The Financial Markets Authority (FMA) has issued a formal warning to a financial adviser who made recommendations to clients that they urgently move their investments to ‘low risk’ funds in the wake of COVID-19. The adviser failed to clarify that the advice may not be suitable for all clients.
The Authorised Financial Adviser (AFA) sent a bulk email in March 2020 to their clients, urgently recommending they move their savings in KiwiSaver plans and similar investment funds to ‘low risk’ funds, following uncertainty caused by COVID-19. The FMA was alerted to the communication after receiving a complaint from one of the adviser’s clients.
FMA Head of Supervision James Greig said the advice was inappropriate and had the potential for significant harm.
“The FMA has a low tolerance for poor conduct that poses risk to customers as a result of the COVID-19 crisis, especially because New Zealanders are looking for financial guidance at this time.
“If the adviser’s clients acted on the advice, they would have locked in any losses caused by market volatility. This change may not have been appropriate for all clients, depending on their investment plans, risk tolerance and specific circumstances,” said Mr Greig.
After reviewing the adviser’s email to clients, the FMA considered that a reasonable adviser in similar circumstances should have:
- Clearly communicated to clients that the email provides ‘class’ financial advice, has limitations and may not be appropriate for all clients. (‘Class’ advice is general in nature and usually suitable for people in a group or ‘class’. It does not take into account personal circumstances)
- Recommended that clients first discuss their personal circumstances and goals with an adviser, instead of asking them to urgently act on the advice.
After making inquiries, the FMA concluded the adviser’s actions would likely be a breach of section 33 of the Financial Advisers Act, which says a financial adviser must act with care, diligence and skill.
Mr Greig said a warning was the appropriate and proportionate regulatory response in the circumstances. The FMA decided not to name the adviser because they had cooperated with the regulator’s inquiries, and they later clarified the advice with their clients. The FMA wanted to urgently deal with the issues at hand and send an important message to the industry about its expectations for providing suitable advice in extreme market conditions.
The warning was issued under section 9 of the Financial Markets Authority Act 2011.