Dalziel: Institute of Financial Advisers
Hon Lianne Dalziel
Minister of Commerce, Minister for Food Safety,
Associate Minister of Justice, MP for Christchurch East
Friday July 25 2008 Speech Notes
Institute of Financial Advisers
Annual Conference Success Forum 2008
Commerce Minister Lianne Dalziel to Institute of Financial
May I begin by congratulating your new President Lyn McMorran on taking up this office. It is important that organisations such as your own are ably represented particularly in times of change and I restate my willingness to continue to engage with the Institute on all matters relevant to your members.
May I pay tribute to your outgoing President, Simon Hassan, who has been an outstanding advocate for building professionalism in this increasingly important field of endeavour. I did note Simon's comments in the Sunday Star Times on the 13th July 2008, saying he thought the APB model would never work. I wish he had told me. I did believe it would work two and a half years ago, but I stopped believing that just before Christmas last year.
I will come back to that, because I do want to address some media comments that indicate a lack of understanding of the Parliamentary process, particularly around the respective roles of the Select Committee and the government. Some commentators even failed to notice that the Select Committee, at my request, put out a discussion document proposing a withdrawal from the APB model some months ago and were reporting as late as last week on the weaknesses of the model. I want to clear up all misunderstandings today.
So thank you for the opportunity today's meeting provides. You have asked me to answer some specific questions and I will address each of them in order.
You have asked if the two Bills on financial adviser regulation are likely to be passed before the General Election.
The Select Committee is due to report back to the House on both Bills by 1 September, so this means that there is time available to pass them. I remain committed to the timetable I set last year and although I can’t give a cast iron guarantee that they will be passed, I will do everything I can to make it happen. The reason I want them passed by then is that that will enable the election period to be utilised by officials, the Securities Commission and the industry to work on implementation – technically this work cannot be done until the Bills are passed, as they have to be guided by the will of Parliament. I should say, however, that the government has received good co-operation from the Opposition and this looks set to continue. It will of course be critical to getting the Bills through.
You have asked: if the Bills are to be passed, what process will be followed to ensure that IFA is able to have adequate time to see specific draft wording for the Bills and to make comment before they are reported back from the Finance and Expenditure Select Committee to Parliament? [It is clear that there are likely to be significant changes to the provisions of the Bills, yet drafts of these changes have not yet been made available.]
The passing and implementation of well considered and appropriate regulation is very important. That is why I have remained in close contact with major players throughout the process and why officials have continued to engage with stakeholders, as has the Select Committee itself. Any decision to release a draft Bill for comment prior to the report date, (which in this case is now about 5 weeks away), is a decision that the Committee must make. Personally, I would be concerned at a delay which would then not allow sufficient time for the Bills to pass.
The Select Committee may not of course get it word perfect, but there is plenty of opportunity in the Committee of the Whole House for the government to tidy up any aspects of the Bill by way of Supplementary Order Paper.
I can give you an absolute assurance that even after the Bill is reported back to the House, my officials and I will continue to work with industry to ensure we get it right.
Next question: What approach to the definition of financial adviser do you support – the original approach with a broad inclusive definition or the proposed ‘occupational’ approach?
I deliberately introduced a Bill with a broad inclusive definition so that those who ought not to be covered would be identified through the submissions. It's much harder to encourage people to suggest additions to a deficient definition, than it is to receive submissions to remove certain groups from a 'belt and braces' definition. I have remained very focused on the purpose of the regulation and I want to make it clear that is not the government's intention to regulate people who do not pose a risk to the unsophisticated investor market. I prefer the proposed occupational approach which takes into account the complexity of the financial product that they are advising on. This is an appropriate risk-based approach in my view.
If the ‘occupational’ approach is adopted, what types of adviser do you see will be regulated and which areas of advice would not be regulated?
As I have indicated I am personally in favour of distinguishing between those who provide advice on complex securities, investment and savings planning services or investment broking services and those who provide advice on credit, general insurance or simple securities (such as bank term deposits or call accounts).
The proposal that we are working on at the moment is one that would see the former requiring authorisation from the Securities Commission and the latter simply covered by their institution's or their own individual obligations under the Financial Service Providers (Registration and Dispute Resolution) Bill.
Do you support allowing licensing
of ‘accredited institutions’ or registration of all
My preference is that the regime should provide for both. The bottom line is that registered banks, insurance companies, credit unions and building societies all have policies and procedures in place to ensure that their staff and their agents are appropriately qualified to undertake their particular role.
We are working on a process of certification for institutions which would leave them with the responsibility to identify which employees or agents need to be individually authorised by the Securities Commission, because they give advice on complex securities, or savings and investment planning, and which of their employees or agents would be covered by the institution’s certification.
