Registered Electrician (EWRB – New Zealand)

Correct: Under the AML/CFT Act 2009, Enhanced Customer Due Diligence (EDD) is mandatory for all foreign PEPs and for domestic PEPs who are determined to be high risk. EDD requires the reporting entity (or the broker acting on their behalf) to obtain and take reasonable steps to verify information relating to the customer’s source of wealth or source of funds. Simply observing that funds are held in a New Zealand bank account does not satisfy the requirement to verify the ‘source’ of that wealth.

Incorrect: Option B is incorrect because simplified due diligence is only available for specific entities like government departments or listed companies, not for individuals based on their residency. Option C is incorrect because the Privacy Act 2020 governs data protection, not AML verification standards, and there is no $2 million threshold for EDD. Option D is incorrect because while foreign PEPs always require EDD, domestic PEPs must still be risk-assessed, and if high risk (as implied by the QA finding), EDD including source of wealth verification is required.

Takeaway: Mortgage brokers must perform Enhanced Customer Due Diligence, including source of wealth verification, for any client identified as a Politically Exposed Person (PEP) to comply with AML/CFT obligations.

Correct: Under the Responsible Lending Code and the principles of client suitability, a lender must ensure that the credit product meets the borrower’s requirements and objectives. Since the client’s stated intent is to subdivide to reduce debt, a land covenant that prohibits subdivision for 25 years creates a fundamental conflict between the loan structure and the client’s goals. The lender must address this discrepancy to ensure the loan is truly suitable and that the repayment plan is realistic.

Incorrect: Focusing solely on the current loan-to-value ratio ignores the lender’s obligation to ensure the loan meets the borrower’s specific objectives. Suggesting a legal variation of the covenant is a complex, uncertain, and costly process that does not resolve the immediate suitability issue for the loan application. Applying risk-based pricing addresses the lender’s risk appetite but fails to address the core issue of whether the loan is appropriate for the borrower’s stated financial strategy.

Takeaway: Lenders must ensure that title encumbrances like covenants do not prevent a borrower from achieving the specific objectives or repayment strategies outlined in their loan application.

Correct: Standard 3 of the Code of Professional Conduct for Financial Advice Services requires advisers to give priority to the client’s interests. Accepting a high-value, volume-based incentive creates a significant conflict of interest. Under the Financial Markets Conduct Act 2013, financial advice providers must take all reasonable steps to ensure that the interests of the client are placed above their own or those of the lender. Failure to manage or disclose such a significant incentive constitutes a breach of these professional duties.

Incorrect: The option regarding the hospitality log incorrectly identifies the Privacy Act 2020 as the source of the requirement, whereas the Privacy Act deals with personal information, not gift registries. The option regarding the Fair Trading Act is incorrect because that Act focuses on misleading and deceptive conduct in trade rather than setting specific dollar limits for broker incentives. The option regarding the AML/CFT Act is incorrect because that legislation focuses on the prevention of money laundering and terrorism financing, not the ethical management of professional conflicts of interest or broker commissions.

Takeaway: Financial advisers must prioritize client interests and transparently manage any conflicts of interest arising from lender incentives or rewards to comply with New Zealand professional standards.

Correct: Under the AML/CFT Act 2009, trusts are considered high-risk vehicles, and enhanced due diligence (EDD) is mandatory. This requires the reporting entity to take reasonable steps to establish the source of wealth or funds for the transaction. This involves obtaining substantive documentation, such as financial statements or records of asset sales, rather than just identifying the legal owners. Furthermore, the identity of all beneficiaries and individuals with effective control must be verified to ensure no sanctioned individuals are involved.

Incorrect: Relying solely on a solicitor’s declaration is insufficient as the bank, as the reporting entity, must conduct its own due diligence and verify information independently. Limiting checks to the trust deed and trustees ignores the requirement to identify the source of wealth and the ultimate beneficial owners (beneficiaries). Waiving EDD based on customer tenure is not permitted under the Act when dealing with high-risk structures like trusts, regardless of the client’s previous history with the bank.

Takeaway: Enhanced due diligence for investment properties held in trusts requires verifying the source of wealth and identifying all individuals with significant control or interest to comply with AML/CFT obligations.

Correct: Under the Financial Markets Conduct Act 2013 and the Code of Professional Conduct for Financial Advice Services, financial advisers have a primary duty to give priority to the client’s interests. While commission-based structures are permitted, any conflicts of interest—such as volume-based bonuses—must be actively managed to ensure they do not compromise the quality of advice. Furthermore, the nature and impact of these incentives must be transparently disclosed to the client so they can make an informed decision.

Incorrect: Transitioning to a fee-for-service model is a business decision rather than a regulatory requirement, as commissions are legal provided they are managed and disclosed. Internal attestations are an insufficient control because they do not address the transparency requirement for the client. Restricting disclosure to the regulator fails to meet the legal obligation to provide clear, concise, and effective disclosure to the client at the time the advice is given.

Takeaway: Financial advisers must prioritize client interests by effectively managing and transparently disclosing any commission or incentive structures that could create a conflict of interest.

