The MED discussion document on FMA levies landed quietly in my inbox last Friday. However its arrival had created a big bang in the industry.

The mainstream media may have ignored it, but it is big news for our readers.

The idea around the levy was no surprise – we had all been waiting to find out how much it would be and whether having a smaller number of AFAs than earlier predicted was going to inflate the cost for those that remained in the industry.

Here the officials have done a good job of managing the situation as they never gave any clue to what they thought the quantum of the levy would be.

Likewise we had been told, quite some time ago, that the FMA would have to be funded by the industry.

Maybe that idea hadn’t really sunk in until now. I recall we had written about it but until we saw the proposals the magnitude of this idea has only just dawned on everyone.

It seems absolutely wrong that the FMA should have to get all its funding from participants and none from the government.

What’s worse is that the government is proposing that all its recent funding is recovered. That is it has given everyone an interest free loan for a couple of years to set up the FMA and all the FAA bits now it wants its money back.

One person described it to me as like getting the criminals to pay for the justice system. Probably not the best analysis but the concept is right.

The government has foisted all this change on one sector of the industry – at huge cost in time and money, and now wants to add to that cost.

Advisers had no choice about it, other than to walk away and many have done just that.

The bottom line of all this is that advisers will have no choice but to recover the costs through increased fees to customers.

The other thing that gets me is the way this whole thing has been handled. I’m already on record expressing doubts about the necessity of all these changes and whether they will actually achieve the goals the politicians have set out. Likewise I am on record saying that the wrong part of the industry is being regulated. The problems have been with product manufacturers like finance companies.

What we see now is a proposal to get millions of dollars from advisers to pay for the FMA. Yet I see in the papers on the weekend the FMA isn’t even set up. It looks like all the staff have been chucked out and now are reapplying for their jobs. Frankly you would expect that the regulatory body, which advisers are paying for, would actually be set up and running by now. After all adviser regulation starts in 15 days.

You may have seen recent reports that, in response to complaints received, FMA has stopped a KiwiSaver provider’s unregistered sales rep from engaging in unacceptable sales practices.  The rep’s activities raised three concerns.

First, the rep was in breach of the FSP Act for being unregistered.

Second, his actions caused the KiwiSaver provider he represented to be in breach of the Securities Act.  This is because of his modus operandi – which included calling out to people, enticing them with a monetary reward to join the Scheme – an unauthorised advertisement under the Securities Act.

Third, he failed to provide a copy of the Scheme’s Investment Statement and so again caused the KiwiSaver provider to breach the Securities Act. His relationship with the KiwiSaver provider was eventually (after a second warning) terminated.

The aspect of this enforcement experience that I want to talk about in the context of the new financial advisers regime is the responsibility of product providers for their distribution channel.  Providers have a both a legal and a moral responsibility to protect their customers.

As a minimum we expect all product providers to ensure their advisers are registered (unless they are a QFE in which case they don’t need to) and providing compliant disclosure statements.  We expect them to know about the advice practices of those offering their products and to be satisfied that they meet robust care, diligence and skill standards.  We expect them to ensure that the Investment Statement is provided and to check for any misleading, deceptive or confusing conduct, including advertising.  We expect them to take any complaints seriously and refer serious conduct matters to FMA.

Providers unsure of their legal responsibilities for those acting on their behalf should refer to sections 5I and 20F of the Financial Advisers Act and, if necessary, take legal advice.  If they are still unsure of how far their liability extends we would advise they err on the side of prudence.

As responsible corporate citizens they also have a moral responsibility to set a high benchmark for customer protection.  Their brand and reputation is at stake.  Under the new Financial Markets Authority Act, FMA can issue warning statements including about unacceptable selling and distribution practices being used by distributors of, for example, particular KiwiSaver schemes.

The success of KiwiSaver is crucial to New Zealanders’ confidence to invest.  FMA is very focused on ensuring appropriate and compliant advice practices and will act decisively to curtail unacceptable modus operandi by individuals and firms.

Mel Hewitson

There are now 733 AFAs and it’s good to see the recent publicity about incomplete qualifications has resulted in a lot more information being sent through over the last week.

I sit along the corridor from the team processing AFA applications and popped in to ask what else advisers could do to ensure they were processed in time. Here’s what they said:

• If you’ve received an email from us telling you we don’t have your results and you think you’ve completed everything, check online at your ETITO account to see if your Record of Learning has been updated with results. If you find the unit standards are not on your Record of Learning you should contact your training provider (or ETITO for Standard Sets B and C) with your result notification. If the unit standards are on your Record of Learning contact ETITO with your ETITO (FSC) number.

• If you get an email from us asking for some other information or clarification please respond right away. Even a note to say you’re working on getting it to us is helpful because then we know you’ve received the message.

• Contact FMA if you haven’t heard from us at all. We have had a few advisers thinking they had applied for AFA but had only completed the registration part. We have contacted all advisers who have applied to be an AFA so if you haven’t heard from us you may have made a mistake in the online application process.