What role do you see for a professional association like IFA under a system of licensing of financial advisers rather than co-regulation?
The downside of the shift away from a co-regulatory model is the risk of losing the experience the professional bodies can bring to the table. That being said the move to a single regulator will still require industry input and expertise.
A code of conduct will have to be developed and the Securities Commission will require advice on that from industry representatives. There will also be a place for professional body representatives within the disciplinary processes as well. This will be provided for in the law.
If financial advisers are to be registered by 2010, there will not be time to test competence for everyone (as the necessary educational structures are still being developed). Do you consider that anyone registered as a financial adviser should be required to demonstrate competence, and if so, what time period do you envisage before competency testing becomes mandatory?
I'm pleased to be able to announce today that the Level 4 qualifications, which the ETITO have been developing with industry participants, including the IFA, have this week been approved by NZQA and will be posted on the NZQA website on August 12th.
We are making good progress but it's hard to put a detailed framework in place when the law hasn't actually been passed yet. The next step is to have tertiary providers set up and ready to deliver the appropriate courses and programmes. So, there's still a lot of work to be done which means the ETITO would appreciate it if you didn't all go running off to see them on Monday.
I haven't got a specific view on the competence issues you have raised as these will not be provided for in the Bill – they will be the subject of consultation and implementation by the Securities Commission.
Why would you expect financial services industry participants to vote for your party this year?
I am not going to respond to your last question, because I was invited to speak here as the Minister of Commerce and I am not interested in electioneering.
Instead I am going to remind you what we have done and why. Since 1999 we have implemented the greatest single reform agenda related to our securities markets that New Zealand has ever seen.
When we became the government there was a Takeovers Panel but no Takeovers Code – we ensured that a Code was brought into being to ensure that minority shareholders facing a takeover in New Zealand received the same protections they would be entitled to in every other mainstream financial market in the world.
We brought in the Securities Markets regime that provided for regulated exchanges – we have one – NZX, which provides frontline supervision backed up by the Securities Commission in a co-regulatory regime that is working well. We have given the Securities Commission real teeth through strengthening the rules around insider trading and market manipulation, which has seen the largest out of court settlement ever achieved by the Securities Commission - $20 million with no admission of liability.
We have brought in criminal sanctions for what is nothing more than theft – taking advantage of what you know to enrich yourself always occurs at someone else's expense – it might be thought of as white collar crime, but it's crime, first and foremost and will be punished.
And then we had the Taskforce on Financial Intermediaries, followed by the Review of Financial Products and Providers. There are those that said we bit off more than we could chew with the nine discussion documents. But let me say this. Financial products and providers are considerably more diverse today than they were even 20 years ago. The regulatory frameworks needed to be set out so we could see how they would operate in an integrated manner. I believe that the process has been strengthened by this approach and there is only one thing I would have done differently.
When the Taskforce on Financial Intermediaries recommended the co-regulatory model, it seemed to me to provide the best of both worlds – the experience of the existing professional bodies and the back up of the Securities Commission.
I did not envisage the impact of the failure of several finance companies, which had taken deposits off people who believed their investment was 'safe as' and who had no idea the level of risk they were taking with their hard-earned money. Some financial advisers received higher than usual commissions for recommending some of those products; some financial advisers did not undertake a proper assessment of their clients' appetite for risk, or if they did, they ignored it; some financial advisers did not tell people what the level of risk was; and some financial advisers did not tell people that the risk they were taking was considerably higher than the rate of interest they were receiving and for the difference in return they might as well put their money in the bank.
All of a sudden the organisations that were so keen to be approved professional bodies could see that they couldn't sustain the level of disciplinary work that might arise each year, with a fragmented APB system. I agreed, but rather than limit the number of APBs I decided to go back to Cabinet and get approval for the discussion document that signalled a shift to a single regulator, namely the Securities Commission. A co-regulatory outcome could not have survived the level of mistrust and anger that exists amongst an investing public who feel they have been betrayed. My regret is that I wasn't alert to this before the Financial Advisers Bill was drafted.
In terms of the future, this new legislative framework will be an important element in the task of restoring confidence to our markets – confidence that has been shaken to its core. It is true that what is happening in New Zealand is occurring overseas, but that is cold comfort to those New Zealanders who have either lost their hard-earned money or have seen it frozen, for how long they can only guess, and with no guarantee that they will get it all repaid. Winning back confidence off the back of this experience is going to be very hard indeed and it is not something that the government can do alone. That is one reason that we have established the Capital Markets Development Taskforce, so that the private sector can partner with government in terms of finding the solutions that will enable our capital markets to grow.
So that is my response to the questions asked by the conference organisers – I am happy to respond to any others you may have.