Financial Advisors Bill

Date 5 dec. 2012
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13 November 2012, the Danish Financial Supervisory Authority submitted a draft bill for consultation regarding financial advisors (hereinafter, the “Bill”). The purpose of the Bill is to establish a framework for non-financial companies providing holistic advice on financial products to consumers without the company falling within the activities conducted by financial companies. If the Bill is adopted, it is expected to come into force on 1 January 2014. The purpose of this newsletter is to outline the main features of the Bill.


Financial Advisory Services

The Bill concerns financial advisors who are not directly affiliated with a financial company providing financial advice to consumers. Financial advisory services – as opposed to investment and insurance advisory services – involve personal advice on transactions and the composition of financial products. This includes advice on credit agreements, deposits, insurance, pensions and investment products. When investment and insurance advisory services deal with specific products, financial advisory services involve a more holistic type of advice.

 

Authorisation

If the Bill is adopted in its current formulation, it will be a requirement to obtain a licence from the Danish FSA as of 14 January 2014 if a company wishes to provide financial advisory services to consumers. The Danish FSA will give its authorization if the undertaking:

  • has its head office and registered address in Denmark (or if the company has a similar licence in another EU country);
  • has procedures for all significant areas of activity;
  • has a management which meets the statutory “fit and proper” requirements;
  • has a liability insurance or a similar guarantee; and
  • can document that a special account for the deposit of trusted funds has been set up if the company receives trust funds from consumers.

Business Procedures

The financial advisor must have a number of internal business procedures, including procedures for handling any conflicts of interest.


In its assessment of whether the requirements for business procedures are met, the Danish FSA will take the size of the individual company into account.


Among other things, it must be described in the procedures how the company will ensure that the advice will not harm the interest of the customer if the company receives commission. Furthermore, the Bill mentions that the company must have a written procedure for the consultancy process. Among these, the company must be able to document the advice which has been given to its customers.

 

Fit and Proper Requirement

A member of the board of directors or management must have sufficient experience to carry out his duties. There are no general criteria for the theoretical or practical requirements which the member must meet. However, the Bill does mention that relevant theoretical training and education may be included in the assessment.


Normally, a person may not be appointed board member or director if the person is subject to criminal liability for violation of the Danish Penal Code or other legislation in the financial field. 


In addition, a board member or director will not be allowed to fulfill his/her duties if this person has filed for bankruptcy or reconstruction or is subject to insolvency proceedings or the like.


Finally, the Danish FSA may take action against a member of management if he/she displays such a behavior that there is reason to believe that the person in question will not carry out his/her duties in an acceptable manner.

“Fit and proper” assessments are made on an individual basis and are dependent upon the nature of the business, the composition of the management and the person’s role within the company.

 

Competency Requirements

A financial advisory company must ensure that the employees who provide advice on financial products to consumers have sufficient expertise to provide sound advice. The competency requirement only covers the personnel providing financial advice.


The Danish FSA will decide on the detailed competency requirements in an executive order.


Best Practice

The Bill determines that a company must operate in accordance with honest business principles and best practice within the given business area. The provision corresponds to the best practice rules already in force in the financial field.


The Minister for Business and Growth will determine the detailed rules on honest business principles and best practice for financial advisors.


Independence

The´Bill lays down three conditions for when a financial advisor may use the term “independent”.

  1. Commission: A financial advisor may not receive commission or other remuneration from companies offering financial products. This includes both direct and indirect payments in return for the company recommending a particular product.
  2. Close connections: A financial advisor may not have close connections to a company selling or arranging financial products. The definition of close connections corresponds to the definition in the Financial Business Act and deals with dual roles and ownership.
  3. Dual roles: Finally, an independent financial advisor may not offer or bring about financial products to a consumer, when the company simultaneously offers advice on the same products to the consumer.

It must be indicated on the company website if an advisor is not independent.


Our Assessment

As the Danish market currently stands, the Bill will only affect a small number of companies. According to the Minister for Business and Growth’s report on ways to strengthen independent advice from August 2012, it is estimated that approximately 50 companies will apply for a financial advisor licence, and the vast majority of these companies already hold a licence to advise on either insurance or investment.


Therefore, it is crucial to note that an insurance and investment advisor must obtain an additional licence to act as financial advisor.


It is our assessment that the requirements regarding the management’s composition, best practice and insurance will correspond to the already existing rules for insurance and investment advisors, but that the requirements for business procedures, including the independency requirements, will be different from the requirements in relation to the existing advisory services.


 

The above does not constitute legal counseling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.