor to liquidity risk, leverage risk, tenant risk and interest-rate risk.

Managed funds pool investor money; unit price = total fund net asset value ÷ number of units.

KiwiSaver: employee default contribution 3% (can be 3%, 4%, 6%, 8% or 10%); employer minimum 3%; government contribution 50 cents per dollar up to $521.43 per year (from 1 July 2024).

Monetary policy: the Reserve Bank of New Zealand sets the Official Cash Rate (OCR); raising the OCR tends to raise borrowing costs and dampen inflation.

Inflation erodes real returns; real return ≈ nominal return − inflation rate.

Business cycle phases (expansion, peak, contraction, trough) affect asset class returns; diversification across asset classes and geographies reduces concentration risk.

Life insurance product types include term life, whole-of-life, trauma/critical illness, income protection and total and permanent disability; each addresses a different risk.

Initial disclosure must be given before advice and cover: the FAP's licence status, the adviser's role, remuneration and commissions, conflicts, complaints process and dispute resolution scheme.

Disclosure must be clear, concise, in writing (or in a manner the client can readily access) and in plain language.

Ongoing disclosure is required for material changes to the information previously disclosed, within a reasonable time.

Records must be retained for at least 7 years (FMCA record-keeping requirements) and be readily accessible to the FMA on request.

The advice file should contain: fact find, risk profile, needs analysis, product research, recommendation rationale, disclosure, and client acknowledgement.

Client communications should be documented (date, method, content) to evidence the advice process and any instructions received.

Complaints must be acknowledged and handled under the FAP's internal complaints process, with referral to the approved dispute resolution scheme if unresolved.

A service agreement should specify review frequency, scope, cost and the client's responsibilities.

Reviews should reassess goals, circumstances, risk profile, product performance and suitability; the review date and outcome must be recorded.

Trigger-based reviews occur on life events (birth, death, divorce, redundancy, inheritance) or market/product changes.

Complaints handling: acknowledge promptly, investigate, respond within the timeframe set by the FAP's process, and record the outcome.

If a complaint is not resolved, the client must be advised of the right to refer it to the FAP's approved dispute resolution scheme (free to the client).

Client files should be reviewed for completeness and compliance on a scheduled basis; findings should feed into process improvement.

Terminated client relationships should retain records for the required retention period, and any ongoing service obligations should be documented.

Competence requirements under the Code: advisers must have the knowledge, skills and experience to provide the advice, and maintain currency.

Continuing professional development (CPD) should be planned, relevant, documented and linked to the adviser's role and the advice given.

The FAP must have a supervision framework: induction, competency assessment, monitoring, and escalation for advisers who are new or providing complex advice.

Nominated representatives must be supervised by the FAP; the FAP remains responsible for the advice given under its licence.

Training records, CPD logs and supervision notes should be retained and available for FMA review.

Advisers should keep up to date with legislative changes (FMCA, Code, AML/CFT, Privacy Act) and product/provider changes.

Professional development should include both technical knowledge and ethical/conduct training, reflecting the dual standards of the Code.