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Dalziel: A regulation update: be informed for 2008

Lianne Dalziel
12 February, 2008

A regulation update: be informed for 2008


Thank you for the opportunity to update the Institute on the government’s regulatory review of the insurance and finance sectors.

The Review of Financial Products and Providers – or the RFPP – is an important component of the government’s economic transformation agenda. I have made the point on several occasions that the regulatory frameworks supporting business generally and the financial sector in particular are part of the country’s essential infrastructure. And as such, it is important that we get the balance right – too much rigidity can stifle innovation and impose unnecessary compliance costs – and insufficient rigour can mean inadequate protections against incompetent or fraudulent behaviour, leading to a loss of confidence in investing in a particular sector.

And that is what the regulatory frameworks in the financial sector are all about - confidence.

In seeking to find the right balance I have sought to provide a focused, streamlined compliance process that minimises the cost to the industry and provides for a dynamic sector, while at the same time offering as much protection for the consumer as is possible in a sector where the rate of return on an investment is based entirely on the level of risk. Not all investments pay off and people who invest in speculative ventures ought to know that.


That being said, an issue that has arisen out of the finance company failures over the past couple of years is whether inexperienced investors have been sufficiently aware of the nature of the risk they are taking. Everyone knows that the higher the promised rate of return the greater the degree of risk. It would seem that some finance companies deliberately lowered their promised rate of return in order to minimise the apparent nature of the risk investors were taking. There are also issues around particularly high rates of commissions, which should have set off alarm bells for the financial advisers concerned; although it is apparent that some of them only heard the ringing of cash registers. I suspect some of those will pay a deservedly high penalty for their lack of vigilance on behalf of consumers who entrusted them with their hard-earned money, which puts paid to the idea that investors are completely without any protection under the existing regime.

The beginning of the RFPP as all of you will know pre-dates the collapse of the finance companies by over two years, although I did lose count last year of the number of times I heard that my announcements on the subject were "in response to the recent finance company failures".

The purpose of the RFPP, as well as the process that we have adopted, has been aimed at strengthening the current regulatory environment in order to promote confidence and therefore increase participation in sound and efficient financial markets. I have used what has occurred to remind people that governments cannot regulate to eliminate risk; but we can minimise unnecessary risk by ensuring that we have a robust framework that benchmarks favourably against international best practice and ensures that investors have access to all relevant information before they decide to invest and can rely on people who describe themselves as financial advisers to be professional in every sense of that word.

The new regime will require all financial services to be registered and all financial issuers and advisers to be licensed. It empowers industry bodies to set standards for their members and to monitor compliance.

Some sectors have already developed their own consumer dispute resolution services, e.g. The Insurance & Savings Ombudsman and the Banking Ombudsman. In future, such services will be mandatory across the financial sector to ensure that all consumers have access to low-cost avenues for redress.

New regulatory powers vested in the Reserve Bank and Securities Commission will introduce prudential and increased market conduct supervision.

The magnitude of the work associated with the review has been, without doubt, the most significant ever taken on by a government. It has demanded the services of four departments and at least 17 institutions. The policy development stage alone was managed in two phases with phase 1 being finalised late last year. Bills covering those provisions either have been, or will soon be, introduced to the House. Phase 2 is due for completion later in the year. Implementation of the new laws will then take place from 2009 to 2012.

The implementation programme is particularly complex, requiring institutional changes, the creation of new registers and more detailed regulations to give effect to the new laws. All this will need to be carried out in a logical sequence that provides a streamlined implementation process for the industry.

There are several pieces of legislation that have or will result from the review. I will touch on those that are currently going through the House and are of particular interest to this group.

But before doing that I would like to briefly mention the Securities Markets regulations covering changes to disclosure obligations for investment advisers and brokers, and remind you that these come into force on the 29th of this month.

Disclosure must be made up-front by investment advisers before investment advice is given to members of the public and by investment brokers before receiving investment money or investment property from members of the public.

These new disclosure obligations require more information to be given to clients, especially about fees, commissions and other forms of remuneration, which has been extended to include "soft" commissions such as travel incentives. The disclosure is mandatory and must be provided without the client having to request it.

Returning to the Review of Financial Products and Providers, two substantial Bills that will have a broad impact across the financial sector were introduced to the House late last year and I hope to have them passed by the end of August this year; these are the Financial Service Providers (Registration and Dispute Resolution) Bill and the Financial Advisers Bill.

The Financial Service Providers Bill provides for both the registration of financial institutions and the establishment of consumer dispute resolution services to promote market discipline.

Financial service providers will be required to be registered in order to do business in New Zealand. The Registrar of Companies will have responsibility for establishing and maintaining the register and will undertake enforcement functions in relation to breaches of the registration requirements.

Currently, there is no way of identifying or monitoring providers of financial services. The availability of this data is important to regulators for the purpose of identifying those who are not complying with statutory requirements, as well as monitoring risks in the sector, and it will assist market participants (business analysts, financial advisers and consumers) to access information on a financial services provider.

The Financial Services Providers Bill also demonstrates New Zealand’s ongoing commitment to its international obligations, addressing previous concerns with respect to compliance with recommendation 23 of the Financial Action Task Force.

The Bill will help regulatory authorities to monitor compliance with anti-money laundering requirements by providing information on the types of financial services provided by various entities. This means that it will be easier for the regulators to monitor and enforce the activities of these financial service providers.

