In 2004 the International Monetary Fund (IMF) Financial Sector Assessment Program rated New Zealand’s regulation of the financial advice market as well below global best practice.
There are many historical reasons for this, but the New Zealand Ministry of Economic Development (MED) is now acting to remedy this and is suggesting a closer harmonisation with Australia may emerge.
However, this ideal is fraught with challenges because there are significant differences in policy settings around products and taxation in each country. In short, the markets are very different.
The New Zealand market is largely unregulated and there are some fairly logical historical reasons for this. A major reason is the open market economic practices of the Governments of the 1980s and 90s.
However, regulating the New Zealand market is not going to be easy. Some key issues are:
~ Whether the cost of regulation reflects value to the consumer. The consumer pays after all. The value should be equal or greater than the cost to the consumer.
~ There are no government mandated preferences for financial planners or advisers in New Zealand as with superannuation in Australia. Consumers are not forced by policy or the complexity of the tax/retirement environment to obtain financial advice. When a government creates such an environment, it is incumbent on it to make sure that environment is both robust and safe (within reason).
n~ There are active taxation tilts in favour of direct investment in property, direct shares and certain international investment products in New Zealand. New Zealanders, who have the ability to do so, often invest without the need to obtain financial advice.
~ Even a moderately financially literate New Zealand investor knows the historical benefits of paying off debt and investing in property. They are happy to do it themselves. Frankly, with current policy settings, it is rational for them to do so.
~ Growth in financial services in New Zealand, with the taxation tilt against superannuation and unit trust type products, has seen the wealth management industry languish. Some major Australian institutions are disinvesting.
~ Employers in New Zealand frequently offer cashed-up packages to all staff, as staff can make their own choices on the use of their funds.
~ Under tax simplification most people in New Zealand don’t need to file a return. Rebates and deductions are few for salaried workers, for instance, and all tax is deducted at the source.
~ The absence of superannuation is partly a contributor to lower growth rates in the life market in New Zealand as well.
‘Rogernomics’ and its aftermath left New Zealand investors with a stronger realisation that they must be aware of financial risks and the search for higher investment returns usually mean higher risk.
Are there more corporate failures or horror stories like Westpoint? Not really.
A key issue with more highly regulated markets like Australia is investors are keen to get the best returns they can, but when a failure happens they expect government via the Australian Securities and Investments Commission or parties involved to indemnify them from their losses. High regulation tends to validate the weakest player in the mind of the consumer/investor.
To sum up, the absence of compulsory superannuation in New Zealand and the lack of the complexity seen in Australia around taxation and retirement means the New Zealand environment is very different and hence there has not been the same demand for regulation and consumer protection.
Australia faces some hard questions regarding financial services regulation. This environment is costing consumers considerable amounts. We won’t always have high return environments to bury product and compliance costs and the tide will, in coming years, begin turning back towards unpeeling regulation and simplification to add value to consumers.
Perhaps the Treasurer was taking a step down this path when he announced simplification of retirement drawdowns in the Federal Budget and said, in essence, he favoured consumers having more control.
How will the proposed New Zealand regulations roll out?
The draft regulations largely follow the line of last year’s report from the Financial Intermediary Taskforce that laid the basis for a ‘co-regulatory’ model in New Zealand.
Under the proposals, advisers would have to belong to an ‘Approved Professional Body’ (APB) designed to oversee the new standards.
The APB system would in turn be regulated by the Securities Commission (New Zealand’s version of the Australian Securities and Investments Commission).
The New Zealand proposals would also cast a wider net than in Australia, with real estate agents and others giving advice on property investments also expected to be caught under the new regulations.
However, the MED has also mapped out a three-tiered model for regulation of financial intermediaries based on their level of client interaction and product knowledge. The three levels of intermediary have been classified as information only, product marketers and high-level financial advice.
While the proposed regulations are significantly different to the Australian regime, the MED says in the discussion document that the ‘Memorandum of Understanding on Business Law’ and the ‘Trans-Tasman Mutual Recognition Arrangement’ (TTMRA) signed between the two Governments mean mutual recognition is likely.
Ministry officials have paid careful consideration to the Australian regime to ensure that equivalent objectives and outcomes to the Australian regime are obtained so there is the potential to utilise (at least for some intermediaries) the TTMRA.
This does not mean New Zealand will be adopting the Australian regime, rather this would enable intermediaries to operate in both jurisdictions, remove impediments to cross border activity and move us further towards a single economic market.
When regulation of advisers was first proposed the New Zealand industry almost unanimously opposed the introduction of a regime similar to Australia. In short, the industry in New Zealand recognised the significant differences between the two markets.
Will New Zealand advisers be able to operate in Australia and compete with Australian advisers?
My answer is that for full advice certainly not. The Australian environment is complex and tax, superannuation and retirement rules are highly complex. Even in Australia advisers often specialise.
How easy or attractive would it be then for a New Zealand adviser to understand this overall environment to the point of adding real value? In my view, very limited.
It is more likely advisers might become involved in product or investment promotion opportunities where they look to bring more New Zealand investment opportunities to Australian investors, but do so on a limited advice basis.
However, there are more opportunities for Australian advisers to advise in New Zealand, given the lower barriers and reduced complexity in New Zealand.
Will these advice markets harmonise?
No, not while policy settings around products, tax and superannuation are so different.
What do advisers in New Zealand deliver currently in terms of advice?
Apart from product investment opportunities, the main focus has been on pure needs analysis and financial planning in the sense of the assets and income planning for retirement.
This is, however, in a low complexity environment often with no superannuation involved.
To sum up, these changes are very interesting, but harmonisation in terms of New Zealand advisers actively working in Australia on a full-time advice basis will not amount to a great deal.
The actual markets in practice are very different with wider divergence of complexity. They are likely to stay that way for quite some time.
Jim Minto, group managing director, Tower.
