Lianne Dalziel: ACI NZ Finance Sector Forum
21st August 2008 Speech Notes
ACI NZ Finance Sector Forum
Opening Address by Commerce Minister Lianne Dalziel
to the Australian Compliance Institute New Zealand Inaugural
Finance Sector Forum.
Ernst & Young
Martin Tolar, thank you for the opportunity to address your conference this morning. In the programme it is stated that “in the current environment of regulatory reform, New Zealand's finance sector faces the challenge to be fully prepared for change. Understanding regulatory impact is key for compliance professionals who have the added responsibility of implementing necessary initiatives within their organisations and to manage the impact over the longer term.”
This is vitally important and with the major changes that have and are being introduced you could be excused for feeling that the pace of change in terms of regulatory reform particularly over the past eight and a half years has been very fast - but for each one of you sitting on the compliance side there are dozens of investors who believe that the rate of change has not been fast enough; they feel that they have been sidelined by the broader focus the government has taken in terms of strengthening the regulatory frameworks around our capital markets and left them exposed to the finance company sector in particular.
I'd like to put that in context, because it is relevant to what you do.
I made a comment in a speech yesterday that a consumer group called Exposing Unacceptable Financial Activities has accused me of being insensitive to the plight of those who made investment decisions and have lost some or all of their life savings; or have some or all of their life savings in frozen funds; or who have taken out a mortgage on their otherwise freehold home to invest in a speculative venture that they didn’t know was speculative.
They have accused me of describing such people as greedy, stupid and naïve. I have never described these investors as greedy or stupid. Of course I have said they were naïve - how else would you describe someone who does not fully appreciate that a return on investment is based on risk; that there is no such thing as a safe bet; that people shouldn’t put all their eggs in one basket and that property values do not always increase, sometimes they drop.
In fact I have made the point that many people went out of their way to get advice they thought they could rely on. People tend to trust that someone else has done the homework for them – a former life insurance agent, who has him or herself invested in Blue Chip – well what could be the risk? One of the investors I spoke to told me how he had been pursued by a Blue Chip agent, who he knew, until he finally gave in.
Can I say that Blue Chip is different from the finance companies; not only were they not covered by the same trustee company supervisory arrangements, they also relied on people using their equity in their homes to invest in this property venture. They were told nothing could go wrong. I have consistently told those who took legal advice or who used a New Zealand registered bank for their mortgage that they must take advice from the Law Society and the Banking Ombudsman – there may be remedies there for the advice they received. I have also told EUFA this, but they appear to prefer to call on the government to "freeze everything", even though I have told them we cannot do that. So Blue Chip is different. But unfortunately because of the timing they all get tied up together and people do not discern a difference. This matters because when we are talking about people who are inexperienced in terms of investing, perception is reality.
Returning to the finance companies, most people I have come across did think they were taking sensible steps to ensure they got good advice, but even though they may have been told that their financial adviser was getting a commission, what use was that if they had no point of reference and didn’t know that it was much more than other products would provide.
People may not have appreciated how important it was that their adviser was a member of a professional body that could hold them accountable for breaching codes of standards and ethics. People may have thought that the investment was ‘safe as’ because the interest rate wasn’t much more than what the bank was offering. These people were not greedy and they were not stupid.
But they were too trusting. They did not appreciate that with any rate of return there was an element of risk and they did not understand what that risk was. Someone said recently that New Zealanders weren’t cynical enough and I think that could be right.
But at the same time, I don't think we should expect the advisers to be accountable for someone else's fraud, unless they have acted unprofessionally by turning a blind eye to a clearly under-priced product or accepted a high commission without analysing the offering in sufficient detail. And there were those that did that – happy to take a commission without doing the homework – and look where their clients are today.
Nor should we take our eye off the need to lift levels of financial literacy so that inexperienced investors understand the nature of the risks they are taking with their hard-earned money. Financial literacy has to be lifted in New Zealand or we are never going to have the depth to our capital markets that we need to achieve our ambitions.
You will recall the 1987 crash and the inexperienced investors who pulled their money out at the time – I feel as if history is repeating itself, where reinvestment rates have plummeted, placing at risk what would otherwise be sound businesses. Until we have confidence restored to this market we have lost an important element of our financial markets and although it isn’t large enough to trigger the attention of the Reserve Bank, it does mean that some developments may not be able to proceed because the finance isn’t there.
It’s been like a set of dominoes – one failure leads to the other – and it is only confidence that will see the rebuild occur.
As many of you will know the government has launched a financial literacy campaign led by the Retirement Commissioner, who has finalised a National Strategy for Financial Literacy. There are many public and private sector players in this important space from schools delivering on the curriculum - to the NZ Enterprise Trust taking business and financial literacy into our schools - to the Securities Commission teaching the basics of risk and return. This is vital work and must continue to receive top priority.
As I have said on many occasions, the regulatory frameworks that support business generally and the financial sector in particular, are part of the country’s essential infrastructure.
