Cullen Speech to FPIA Success Forum
Michael Cullen Speech to FPIA Success Forum Sky City Auckland Convention Centre, 88 Federal St, Auckland
It is my pleasure, on behalf of the Prime Minister, Rt Hon Helen Clark, to open this forum.
This is an important time for the financial planning industry in New Zealand. We are beginning to get some traction on increasing the general level of financial literacy amongst the community. New Zealanders are beginning to invest more time and thought into making sound decisions about their financial future, and want to consider and understand the range of options available to them.
So it is increasingly important that we have a cadre of high quality financial advisors, supported by a thriving industry body, to service this growing need.
In many ways I do not envy the job of financial planners and insurance advisors. It is a hard sell to convince people not to use all of their current income for consumption, but to put some of it aside for securing a better financial future or for insuring life’s major risks.
The fact is many New Zealanders feel under financial pressure and quite understandably find it difficult to spare a thought (or a dollar) to anything other than immediate spending priorities.
However, I for one do not believe that New Zealanders are by their nature profligate consumers and unwilling to think ahead. The fault has been more in the prevailing level of financial literacy, which, as the Office of the Retirement Commissioner found when they undertook research, has been pretty poor. Just what level of weekly savings is needed to generate a particular annuity payment in retirement is something many New Zealanders cannot tell us. Nor, indeed, do many people understand exactly what their state entitlements will be under New Zealand Superannuation or under the ACC or benefits systems, should they become incapacitated. Hence, they have a limited appreciation of what level of risk they are already bearing when it comes to preparing for these contingencies.
That situation is changing, without doubt. But the job is by no means finished. Educating an entire population is necessarily a slow process, and one that requires sustained effort.
That is something that the Retirement Commissioner has made a priority, and many players in the financial planning industry have also seen it as in their interests to promote greater financial literacy.
One thing that we need to be sensitive to, of course, is the strong tradition of Kiwi individualism. We are not good joiners. We tend to prefer something we have constructed ourselves, rather than some scheme bought ‘off the shelf’.
I don’t think we should view this impulse negatively. It comes from a desire to manage the whole portfolio of life-cycle investments (a mortgage free house; a business, perhaps; an education; some leisure priorities), and the belief that our own portfolio is unique to us. There is a level of suspicion around pre-packaged vehicles for saving and risk-management, and it is important that we address this.
Financial planning that takes too narrow an approach will always run counter to this impulse. And we must take seriously the need to ensure the probity of those to whom New Zealanders entrust their life savings. Amongst financial advisors, one bad apple can ruin the reputation of the whole barrel.
So I believe there are two important priorities in the next couple of years:
We need to ensure that there is a broad range of options for investment and insurance, to give people the flexibility to arrange their financial plans to take account of family, business, employment and housing needs that may change frequently (as least, more frequently than happened in previous generations); and
We need a strong, but not onerous, regulatory regime to ensure that ordinary New Zealanders can have a high degree of confidence in the financial advice they receive.
I want to touch upon each of these priorities in turn.
First, the need to ensure a broad range of options for investment and insurance. Surely one of the more encouraging developments of recent years has been the degree to which previously separate financial and insurance products have begun to merge. This makes it more likely that, once a customer’s priorities and tolerance for risk have been identified and understood, a customised set of products can be designed for them.
Having said that, one important option has become less and less available to New Zealanders over the past decade, and that is savings vehicles which are part of employment packages. These are commonplace in the rest of the world; so much so that it is frequently a surprise for skilled immigrants arriving in New Zealand to find that workplace savings is not a standard part of remuneration.
There are obvious reasons for this, most notably the fact that superannuation schemes are either compulsory or heavily favoured by tax breaks in many other OECD countries. Neither is the case here, and the arguments against compulsion or favourable tax treatment are quite compelling.
Nevertheless, workplace savings schemes are a very attractive option for some workers, including many who we know are only likely to make regular contributions to a savings fund if this is done ‘painlessly’ by deduction of contributions at source. The option of an employment based scheme, with matching employer contributions as part of the package, needs to be more widespread in New Zealand.
For this reason, the government has established a Working Party to investigate workplace superannuation, and to recommend measures that would make it a more attractive option for workers and for employers. A return to tax exemption on contributions to registered schemes is not an option that is high on the list, as it is difficult to prevent such a measure from being captured by tax planners and hence ending up being very costly in revenue terms for very little gain in terms of increased savings.
Nevertheless, there are a number of ways in which some of the costs of offering schemes could be socialised or reduced in order to attract in particular the small to medium sized employers for whom the administration costs of superannuation scheme are very high on a per worker basis.
