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Dalziel: Financial Advisers Bill 2nd Reading

Financial Advisers Bill 2nd Reading Speech – Minister of Commerce

I move, that the Financial Advisors Bill be now read a second time.

I would like to begin by thanking the Finance and Expenditure Select Committee and the officials for work they have done, because we now have a bill now that will accomplish its objective of encouraging the sound and efficient delivery of financial advice, which should boost confidence in the use of such advice.

There have been a number of comments made in the last few weeks suggesting that the government should slow the passage of this Bill – primarily because of the extent of the changes the Committee has made; however I have spoken to or met with many of those who have made these comments and am confident that we have a way forward with this Bill and I thank the industry for sharing its expertise to help us get it right.

That being said I have taken on board the concerns expressed by those who fear that we might not have picked up everything and given that a lot of the detail of the new structure will be included in regulations I have decided to establish a working group which will encompass representatives of the industry, the Ministry of Economic Development and the Securities Commission to provide a feedback loop as we go forward.

The Committee has recommended changes to the Bill that:

• First, focus on financial products, in contrast to financial decisions as was originally proposed in the Bill;

• adoption of a tiered approach to the authorisation of financial advisers, to:
· ensure that category 1 advisers - those providing financial advice on complex products (e.g securities or futures contracts) - are approved as “Authorised Financial Advisers” (AFA); while category 2 advisers (who provide advice on simple products such as consumer credit contracts and insurance products) must comply with basic conduct and disclosure requirements, must be registered and belong to a dispute resolution scheme;
· enable the adoption of a “Qualifying Financial Entity” (QFE) model to reduce compliance costs for institutions with a large number of advisers; while ensuring there is appropriate regulatory coverage of advisers within these institutions;

• Third, ensure that the Bill provides clear and appropriate exemptions from the definition of a financial adviser;
The most fundamental of these changes is the adoption of what they have termed “a tiered approach to regulation.”

This risk-based approach will see more complex advice (such as advice on derivatives, PIE products and other complex securities or financial planning services) subject to greater regulatory control than advice on simple products. These Category 1 advisers will need to be individually authorised by the Securities Commission.

This does not mean that advisers who advise on simple products will be totally unregulated. Rather, the Bill provides that advisers (namely those that are providing advice on products such as consumer credit contracts and insurance products) must comply with basic conduct and disclosure requirements. They will also be required to be registered and be members of a dispute resolution scheme.

The third category of adviser will be employees or agents of a Qualifying Financial Entity. QFE status will be granted to those institutions that have appropriate processes in place to ensure that any employees or agents covered by the QFE’s status operate appropriately. These entities will be able to meet all the registration and disclosure obligations on behalf of their employees and agents. Employees, who are Category 1 Advisers, however will still need to be individually authorised. This will ensure that there is a level playing field between advisers who work for such organisations and those who operate independently.

The most fundamental change proposed by the Committee was one signalled early on in the process and that is the proposal to shift away from the Approved Professional Bodies co-regulatory Model. The Committee has recommended that the Securities Commission undertake all regulatory oversight of financial advisers.

I agree and as I have said on more than one occasion now the co-regulatory model could not have survived the level of mistrust and anger that exists amongst an investing public who feel they have been betrayed. Anything that signals any form of self-regulation in this environment is not sustainable. My regret is that I wasn't alert to this before the Financial Advisers Bill was first introduced.

Some industry organisations raised concerns about their ability to undertake the disciplinary functions that were contemplated for APBs in the Bill as it was introduced. If it had ensued that industry organisations did not have the capacity to undertake the necessary disciplinary functions, the Securities Commission would have been required to act in the APBs stead.
This would have required the Commission to have adopted an approach that catered to the diversity of standards that applied across the industry. This was likely to lead to increased transaction costs both for the industry and the regulator.

The approach we have adopted in the end aligns with the approach taken in respect of other occupational regulatory regimes in New Zealand, including the regulatory framework for accountants, lawyers, real estate agents, electrical workers and architects, which means it is better placed for trans Tasman mutual recognition as well.

While some commentators have claimed that this would result in the loss of industry expertise in the development of rules, I believe that the Committee has come up with a sensible and workable solution to alleviate this concern.

They have recommended that a Commissioner of Financial Advisers; a Code Committee and a Disciplinary Committee be established. Both Committees will need to include advisers with industry experience. This will allow industry representatives to be involved in the promulgation of the professional code of conduct to govern authorised financial advisers and the discipline of the profession. Further, the Committee will be obliged to consult with advisers and other stakeholders when developing the code.

In conclusion can I reiterate my gratitude to the industry, especially those who came to talk to me about their concerns, to the FEC members and in that regard can I single out Charles Chauvel and Simon Power, who were excellent to work with, and the officials – who worked long hours well beyond the call of duty and the PCO assigned to work on this Bill – this Bill represents an extraordinary effort and a good outcome.

I commend this Bill to the House.


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