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Overhauling the financial advice industry - What is being done to ensure Kiwis get good financial advice?

Jane Diplock AO
Chairman, Securities Commission New Zealand
& Executive Committee, IOSCO

IFA Financial Awareness Week
8 September 2009

Introduction

I'm delighted to be here today to talk about the financial advice industry reforms with a well-informed, well-motivated audience such as this one.

You're probably aware that the reforms are not a response to the global financial crisis. They are part and parcel of a long-standing push by the Commission to bring New Zealand's securities markets regulation up to international standards.

The last two decades have seen New Zealand move from quite a light-handed regulatory regime to one close to international best practice. These reforms constitute another crucial piece in that jigsaw.

The purpose of a sound regulatory framework is, of course, to enhance investor confidence, thereby encouraging domestic and overseas investment in our securities markets. Thriving markets are a key part of economic health and stability, alongside, and equally as important as, banks and other institutions.

I'd like to make it clear from the outset that we at the Commission are keenly aware of the need to engage with the industry as we work towards implementing these reforms. We have no interest in unilaterally imposing on it a new regulatory framework when what we all want is a sound, workable regime.

Origin of the reforms

As I said, the reforms were in the pipeline long before there was any hint of a global crisis. In 2003 this country's financial sector was thoroughly reviewed under a programme developed by the IMF and the World Bank.

The aim here, as elsewhere, was to examine our regulatory framework to uncover any vulnerabilities. New Zealand received a basically good report. However, it did identify a gap in our regulatory framework relating to financial intermediaries.

The implication of that gap was the potential for mis-selling. A client may well have read a prospectus, been made aware of a product's risks, even signed as to having done so. However, these steps alone - as our best professionals know - are not enough to ensure a product is necessarily appropriate. A professional adviser needs to confident that the product suits this client's financial situation, investment experience and objectives, and their appetite for risk.

The reforms underway, then, are a direct outcome of that assessment carried out six years ago. An effort to ensure this gap in our regulatory framework is closed. This, I might add, is not just in the interests of investors, but in the interests of those in the industry too.

You are the ones whose professionalism is impugned whenever an investor is burned by unprofessional conduct. It's your collective standing that is threatened. Advisors are for many the first point of contact with securities markets. The public needs to be able to have faith in their knowledge, abilities and ethics. The financial advice industry as a whole needs the public to have that faith.

The new law

The Financial Advisers Act was passed late last year and we expect the new regime to be operational by the end of 2010. This law makes the Commission the industry's main regulator. Advisers will have to meet specified standards of competence, professional conduct and disclosure. They will also have to be responsible for the quality of their advice.

The regulations at the heart of the new law will be grouped under a Code of Professional Conduct for Authorised Financial Advisers. The code will be developed by an independent code committee, whose 10 members were appointed recently. It will detail minimum standards of adviser competence, knowledge and experience, ethical conduct and client care. It will lay down guidelines for continuing professional development, and specify standards for various classes of authorized financial adviser.

The Financial Service Providers (Registration and Dispute Resolution) Act was also passed late last year. It requires financial advice providers to be on a national register and to enrol with an independent, industry-based resolution service. This ensures that, should things go wrong, consumers will have access to low-coast redress.

Key features of reform

Encouraging professionalism is central to the design of the authorisation process. A good deal of the detail the Commission will need on whether an adviser is acting professionally will be information they already use themselves to manage their business.

Any business demands sound governance in the shape of formalised plans, processes and controls. We firmly believe, then, that good professional practice entails production of key documents about an adviser's business.

We're working on a way to help advisers do this by having them produce an adviser business statement. This will describe their business model and summarise their systems, controls, compliance and risk management procedures. The statement will also contain detail about the adviser's skills and competence for conducting their business.

The statement will be expected to evolve as the business evolves. It will be a living document. We expect statement requirements to be available by early 2010.

The other key aspect of the reforms is the requirement for businesses to become qualifying financial entities. Becoming a QFE will mean taking direct responsibility for the compliance of adviser employees. We expect requirements for QFE status to be available by October, which gives firms enough time to prepare their adviser business statement before the law comes into force.

Consultation

As I said earlier, the reform implementation process has been and will continue to be a two-way street.

This year we have issued two relevant staff papers. The first, released in April, dealt with competence standards for authorised financial advisers. The second, released in June, sought industry feedback on proposals for financial adviser supervision.

We invited financial advisers and their employers, plus investors and other interested parties to make submissions on the proposals. We were gratified to receive 70, amounting to 500 pages of feedback.

The Minister of Consumer Affairs also released a paper on the proposed financial service providers dispute resolution framework.

Public understanding

That, then, is a brief overview of what we're doing in relation to the finance industry to ensure Kiwis get good advice.

There is a second important aspect here, though - the other party in the financial advice business: the one receiving the advice. It's essential investors understand not just the product they are investing in, but the level of risk that's personally acceptable to them.

The Commission cannot and never should try to make investment bullet-proof. Securities markets investment comes with no cast-iron guarantee. What we aim to do is to level the playing field - by sound regulation and enforcement, and by enhancing public understanding.

Our education programme is based on the premise that knowledgeable investors will be better placed to look after their own interests than those with little understanding of what they are buying into. Knowledgeable investors will also, I might add, be well-placed to benefit from the eventual economic recovery.

Without scaring investors we aim to give them the information necessary to look after their money. We do this through our websites, publications and media releases and topical articles on various aspects of investing.

We deal with many public enquiries. We have also funded a three-year financial studies course for older secondary students, with the aim of encouraging greater financial literacy in our next generation of investors.

Conclusion

Our programme over the next 15 months as we work alongside the financial advisory industry and others to implement this new regime will be intense. It must cover policy, regulatory and IT areas. The results, though, will pay huge dividends in investor confidence.

We have already consulted widely and will continue to do so. The Commission needs your input; it is vital.

Thank you.

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