As regulators around the world confront similar challenges in ensuring that retail investors get adequate advice, a new review from New Zealand’s Financial Markets Authority (FMA) finds that the financial services sector needs to do better on that front.

The FMA published its first monitoring report on sales and advice practices within New Zealand’s financial services sector since new conduct standards were introduced for financial advisors in 2013. The FMA’s report found that firms are falling short of its expectation that they put customers’ interests first, among other things.

“While we saw some excellent practices, there is still plenty of improvement required to reach the standards of conduct we expect,” the FMA’s report says. “Many businesses were unable to show us how they explicitly balanced conflicts of interest, such as incentives for sales staff versus customers’ interests. Many were also unable to demonstrate how they help their customers to make informed decisions based on a product’s risk profile.”

The FMA’s review also found deficiencies in firms’ governance and culture: “Many businesses were unable to demonstrate how the ‘tone from the top’ formed part of their culture. Good policies were not always reflected in good processes, and staff did not always have a good understanding of the value of such processes.”

In particular, the FMA’s review found that there is “insufficient reporting to senior management on sales and advice outcomes, and inconsistent attention to managing conflicts of interest in sales and advice practices.”

The regulator also uncovered inadequate systems to ensure compliance and observed “a lack of oversight of the suitability of decisions made by frontline staff.” In addition, the FMA report says that there’s “inconsistency in the quality and maturity of systems, and the practices in use across the industry.”

Although there appears to be a willingness among firms to meet their obligations, it will take time for the financial services sector to adapt to regulators’ and consumers’ expectations, notes Liam Mason, the FMA’s director of regulation, in a statement: “We’ll be stepping up our efforts to accelerate the change and to ensure providers are systematically putting the interests and outcomes for consumers at the centre of their processes.”

The FMA plans to do this by focusing on sales and advice practices in its monitoring work, particularly in areas that pose a higher risk to investors; engaging with boards and senior management to ensure that the interests of investors are “systematically prioritized,” and to ensure firms are meeting their conduct obligations; and by issuing further guidance to ensure that firms understand the FMA’s expectations.

“Firms and advisors are showing considerable goodwill to the spirit of the FMC Act with its focus on conduct and the interests of customers,” Mason says, “good intentions are all very well, but firms need to hardwire into their core processes and structures the focus on the customer that we have been talking about.”

According to the FMA’s review, as of June 30, New Zealand’s financial advisory sector includes, as of June 30: 1,845 authorized financial advisors (AFAs) who can give advice on a full range or products; 6,420 registered financial advisors (RFAs), who can only give advice on less complex products; and approximately 26,000 advisors who work for large organizations, such as banks and fund managers, and can only provide advice on products issued, or promoted, by their firms.