It is also useful to note that this government is undertaking a substantial programme of reform, led by the Ministry of Justice, on overall compliance with the Financial Action Task Force’s recommendations. It is envisaged that a new supervisory structure will be developed to ensure adequate supervision to counter money laundering activities. In the financial sector, this will largely operate via the institutional framework being established under the RFPP. By consolidating the functions of the regulator, the government is ensuring that the costs of reporting and supervision on market participants is reduced, while at the same time ensuring we fulfil our obligations in the international sphere.

And, as I indicated earlier, this Bill also provides for the establishment of consumer dispute resolution schemes to provide low-cost avenues of redress for consumer complaints. As I mentioned before, voluntary industry-based dispute resolution schemes already exist and it is not intended that this Bill will see these schemes replaced. In fact, some of the existing schemes may expand their coverage – others will model themselves on them. Under the Bill dispute resolution schemes will be approved by the Minister of Commerce if the scheme meets the principles of accessibility, independence, fairness, accountability, efficiency, and effectiveness.

The Registration and Dispute Resolution Bill has been referred to the Finance and Expenditure Select Committee with submissions required to be received by the end of this month.

The companion bill, the Financial Advisers Bill, is due to receive its first reading soon.

Although the timeframes for the Select Committee consideration of this Bill have not been established yet, the Bill is already publicly available and submissions for this Bill will soon be invited.

New Zealand requires competent and reliable financial advisers to ensure investors receive the best possible support when making investment decisions. As with all the financial sector regulatory work we're undertaking, this legislation aims to promote a sound and efficient financial sector in which the public can have confidence in the professionalism and integrity of advisers; we have again focussed on a regulatory framework that is well targeted and does not impose unnecessary costs to ensure the dynamism of the sector and to encourage innovative and competitive markets.

The new framework will set standards of practice and competency which will allow New Zealand to better meet international regulatory standards as well as providing a solid basis for trans-Tasman mutual recognition of financial advisers.

This Bill proposes a co-regulatory framework with Approved Professional Bodies having frontline responsibility backed up by the Securities Commission.

Another Bill introduced into Parliament in November last year was the Reserve Bank of New Zealand Amendment Bill (No 3) (by my colleague the Minister of Finance). This is the first of two amendment bills that provide for the implementation of the new regulatory framework relating to Non-Bank Deposit Takers which will be to draw Registered Deposit Takers into the Reserve Bank’s prudential supervisory regime. Submissions on this first Bill close this Friday (15th Feb 08) and the second Bill is planned for introduction early this year.

Under the Bills, Registered Deposit Takers will continue to be supervised by trustee corporations under the enhanced trust deed requirements for debt issuers, but will in future be required to be licensed by the Reserve Bank.

They will be subject to minimum prudential, governance and fit and proper requirements set and enforced by the Reserve Bank in consultation with the Securities Commission, and they will be required to obtain and disclose a credit rating from an approved rating agency.

Similarly for the insurance industry, the Bank’s role as regulator and supervisor of the sector will include licensing insurers and enforcing disclosure requirements, including a mandatory rating of an insurer’s financial strength. The Reserve Bank is currently responsible for overseeing the drafting of the Insurance Prudential Bill to be introduced to the House this year.

At around the same time I will introduce the Insurance Contracts Bill which covers the market conduct issues for insurance. It will address areas in the present law with respect to certain aspects of insurance contracts, insurance intermediary agency status, and the registration of assignments of life insurance policies that no longer meet the needs of New Zealand’s insurance market.

The Insurance Contracts Bill will switch the onus from the insured to the insurer to essentially ask all the right questions. This will avoid instances where the insured innocently fails to tell their insurer something that might affect the assessment of risk. The bill will also require insurers to be responsible for the actions of their agents. There has been some legal uncertainty in this area. The proposed bill will require the agency status of the intermediary to be declared in writing. The default position will be that the broker is an agent of the insurer.

I will mention one other Bill that is currently in drafting stage and expected to be introduced to the House in 2008. This is The Securities (Securities Trustee) Amendment Bill that will cover the supervision of Trustees by the Securities Commission. The Bill provides for a regulatory model that retains Trustees as ‘frontline' supervisors of debt securities and collective investment schemes, and has an enhanced role for the Securities Commission.

The Securities Commission will approve trustees and monitor them on an ongoing basis and have a graduated set of powers to deal with a Trustee that appears to be in breach of its obligations.

Further policy development work is being undertaken on the remaining areas (Phase 2) of the Review of Financial Products and Providers. This includes the review of securities offerings and disclosure, licensing requirements for Collective Investment Schemes, and recommendations for a regulatory framework for platforms and portfolio management services. I will be reporting to Cabinet on this final range of policy decisions by the middle of the year to enable work to begin on the drafting of the last piece of legislation I wish to introduce, which is the Securities Offerings Bill.

So as you will appreciate, this review will impact on all areas of New Zealand’s financial sector – from increasing market participation and improving investor confidence; to aligning our laws with international requirements and contributing to trans-Tasman coordination; to supporting and encouraging New Zealand’s savings and retirement funds.

It is a huge challenge. However the level of stakeholder engagement has in my view helped us get the balance right. For those of you who have participated in the process to date or plan to as we enter the next phase, thank you. It would not be possible to take on this challenge without your practical on-the-ground experience.

On that note thank you for inviting me to provide an outline of where we are at and I look forward to the panel discussion that will follow.

ENDS

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