Interposed persons under the financial advice regime

Ordinarily, where a licensed FAP engages individuals to give financial advice on its behalf, it will engage them directly. Where the engagement of an individual by a FAP is indirect – i.e. the engagement of the individual takes place through another person, then that other person is an ‘interposed person’.

The Ministry of Business, Innovation and Employment has a guidance sheet  that provides an overview of interposed person arrangements and explains what this arrangement may be.

The guidance highlights that a FAP is not an interposed person if it merely refers a retail client to another FAP to obtain a particular type of financial advice. It also highlights that where a financial adviser has their own limited liability company and is to be engaged by a licensed FAP, an interposed person arrangement is not automatically required, as the FAP can directly engage the financial adviser as an employee or contractor. The requirements include:

• the FAP must have a licence condition authorising the interposed person arrangement, and there may be restrictions on the authorisation;
• specific duties for the FAP and the interposed person, and liabilities in relation to the giving of financial advice under the arrangement.

Individuals engaged through an interposed person arrangement

In an interposed person arrangement, financial advice is given by the indirectly engaged individuals. The individuals may be financial advisers or nominated representatives. The conditions of the engaging FAP’s licence must authorise the FAP to engage the individual(s) through the interposed person (section 431F(1) b) FMC Act).

Can a financial adviser be engaged by more than one FAP?

Some interposed person arrangements may result in financial advisers being engaged by more than one FAP. For example, where:

• the interposed person is also a FAP that provides regulated financial advice to its own clients through its financial advisers, and those financial advisers also give advice on behalf of the FAP in an interposed person arrangement;
• an interposed person’s financial advisers provide advice on behalf of a number of different FAPs”

The legislation permits a financial adviser to be directly or indirectly engaged by multiple FAPs (unless restricted by a specific licensing condition). Each engaging FAP must record its engagement of the financial adviser against its FAP service on the FSPR. The financial adviser’s FSPR service will correspondingly reflect the details of each FAP that engages them.

Where one financial adviser is engaged by multiple FAPs to provide financial advice to each FAP’s retail clients, there is additional complexity and risk. FAPs involved in such arrangements, and the associated interposed persons, must ensure they understand and manage the risks and can meet their respective duties when putting multiple engagements in place.

MBIE’s guidance sheet on multiple FAP arrangements sets out factors that FAPs are encouraged to consider when engaging a financial adviser who will also be engaged by other FAPs.

Nominated representatives engaged through interposed persons

A FAP may engage an individual as a nominated representative to give financial advice on its behalf. A FAP may not engage (directly or indirectly) an individual as a nominated representative if the individual is a financial adviser or another FAP.

A FAP can engage a nominated representative directly, or indirectly through an interposed person. The engaged individual will be the nominated representative of the FAP, not the nominated representative of the interposed person. The interposed person arrangement involving a nominated representative must be authorised by a condition on the engaging FAP’s full licence.

A nominated representative can be engaged by two or more FAPs operating under the same FAP licence. A licence condition permitting the multiple engagements of nominated representatives under the same licence is not required.

For example, the same individual may be engaged as a nominated representative by:

• the licensee FAP and one or more authorised body FAPs on the same licence; or
• two or more authorised body FAPs on the same licence.

An individual may not be engaged as a nominated representative by two or more FAPs operating under different FAP licences, unless permitted to do so by a condition on each of the engaging FAP’s licences that relates to an interposed person arrangement.

What is the difference between an interposed person and an engaged entity?

An engaged entity is an entity that is directly engaged by a FAP to give regulated financial advice on its behalf. This must be permitted by the engaging FAP’s licence conditions (section 431F(1)(c) FMC Act). An engaged entity gives the regulated financial advice itself on behalf of the engaging FAP (e.g. an engaged entity providing digital advice to its engaging FAP’s clients on behalf of the engaging FAP’s business). This advice is given by the engaged entity, rather than any particular individual employed or contracted by the entity. An engaged entity can only be an entity, such as a company or other type of body.

In contrast, in an interposed person arrangement an individual financial adviser or nominated representative gives the advice on behalf of the engaging FAP, but is engaged indirectly through an interposed person. The interposed person will usually be an entity but is not an engaged entity.

FAPs will have to apply for a Class 2 or Class 3 FAP licence to be permitted to indirectly engage individuals through an interposed person. See our document outlining the classes of financial advice service for more details on the classes.

The FMC Act allows us to place a condition on an individual licence that permits a FAP licensee, or an authorised body, to indirectly engage an individual through an interposed person (a permissive condition).

We may also place limitations on the permissive condition that will impact the arrangement between the FAP licensee and the interposed person.

The limitations we impose may require an interposed person to be:

• registered on the FSPR (a registration condition); or
• licensed as a FAP (a licensing condition that requires FSPR registration as a precursor).

The limitations we impose will depend on:

• the arrangements in place between the engaging FAP and the interposed person; and
• the level of risk the arrangement poses to retail clients.

We will take a risk-based approach when imposing any limitation on an interposed person. More information about the registration and licensing of interposed persons and engaged entities is available in the information sheet.

Duties

Every person who gives regulated financial advice must comply with the duty provisions in the FMC Act. Certain duty provisions apply specifically when regulated financial advice is given to retail clients. Refer to the FAP page for further information on the duties when giving financial advice and the financial adviser page for information on financial advisers’ duties.

A FAP that engages others to give financial advice on its behalf has an additional duty to take all reasonable steps to ensure those it engages comply with the duty provisions on the giving of financial advice.

If there is an interposed person arrangement, each interposed person must also take all reasonable steps to ensure that any individuals indirectly engaged through it comply with the duty provisions while they provide advice on behalf of the engaging FAP.

A FAP that engages nominated representatives to give regulated financial advice on its behalf – whether directly or indirectly – has the additional duty of ensuring it has in place processes and controls that:

• limit the nature and scope of the advice the nominated representatives give;
• allow the FAP to regulate what advice is given and the circumstances in which it is given.

The FAP and any interposed person through whom nominated representatives are engaged must:

• ensure the nominated representatives comply with the FAP’s processes and controls;
• monitor the nominated representatives and the advice they give to ensure that:
  • those processes and controls are effective and are complied with; and
  • the nominated representatives comply with their duties.

In practice this means FAPs that are permitted to indirectly engage nominated representatives through interposed persons must apply an appropriate level of additional oversight to ensure they meet their obligations. This might include working closely with each interposed person on an ongoing basis. The interposed persons must also ensure they have the necessary processes and controls in place, and monitor compliance with them on an ongoing basis.

Liability

The FMC Act imposes liability for contravening the duty provisions which, depending on the circumstances, can apply to an engaging FAP, an individual directly or indirectly engaged by a FAP, and to an interposed person. MBIE has published a summary sheet of duties and liabilities.