By world standards, the Australian Securities and Investment Commission (ASIC) keeps advisers on a very short leash. But across the Tasman, financial intermediaries are subject to fewer restrictions. Late last year, New Zealand’s Ministry of Economic Development established an independent task force to review this situation.
The Taskforce on Regulation of Financial Intermediaries, as it is known, set out to review the country’s regulation of the sector, with a view to ensuring New Zealand’s public has access to good quality financial information and advice to help them make the most of their savings.
However, just days before the task force was due to report back, the ministry put any plans for reform on the back burner, with revelations it will incorporate the task force’s work into a wider-ranging review of New Zealand’s non-bank finance sector. Submissions from the combined review are not expected until late 2006, with legislation planned for 2008.
Despite the set back, the consultation and analysis undertaken by the taskforce has laid solid foundations for future activities. Taskforce chair Michael Webb says the group approached its work with a clean slate. “The approach we’ve taken is to firstly say: ‘What are the key issues?’ he explains.
The team pinpointed the primary concerns as relating to the availability of consumer information, standards for financial intermediaries and avenues for consumer redress, sanctions and enforcement.
Who’s who
An early activity was to define who New Zealand’s financial intermediaries were. The taskforce found limited data on sector participants, referring to the 2001 New Zealand census in which 7,836 people claimed to be financial intermediaries, 2,817 said they were financial dealers or brokers, and 3,840 said they were insurance representatives.
The group’s consultation paper defined sector participants as being those who provide “financial advice and/or promote or market financial products to consumers”. Financial products included risk and investment products, but not the person’s residential home. Credit products were also excluded.
International comparisons
The taskforce also reviewed comparable systems in other jurisdictions, including the United Kingdom, Canada, Hong Kong, Singapore and Australia.
To learn from Australia’s experiences, taskforce members spent three days in Australia consulting with industry, consumer groups, regulators, ombudsmen, individual participants and dealer groups.
Webb stresses the group did not set out to “Australianise” the New Zealand regime or use Australia’s Financial Services Reform system as a template. “We saw Australia as relevant in three particular ways,” he says.
“First, as a jurisdiction with a significant economy and population very close to us … Secondly, the Australia — New Zealand government to government dialogues, such as closer business relations, close economic relations. Any consideration of commercial law reform needs to be mindful of the Australian dimension.
“And thirdly, the specific legislation between Australia and New Zealand in terms of trans-Tasman mutual recognition, under which people have certain occupations involving registration in one jurisdiction recognised and able to be practiced in the other jurisdiction.”
While Australian advisers must have detailed licences, and comply with sometimes onerous obligations on reporting, ethics and disclosure, their New Zealand counterparts are subject to few of these burdens.
From a consumer perspective, dispute resolution processes in Australia are well developed, but Webb says consumer redress in New Zealand can be complicated and costly, and in many cases is not enforced.
Tower New Zealand’s national manager distribution support services Peter Conroy says the process gave the taskforce the benefit of hindsight. “I think it is fair to say that Australia has come to an agreement that they have probably over-prescribed,” he says. This helped the review in New Zealand to remain focused on increasing consumer confidence, improving education for advisers, and achieving better quality advice, he says.
“We’re focusing on outcomes rather than how we do it, and I think that’s one of the things we learned from the Australian experience.”
Webb says looking at the Australian system provided warnings for the task force. “One of the messages it gave to us was to be very careful about measures which in terms of their principles are entirely justifiable, but in their application can lead to very high compliance issues.”
He says the trip also highlighted differences between the markets, such as the complexity of Australia’s taxation system in comparison to New Zealand’s, and the fact that Australia has compulsory superannuation whereas New Zealand does not.
Graham Rich, director of Brillient and a pioneer of New Zealand’s first financial planning industry in the early 1980s, says New Zealand also had less regulation than Australia at the start of the financial services reform process. New Zealand has a much simpler parliamentary system than Australia, and a Securities and Investment Commission with only 50 staff, compared with ASIC’s staff of around 2,500.
Rich, who is also a founder and a life member of New Zealand’s Financial Planners and Insurance Advisers Association (FPIA), says the financial infrastructure currently available in New Zealand would be hard pressed to cope with the complexity and expense of a system as comprehensive as Australia’s Financial Services Reform Act.
Assessing the options
Webb says the task force looked at the whole spectrum of regulatory options, from voluntary compliance to full government intervention. In May, the task force released a paper that set out options for reform, including:
n changing general laws;
n requiring registration with a governing body;
restricting financial intermediaries from calling themselves financial advisers unless they had certain qualifications and met certain requirements; and
full licensing, preventing people from providing advice without meeting licensing requirements (similar to Australia’s system).
“The other challenge which we’ve been very conscious of is that any reform must be proportionate and cost effective concerning compliance,” Webb says.
Favoured options
The FPIA, in its submission on the taskforce’s options paper, suggested a self-regulating model for financial intermediaries, putting itself forward as a suitable controlling body. However, Rich thinks it is unlikely this model will win favour.
Rich expects any recommendations to fall in the middle ground. “I think it’s very unlikely that option four, full licensing, would be put forward because the infrastructure is not in place,” he says.
Webb says most industry and consumer groups favoured a co-regulatory approach combining the options. “There’s been a very broad convergence both from industry and consumer groups favouring a co-regulatory approach, as opposed to being at either end of the spectrum,” he said.
Given the ministry’s postponement of the project, however, it looks like New Zealand will have to wait and see what regulation the future will bring for its financial intermediaries.