As you are aware the government is not simply reacting to the current pressures in the sector. The regulatory reforms that are currently before the House, and indeed the reforms that are still in the policy development stages are a result of work that was initiated back in 2005.
And this itself was the final stage in the broader reform of securities law that had to be undertaken when we became the government in 1999. The Takeovers Panel needed a Code to enforce. The regulation of our stock exchange had to meet IOSCO standards. The rules around insider trading, market manipulation and investment adviser disclosure requirements all had to be strengthened.
The Review of
Financial Products and Providers encompassed a broad range
of work, including work relating to financial advisers,
non-bank deposit takers, compliance with the Financial
Action Task Force (FATF) recommendations, and insurance and
securities law more generally.
We took a holistic approach to reviewing the sector so we could look at the various interdependencies that exist in the industry and develop proposals that accounted for these interconnections.
I believe that this has fundamentally improved our understanding of the sector and has enabled us to develop rules that are more suited to the realities of what is a complex financial environment.
Late last year, Dr Cullen and I introduced three pieces of legislation into the House; the Financial Advisers Bill, the Financial Service Providers (Registration and Dispute Resolution) Bill and the Reserve Bank Amendment Bill (No 3).
The Financial Advisers Bill has been the most difficult Bill for the Finance & Expenditure Select Committee to deal with, largely because it has become obvious that the co-regulatory model involving industry-based Approved Professional Bodies cannot work in the current environment. As I said in a speech to the IFA recently, the level of mistrust simply could not sustain the co-regulatory model if we wanted to rebuild confidence.
Earlier this year, the Select Committee made an interim report to Parliament in order to release a discussion document, which proposed another model and on the 7th of August the Select Committee released a second interim report confirming that they will recommend that the Securities Commission undertake the regulatory role.
As I have said recently, I was concerned not to lose the strength of the co-regulatory model and that was the industry expertise that exists in the professional bodies. With government backing, the Select Committee has proposed the establishment of a Commissioner of Financial Advisers, who will have a statutory responsibility to engage with industry to develop a code of conduct and to establish an appropriate disciplinary body.
I am confident that this approach will ensure that we have the strength of central supervision, without losing the experience and knowledge of industry participants. The proposal suggests a two-tiered approach to imposing appropriate obligations on financial advisers, and allows for institutional certification to ensure that the regulation is effectively tailored to the risks associated with the level of financial advice given.
The first tier financial advisers will need to be individually authorised by the Securities Commission whether or not they are employed by a Certified Financial Institution, thereby creating a level playing field, allowing the public to know that if they are getting advice on complex securities or superannuation or investment planning they will be able to rely on the Securities Commission’s oversight. Regulation of financial advisers will help to assure the public about the services being offered to them.
The Select Committee has also been considering the Financial Service Providers (Registration and Dispute Resolution) Bill. This Bill will allow for a complete register of all financial service providers to be developed and will enable negative assurance criteria to be placed on the controlling owners, directors, and senior mangers of financial service providers.
All financial service providers and financial advisers who provide a service to the public will be required to be a member of an approved dispute resolution scheme, which will provide investors with a simple low-cost avenue to seek redress.
The Reserve Bank of New Zealand Amendment Bill (No. 3), which has been reported back to the House, creates a new framework for non-bank deposit takers, which includes finance companies, to be administered by the Reserve Bank. The Bill establishes minimum prudential standards on NBDTs, including capital adequacy requirements and a credit rating from an approved credit rating agency.
We are also working on a reform of securities law more generally. The RFPP included a discussion document on Collective Investment Schemes, Supervision of Issuers and Securities Offerings. In light of the recent events in the sector, the Ministry is undertaking further policy work on the review of these three areas.
In conclusion, can I say that at the same time as undertaking this work we are looking forward with the establishment of the Capital Market Development Taskforce and pressing on with the Single Economic Market agenda to strengthen the processes for doing business on both sides of the Tasman.
This is the right time to be doing these things and we cannot take our eye off the ball because of the global financial environment. KiwiSaver, now with over 750,000 members, is proving a runaway success in encouraging savings. The Portfolio Investment Entity Regime is stimulating savings in financial assets and the Limited Partnership regime has already proved a successful vehicle for fundraising. Together with other aspects of the business tax package that have recently come into force, these changes significantly improve New Zealand’s outlook.
However as I have said, recent events have highlighted the complexity of financial products and services that are offered in the market today. The reform in the financial sector will increase transparency and ensure that providers are held accountable. But I want to reiterate how important it is that we address the levels of financial literacy in this country.
As I said at the outset, from your perspective, it may look as if we are proceeding at pace, but for others it isn't fast enough. I have always said that I believe that our response in any area of regulation must be proportionate - both in the policy and in the enforcement. The risk with not proceeding with financial sector reform is that we wait longer to rebuild the confidence we need to achieve our ambitions for New Zealand.
Thank you and I hope you enjoy your conference.