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Dalziel: Address to Financial Advisers

Friday 29 September 2006

Address to the Southland Branch of the Institute of Financial Advisers

Invercargill Public Library,
Dee St, Invercargill

Thank-you for inviting me to speak today. I’m looking forward to discussing with you some of the work going on in the financial sector at the moment, but the focus of my speech will relate to the current work on financial intermediaries. It’s definitely a busy time in which to be providing financial advice in New Zealand, and with the number of reviews of the financial sector underway I can assure you it's a busy - and interesting - time to be the Minister responsible.

Before I start on the detail, I will note that there are some strong objectives underpinning the government's work on financial intermediaries. As part of its economic transformation agenda the Labour-led government is keen to increase the savings and investment rates of New Zealanders. Obviously, financial intermediaries play a pivotal role in that objective – members of the public rely on you to help us understand and choose investments that suit our particular needs. It's an important role that carries a lot of professional and ethical responsibility.

The government recognises the value that financial intermediaries can add to New Zealanders’ savings and investments – for example, you may have seen that under the KiwiSaver legislation, which will come into effect in July 2007, new employees will receive an information pack which suggests that employees should seek financial advice; and clarifies that employees should seek such advice from a professional financial adviser rather than their employer.
It is important that we have financial intermediaries who have the skills and experience to provide this information. We have been told by organisations such as yours (the Institute of Financial Advisers) that industry already has the voluntary standards and codes of conduct required to give advice as a financial intermediary, and that’s why we’ve proposed a model which I have been referring to as co-regulation. It is a model that appeals to me personally, precisely because it leverages off what industry is already doing, but also provides the reassurance and opportunities for redress that consumers are entitled to expect in a regulated environment where they have much at stake.

I’m sure that many of you are already aware of the proposed details of this co-regulatory model but, in summary, we're suggesting that financial intermediaries should be regulated by the industry itself, with oversight by the Securities Commission.

Under this model anyone who provides financial advice on financial products to the public will generally be considered a financial intermediary. As a financial intermediary, you will be required to meet statutory disclosure and conduct obligations (depending on the type of advice given), which the Securities Commission will enforce.

If you give advice across a range of financial products, you will be required to belong to an approved professional body, an “APB”, and you will have to meet that body's additional codes of conduct and competency standards. The approved professional body will also have the responsibility to ensure that you maintain your standards, and will monitor this.

As I have mentioned, the current work on financial intermediaries has a number of objectives, one of which is the benefit for practitioners. Your reputation is everything. Unfortunately, not everyone who is assumed by the public to be a bona fide or competent adviser will hold to your high standards. I cannot legislate against people investing their money in ventures on the basis of endorsements by a familiar face on TV.
However, I remain committed to developing consistent standards that will make it more difficult for advisers who give inappropriate, unethical or negligent advice to practise, and these standards will be set out in the new regulations. Hopefully, this will reduce any negative impacts unprofessional practitioners will have on your business reputation.

A further objective of the the proposed co-regulatory model is to provide greater consumer protection. If a client complains about the service that they have received from you, then there will be a dispute resolution process available. The Review of Financial Products and Providers, which I’m also leading, is currently looking at dispute resolution options across the whole non-bank finance sector including financial intermediaries, financial product providers and financial institutions. One of the options being looked at includes having the approved professional body responsible for initial resolution of the issue that is under dispute.

If an intermediary breaches the approved professional body rules, then the approved professional body will be responsible for disciplinary procedures, while the Securities Commission will be responsible for disciplining any intermediary who breaches the statute (including the statutory disclosure and conduct obligations I mentioned earlier).

The approved professional body will have set rules to deal with these issues of competency, conduct, monitoring, dispute resolution and discipline and so on. We’ve suggested a process whereby a potential approved professional body meets with the Securities Commission to discuss its rules, to talk through the details of a particular industry sector from both the industry perspective and from the regulatory perspective. Once the approved professional body decides that its rules are finalised, they will then apply to me, as Minister, to be registered as an approved professional body. I make my decision by considering the rules against the set objectives in the Act, which will act as guidelines for me, and I will also consider the recommendations of the Securities Commission.

