Tougher disclosure regime will help long term

Tougher disclosure regime will help the financial sector long-term

Parliament’s proposal to toughen up on disclosure rules for all financial advisers may cause short-term pain for some Registered Financial Advisers, but overall the changes will make the industry stronger, says Michael Cave, Managing Director of Cave Financial.

Mr Cave, an Authorised Financial Adviser, says since the likes of the Financial Advisers Act were introduced following the Global Financial Crisis, AFAs have been well used to operating in a more regulated environment including full disclosure of their commissions and performance incentives.

He says greater change will come for the RFAs who primarily sell life insurance and mortgages and who were not part of the much tougher disclosure rules in 2008.

“When it comes to telling clients exactly how and what we get paid us investment guys have been doing that for a decade. However, it’s time those rules applied to all advisers which will help deliver consistency across the sector. It will also force a bit more self-accountability as disclosure becomes a bigger part of the RFAs’ client meetings.”

Mr Cave doesn’t think disclosure shortcomings have been a major issue for the industry overall or are necessarily a concern for consumers as most understand advisers and brokers can be aligned to certain providers, operate on a fees and commission structure, and are often incentivised by the likes of overseas holidays.

“MBIE commissioned some Colmar Brunton research last year that concluded that consumers’ confidence in their adviser is primarily driven by a number of common factors outside of disclosure information. It showed the things that give people confidence are advisers being recommended by trusted friends and family, the fact they’re a linked to a bigger organisation, are locally-based, and in many cases have a long relationship with their client.

“However, these changes will put New Zealand on par with other countries, and can only improve the industry’s overall perception, credibility and trust levels. Critically they absolutely put the consumer centre stage.

“Legislating to ensure about 7,000 advisers will have to operate to the same standard that 1,500 of us have been doing so for 10 years is the right thing to do. It will end any confusion and provide certainly to consumers.”

He says for a country that suffers from poor financial literacy, low savings, is massively under insured when it comes to life insurance, as well as being over mortgaged when it comes to property, the changes proposed in the Financial Services Legislation Amendment Bill will help lift people’s confidence and participation when it comes to understanding the financial markets and obtaining advice.

“Too few New Zealanders seek financial advice despite all that’s at stake when they’re making big decisions. These kinds of measures will hopefully help change that as they provide that last piece of the puzzle in our industry professionalism, help strengthen our capital markets, and offer consumers more information and ultimately choice.”

He does not believe there is any need for the likes of a Royal Commission to investigate the behaviour of financial institutions as is currently happening in Australia.

“I agree with new Reserve Bank Governor Adrian Orr when he says things are infinitely better in New Zealand than some of the activity we’re seeing in Australia. The overall culture of New Zealand’s financial and banking sector is much better. We don’t need not a complete overhaul. All we need are some regulatory upgrades and so in that regard the proposed legislation is completely fit for purpose.”

Mr Cave expects new regulation will probably add to compliance costs and licence fees, leading to sector consolidation and some of the “old school” advisers exiting the industry.

He says depending on the extent of the changes, more smaller advisers will probably choose to operate under a master licence where their parent body primarily deals with all the compliance, auditing, and the regulator.

“Regardless of where the legislation lands it certainly will be a period of change, with some advisers disappearing, others reappearing under another banner, while many agencies and companies experience aggregation and consolidation.”

He says while sector change is imminent, it’s important Parliament strikes the right balance with the Bill which was introduced by the National Government and has now been picked up by Labour, ensuring it will retain strong cross-party support.

“It’s important the changes achieve the right balance, particularly when it comes to the likes of the many smaller advisers who do a great job in our rural areas, towns and cities. No one wants them strangled by red tape and pushed out of business. Their role is important as they can offer a really personalised, tailored and local service that people don’t want to lose.”

Mr Cave says no one doubts the need for change with the industry in broad agreement when you consider recent MBIE discussion documents, RFA reviews, a new code of conduct, the push from successive Commerce ministers, and the near universal support for the Bill currently before Parliament.

“The overwhelming majority of advisers have always put the clients’ interests first and the relationship between adviser and client remains central to everything. Neither of these factors will change. However, both can only be enhanced by greater transparency, and that’s got to be good for New Zealand consumers and the industry alike,” he says.

www.cavefinancial.co.nz
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