I am expecting a report from the Working Party in August this year.
Moving to the question of the appropriate regulatory regime for financial advisors, this needs to be seen in the context of the effective and efficient operation of New Zealand's capital markets. The truth is that well-regulated markets foster confidence amongst investors to invest in financial products. Financial service providers play a key role in the decisions people make about investing their money; and so it is essential that we regulate those giving investment advice so consumers are encouraged to seek counsel from a professional industry in order to make the most of their savings.
Last year the government announced changes to investment adviser and broker disclosure requirements. These changes will have implications for the industry and I believe they will help strengthen the financial services industry by promoting confidence in the law and the institutions regulating this industry.
As part of the Securities Trading Law Reform Bill, changes are being made to the Investment Advisers (Disclosure) Act 1996. These are designed to strengthen the disclosure regime, introduce a new offence and penalties and ensure there is robust enforcement of the Act. Specifically the new provisions involve:
The current two tiers of disclosure being collapsed into one - so all the required disclosure will be required up front before investment advice is given;
Requirements for some additional disclosure; and
A requirement for advisers to provide updated information if material information changes after the initial statement is given, but before the advice is provided.
The changes acknowledge one of the problems with the current regime, where information is provided only on request. Many investors are simply unaware they can request certain information.
There will also be a new offence provision introduced prohibiting advisers from recommending illegal offers of securities where they know, or ought to know, the offer is illegal. Again, investors rely on information provided to them by investment advisers, and are rarely able to judge whether securities recommended by an adviser comply with the law.
One of the acknowledged shortcomings of the current law is the lack of an effective enforcement mechanism. Investors can take an adviser or broker to court to require disclosure or for compensation for a lack of disclosure. However, this is not a realistic option for most investors, and as a result, there is no effective policing of the current disclosure requirements.
To remedy this, we are proposing to give the Securities Commission the ability to take action to enforce investment adviser disclosure requirements. We also intend to give the Commission a broader range of powers to deal with deficiencies in disclosure, including an ability to suspend an adviser for up to 14 days if they are operating outside the law.
The Bill is due to be introduced into the House later this year and will be referred to a Select Committee, which will call for public submissions.
Beyond this particular Bill, the question remains whether more comprehensive regulation is required for financial intermediaries in New Zealand. This will be taken up in the forthcoming review of the Securities Act and other securities law issues.
These are complex and important issues; but it is important that we address them. Last year's International Monetary Fund Financial Sector Assessment Programme report on New Zealand raised some issues about the current system of regulation of financial intermediaries, including minimum entry standards for some market intermediaries, systems for the demonstration of ongoing competence, and appropriate disciplinary structures.
We also need to bear in mind the intention of governments on both sides of the Tasman to move towards a single economic market. As many of you will be aware, Peter Costello and I have made public an extensive work agenda to make this a reality. The regulation of financial intermediaries is not currently one of the immediate priorities; but several allied issues – such as the mutual recognition of securities offerings – are on the agenda.
Inevitably we will need to look at Australia's experience under the Financial Services Reform Act which took effect in March this year. That Act imposes a stringent licensing and disclosure regime on anyone selling financial products or providing financial advice. Each product must now be accompanied by a detailed disclosure on commissions, risks, and charges. The Act is designed to give consumers better information about financial products offered to them and to ensure advisers are qualified appropriately to act in the interests of consumers.
The new Australian regime has been criticised by industry for the compliance costs it has imposed. Whether this cost is justified by better information or advice to investor consumers remains to be seen. We have no intention of importing the Australian regime at this stage. Ours is a very different market, a much smaller market, and one which does not, for example, include compulsory workplace superannuation.
Before we go further down the track of regulating financial intermediaries and investment advisors we would need to consider whether it would indeed raise the quality of advice or whether it would simply cut down the number of market participants, pushing up the price of advice and brokering services for investors.
The options need to be considered against the backdrop of current industry self-regulation and the size and depth of the New Zealand market.
Self-regulatory organisations, such as the FPIAA will certainly have much to contribute to the debate. I know that my colleague, Margaret Wilson, is giving a lot of thought as to how best to involve the industry in the identification of reform options.
These changes create some challenges for the financial services industry, but also represent important opportunities to shape the future of the industry. Higher standards for disclosure and better enforcement will help strengthen public confidence in investment advisers and brokers generally. These and other possible measures should encourage greater participation in investment amongst New Zealanders, and ultimately lead to greater prosperity for all.