The involvement of the objectives in the Act, the Securities Commission and my role will mean that there will be consistency in the standards across the industry and will ensure that intermediaries are not disadvantaged by having to belong to one approved professional body over another.

One subject that has received some media attention is the different range of advice-giving roles mentioned in the discussion document, and the different obligations attached to each, depending on the type of advice. We’ve suggested this on the basis that there are different types of services already existing in the financial services market.

For example, we know that a number of businesses have intermediaries, generally as employees, selling only one product or brand of products. These people generally only have to have knowledge only of the particular product they sell, rather than a range of competing products and how they might suit a customer’s personal circumstances. This category of financial intermediary generally receives training on this product which is provided by their employer in order to protect their brand. For this reason, it seems that we would impose a significant cost on these businesses and intermediaries if we require them to be trained to the level of expertise of those of you here who are qualified to give advice about a range of products and their suitability.

That is not to say that these employees, or product marketeers as we’ve described them, should not be subject to some obligations – we acknowledge that they do still give advice, and so the discussion document proposes that they will still be subject to statutory obligations in relation to conduct and disclosure and that they should also have to participate in dispute resolution. These intermediaries are usually employees of product provider companies, and it’s useful to note that these companies will be subject to regulation of their own, under the review of financial products and providers, which I mentioned earlier.

The discussion around financial intermediaries also proposes that an adviser who sells only one brand of product will have to disclose that they only sell that type of product, so that the consumer can make an informed decision, recognising that that person has a vested interest in that brand or a limited knowledge of alternatives.

For those advisers who provide a higher level of advice by considering a range of financial products before recommending the best product for a person’s circumstances, the discussion paper proposes that they should belong to an approved professional body and meet competency standards.

This is because we consider that intermediaries who do take into account personal circumstances of clients, and recommend a range of products are experts and should be competent and qualified, and recognised and respected as such. These people will be able to brand themselves as people with the expertise to provide specialised financial advice and their names will be held on a public register.

We have assumed that that is why you choose now to voluntarily belong to the Institute of Financial Advisers, that you recognise membership of Institute of Financial Advisers does mark you as a professional who sets and meets higher standards for your practice.

Even though our starting point is that you do have more specialised and expert skills than a call centre employee, and that this should be recognised in legislation, I am very much aware of alternate suggestions that every advice giving role should be subject to the same level of regulation and disclosure. I am keen to read the officials report on the submissions on this as your feedback and on the proposed details will be critical to us getting it right. We did extend the submission period by a month to allow for those who wanted to get a flavour of the Review of Financial Products and Providers before signing off on their submission.

Ministry officials are working hard to make sure that regulation across the financial sector is consistent, appropriate and cost-effective: for financial intermediaries; for financial product providers; and for financial institutions.

Once Cabinet has considered the policy and legislation has been approved for introduction, then the standard legislative process will follow, during which the Select Committee will ask for submissions on the draft bill.

In this work we’re aiming to involve business as much as possible to ensure that the final regulatory frameworks are relevant, effective and most importantly proportionate to the risks people face.

As Minister of Commerce, I am also running a review of New Zealand's regulatory frameworks, which has a strong focus on quality regulatory impact analysis. This is why I am pleased that there is such an open and rigorous stakeholder engagement. As is the case with the financial intermediaries, most of the propsals in the Quality Regulation Review are industry-driven. I believe they are more likely to be effective because the reforms proposed come from the ground up; i.e. from the practitioners who have to work within the frameworks on a daily basis.

The ultimate shape and success of the regulatory framework will depend on the industry, and organisations such as the Institute of Financial Advisers taking the time to tell us why certain things would or would not work.

We very much value and appreciate your contribution. It can only lead to better-designed and higher-quality regulation. You are all a key part of this work, and I thank you for your time today.


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