News
Financial adviser regulation: phase one complete but much more to come
Getting investment advice when planning financial affairs is not only generally accepted as a prudent move - New Zealanders are openly encouraged to do so through various government policies. Every Investment Statement, for example, is required to tell potential investors to "seek advice before committing yourself".
However, there has been widespread concern at the lack of regulatory protection for people who take this prudent course. The rules applicable to financial advisers in New Zealand are very light-handed compared to many countries. Essentially, anyone can hang up his or her shingle as a financial adviser. There are no legal requirements around education, qualifications or membership of professional bodies.
This is all about to change. From 29 February 2008, the law was changed to require financial advisers to provide clients with a "disclosure statement" before giving advice on investment securities. This disclosure statement must set out key information about the financial adviser including such things as experience, qualifications, criminal convictions, fees and conflicts of interest.
This is just the start. Further regulations are proposed in the Financial Advisers Bill which will extend the requirements beyond investment securities, to cover a much wider range of financial advice, including life insurance, property insurance, mortgage broking and other things. They will also impose some "conduct" standards, such as a requirement to act with integrity and exercise care, diligence and skill; and will also require all financial advisers to join an Approved Professional Body (APB).
The APB requirement is perhaps the most interesting aspect of this proposed legislation. It is proposed that APBs will work with the Securities Commission to co-regulate financial advisers. The APBs will be responsible for matters such as establishing educational requirements, competency standards and complaints handling procedures.
As the legislation is currently drafted, it will be open to any interested party to seek authorisation to operate an APB. It seems likely that organisations such as NZX and The Institute of Financial Advisers will seek to participate. However, it will be fascinating to see how the APB "market" unfolds. Things to watch include:
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How many APBs will there be? This may be constrained by the capacity of the Securities Commission to work with a multitude of APBs.
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Will the coverage and target membership of APBs overlap? If so, on what basis will the APBs compete with each other?
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Will particular APBs cover the broad range of financial advice or limit their activities to specific areas. If the latter, then some financial advisers may need to join a number of APBs.
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To what extent will APBs recognise the training and standards that large financial institutions require their employed and associated financial advisers to meet? If these existing requirements are not recognised, then significant duplication could arise.
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Will it be possible for a large financial institution to establish an APB solely for its employed and associated financial advisers? Some financial institutions may favour this for commercial reasons.
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What will be the costs of membership? High costs could make some distribution channels uneconomic.
- Finally, will there be any gaps in coverage? If there is no APB dealing with a particular area of financial advice then it will not be possible for financial advisers to participate in that area.
The enhanced regulation of financial advisers is certainly a welcome development. However, a number of question marks remain as to how the new regulation will operate in practice.