Correct: Under the Credit Contracts and Consumer Finance Act (CCCFA) and the Responsible Lending Code, lenders and advisers must ensure that disclosure is accurate and not misleading. If an amortisation schedule is incorrect, the adviser must ensure the lender provides a corrected version. This ensures the client can make an informed decision based on the true cost of borrowing and the actual terms of the contract before becoming legally bound.

Incorrect: Instructing a client to rely on verbal estimates rather than written disclosure fails to meet professional standards for accuracy. Advising a client to sign inaccurate documents on the assumption that systems will self-correct is a breach of the duty of care and disclosure obligations. While reporting to the FMA may be appropriate for widespread systemic issues, the immediate priority for the adviser is to rectify the specific disclosure error for the client’s pending transaction.

Takeaway: Advisers must ensure that all amortisation and repayment disclosures are accurate and reflect the agreed-upon terms to satisfy the requirements of the Responsible Lending Code.

Correct: Under New Zealand tax law, specifically the Income Tax Act 2007, property acquired with the intention of resale is subject to tax on the gains. Furthermore, the bright-line property rule captures residential property sold within the applicable bright-line period. As part of professional conduct and responsible lending, an adviser must recognize these tax triggers as they affect the client’s financial position but must refer the client to a tax specialist to avoid providing advice outside their scope of expertise.

Incorrect: Providing specific tax calculations or estimates is outside the professional scope of a residential property lending specialist and creates significant liability risk. Claiming that renovations automatically grant ‘new build’ status is factually incorrect under IRD definitions, which require a new dwelling to be added to the land. Stating that a secondary property can qualify for the main home exclusion is a misunderstanding of the law, as the exclusion generally only applies to the taxpayer’s primary residence.

Takeaway: Advisers must identify potential tax liabilities like the bright-line test and refer clients to qualified tax professionals to ensure informed decision-making and regulatory compliance.

Correct: In New Zealand, the Bright-line Test functions as a form of capital gains tax on residential property sold within a specific timeframe. Because the client mentioned a potential sale within twenty-four months, the lender must recognize this as a trigger for tax liability. Under professional conduct standards, the lender should identify this risk and direct the client to a qualified tax professional, as providing specific tax advice typically falls outside the scope of a residential land lender’s primary duties.

Incorrect: Claiming that capital gains are never taxable in New Zealand is factually incorrect due to the Bright-line Test and rules regarding property speculators. Calculating specific tax liabilities for the client involves providing specialized tax advice which may exceed the adviser’s professional indemnity coverage and expertise. Suggesting a client misclassify a property to claim a ‘main home’ exclusion is a breach of ethical standards and could be considered facilitating tax evasion.

Takeaway: Lenders must identify potential Bright-line Test triggers based on a client’s timeline and refer them to tax specialists to ensure compliance with Inland Revenue requirements.

Correct: In the New Zealand regulatory environment, particularly under the Responsible Lending Code and the Financial Markets Conduct Act, lenders must ensure that their staff provide accurate information and that serviceability assessments are based on a realistic view of the borrower’s financial position. If internal guidance for advisers is not synchronized with system updates regarding tax rules like interest deductibility or ring-fencing, there is a significant risk of providing misleading advice or failing to correctly assess a borrower’s true net income, leading to potential breaches of responsible lending obligations.

Incorrect: The second option is incorrect because lenders are generally not liable for the accuracy of a client’s independent tax filings, even if they provide general information about tax impacts on lending. The third option is incorrect because Financial Service Provider (FSP) registration is managed by the Companies Office and overseen by the FMA, not the IRD, and is not typically revoked for internal guidance discrepancies. The fourth option is incorrect because interest deductibility for a borrower is a cash flow consideration for serviceability and does not impact the lender’s regulatory capital structure or Tier 2 asset classification.

Takeaway: Effective change management in lending requires that both automated systems and manual advisory guidance are updated simultaneously to ensure consistent compliance with tax-related serviceability requirements.

Correct: Under the Credit Contracts and Consumer Finance Act (CCCFA) and the Responsible Lending Code, lenders have specific obligations toward guarantors. For a guarantee to be enforceable, the lender must provide a disclosure statement containing key information about the guarantee before it is signed. Furthermore, to prevent the guarantee from being set aside due to ‘unconscionable conduct’ or ‘undue influence’ (especially in family situations), the lender must ensure the guarantor understands the risks, which is best achieved by requiring or strongly recommending independent legal advice.

Incorrect: Registering an interest on the title is a method of securing a debt but is not a legal requirement for the enforceability of a personal guarantee itself. Statutory rights under consumer protection legislation like the CCCFA cannot be waived by a contract term, and such waivers would likely be considered unfair contract terms. While assessing the guarantor’s financial position is part of the lender’s due diligence under the Responsible Lending Code, a specific 150% net worth ratio is an internal policy rather than a legal requirement for the enforceability of the guarantee.

Takeaway: Enforceability of a guarantee in New Zealand relies on strict adherence to disclosure requirements and ensuring the guarantor makes an informed decision, typically evidenced by independent legal advice.