When is a Lawyer a Financial Adviser? A timely reminder of the need for caution
||All lawyers need to be careful that when giving advice, they are not giving financial advice, according to Frank Chan, ADLS Commercial Law Committee Convenor.
In a recent article appearing in The New Zealand Herald, the Financial Markets Authority (FMA) reminded lawyers that the exemption for lawyers under the Financial Advisers Act 2008 is narrow. Some readers may not have seen that article, and it is timely to remind all lawyers of this issue.
All financial advisers must comply with the requirements of the Financial Advisers Act.
A person gives financial advice when he or she is making a recommendation, or giving an opinion about acquiring, holding or disposing of a financial product (section 10 Financial Advisers Act).
Although exemptions for certain professionals do apply, it is easy to see how care is needed for those whose roles may overlap with financial services, to ensure that they stay on the right side of the line.
In addition to the exception for incidental service in section 13(1), the important exemption for lawyers is found in section 14 of the Financial Advisers Act, which recognises exemptions for certain persons and professionals. These include (among others) “lawyers and incorporated law firms” as long as they are “providing a relevant service [i.e. advice] in the ordinary course of business of that kind” (section 14(1)(d)).
Care is still needed
Although the Financial Advisers Act has now been in force for some time, a series of articles in the Herald earlier this year brought the scope of the exemption for lawyers under the Financial Advisers Act to the forefront again, making it timely for lawyers to take stock of this issue again.
The initial articles criticised a perceived “elitism” in making lawyers and accountants exempt from financial advice regulation, as compared with other professions in the wake of collapsing finance companies.
In response to these comments, the FMA clarified its position in a follow-up article appearing in the Herald, stressing that despite the statutory exemptions for lawyers and accountants, they must still pay careful heed to the limits of those rules. Although the drafters of the Financial Advisers Act deemed it necessary to provide exemptions for lawyers and accountants in part to avoid a redundancy of regulation already carried out by the New Zealand Law Society (NZLS) and the New Zealand Institute of Chartered Accountants (NZICA), the FMA emphasised that the exemptions are not as wide as people might think.
The FMA said the exemption for lawyers is for those lawyers who provide financial adviser services in the ordinary course of their business. The FMA’s view is that the occupational exemption has a narrow application. When lawyers provide legal advice, they will be covered by the exemption. However, when they provide services that would otherwise be categorised as financial adviser services, they may fall outside the exemption and could be in breach of the Financial Advisers Act (and face liability on conviction to considerable fines) and other related legislation if they are not registered or authorised.
The Commercial Law Committee points out that in those circumstances, lawyers may not be covered under their insurance policy.
Some useful examples
The FMA has given examples where a lawyer (or accountant) might provide services in the ordinary course of business within the exemption from the Financial Advisers Act, for example:
An accountant (or a lawyer) who is administering a deceased estate notifies the beneficiaries of their cash inheritance and suggests they place the inheritance in a bank term deposit until they have decided how to use or invest it, with the help of an authorised financial adviser if they require financial advice; or
A lawyer who is engaged by a client to set up a company between her and her business partner advises that she should include an option to buy out her partner’s shares in the event that he wishes to sell, and to agree the method for calculating the price of the shares.
In contrast, the FMA has given examples of situations where a lawyer (or accountant) might provide services outside the exemption, such as:
A lawyer who has administered a deceased estate informs the beneficiaries of their cash inheritance and advises them to use the money to pay down their mortgage, or invest in a specific KiwiSaver Scheme; or
An accountant (or a lawyer) who has acted in the voluntary solvent liquidation of a company advises the shareholders to use the released equity to invest in shares in a specific company, which is about to list on the NZX.
Further guidance on this issue?
The NZICA has issued its own guidance on what types of activities it considers form part of the ordinary course of business of a chartered accountant.
The Commercial Law Committee has previously raised this issue in Law News and engaged with the FMA to seek clarification. The Committee is also considering the merits of guidelines for lawyers on what types of activities it considers to be in the ordinary course of business, along the lines of the guidelines of the NZICA. The Committee is aware that NZLS has also been carrying out work on this topic.
The FMA has said it would be interested to hear from any clients of lawyers who may have received financial advice so that they can assess how the exemption is being utilised in practice and ensure any misuse is being addressed.
The FMA has warned that lawyers should not routinely provide financial adviser services, particularly where this involves complex investment decisions. The overall message, however, is that professionals must focus on the needs of the client first, the nature and scope of the advice being sought and whether they are best qualified to provide the advice in each circumstance, despite the existence of the exemption.
The Commercial Law Committee is seeking questions or comments on its proposal to issue guidelines for lawyers. Please send submissions to Helen Young, Commercial Law Committee Secretary at ADLS.