• Contact us if you haven’t heard from us for a while and want to check the status of your application. We’re happy to set your mind at rest if you’ve got a completed application and want to be sure you’ll be processed in time.

Once you are authorised you’ll get an email from the team telling you you’re an AFA. The email will include your AFA certificate and a copy of the standard terms and conditions you’ll have to abide by. Your FSPR record will be updated to show your AFA status. We also publish the names of all AFAs on the FMA website.

We’re aiming to have all completed applications processed by 17 June so you have time to update your clients. Time really is running out now so make sure you stay in touch with my team. Please don’t leave it until the last minute, we can’t delay our timetable

Mel Hewitson

The recent focus on Pharmac’s place in the progress of trade talks with the United States has been more than a bit myopic.

It has centred on powerful and politically connected US pharmaceutical companies being a real threat to the longevity of our own ‘dedicated minder of the New Zealand public purse’.

Pharmac will no doubt relish repeating some of the supportive comments from previously critical quarters in its annual report.

The irony aside, the debate about whether Pharmac should be a victim of change so New Zealand can become an acceptable part of the Trans-Pacific Partnership – a free trade agreement between Asian and Pacific countries – needs to have wider scope. If the National coalition government allows its negotiating team to tinker at the edges of the Pharmac structure, it must be with clear understanding of the domino effect.

Take health insurance for example. Concessions to the US pharmaceutical lobby are generally accepted to mean the cost of US drugs to New Zealand will go up, ultimately pushing up insurance premiums and altering payouts.

Alternatively, India’s generics may get a bigger look in. You can be sure they are standing by, ready.

New Zealand’s health insurance industry needs to speak up and get the calculators out.

Those who attended the PAA conference would have heard FMA’s Chief Executive Sean Hughes talking about how, at its heart, regulation is about getting better outcomes for the people who need and use financial advice.

Giving the public information about regulatory changes is a key part of FMA’s role and, over time, will help give investors more confidence because there is really good news for investors in the changes that are taking place.

• Providing clients with care, diligence and skill is now mandated in law for all advisers.

• There are clearer guidelines on the different types of services different advisers can provide and disclosure rules should make it easier for investors to choose an adviser who’s right for them.

• For the first time, there is a public register people can visit to look up an adviser or financial service provider.  Investors wanting to work with an AFA can also look them up on FMA’s website – check out our new, more searchable list.  QFEs are listed there too.

• And if an investor experiences a problem with an adviser there are now clearer pathways to help them get those resolved.

We’ll be using a mix of activities to get these messages out to the public.  We’ll be taking a positive, engaging approach. We know many New Zealanders struggle with financial literacy so we want them to believe that getting advice from an appropriately regulated adviser is a good idea.

If there are opportunities you’ve spotted or particular messages you think it’s important for consumers to know, send us your ideas. We won’t be able to action all of them but they may spark a thought about how best to explain what’s changed.

We’re also working on some specific initiatives, such as updating the old Securities Commission’s Using an Investment Adviser flyer. We have FMA branded Codes of Conduct now available for AFAs.  Would AFAs like to be mailed copies automatically or is this something you’d just request if you need it?

I welcome your thoughts.

Mel Hewitson

So this was a savings and investment Budget.

Lots of attention has been focused on the KiwiSaver changes and quite rightly. It’s one of the most successful products the country has ever seen and has $8 billion of funds invested in it.

The government is proposing to cut the member tax credit in half, which is what I predicted last week.

What’s more worrying is that employers are the losers. They lose the tax-free status of their contributions and they will be forced to increase their contribution rate from April 2013.

These changes aren’t going to be popular with the 1.7 million KiwiSaver members or with employers. I wonder whether the government has underestimated the backlash they will generate, especially from the business sector which is a core constituency group.

What interests me is how several other changes will impact on investors. The government wants to partially privatise state assets; it wants to have an earthquake bond and it plans an inflation indexed bond.

I have spoken to a number of people since the February 22 earthquake arguing that the government should have quickly put together a bond to help fund the rebuild of Christchurch. It is an excellent funding idea and if done earlier could well have been sold offshore, particularly to investors who were sympathetic to what happened in Christchurch.

Index-linked bonds are useful too. There is a view emerging that there are growing risks of strong inflation growth coming.

Deepening capital markets and getting more New Zealanders investing is a good thing. But what we really need to do is wean people off fixed interest investments and into growth assets.

Unfortunately there is nothing in the Budget which does that. You could argue listing bits of state assets on the NZX falls into this category.

The reality is the companies suggested aren’t really growth stories. They are income plays and reinforce the fixed interest addiction.

One thing I was hoping for was a rearranging of PIE tax rates to slightly advantage PIE funds for all investors over other forms of investing.

That hasn’t happened but is something which would have been worthwhile.

Overall the Budget moves KiwiSaver more towards being a true workplace savings scheme. The next thing will be ever increasing compulsory contribution rates. It’s a plus that the government talked about resuming contributions to the NZ Superannuation Fund, but it missed the target in some areas. It will also, I predict, be a hard sell for the government.

There is a place for regulation – an underregulated financial services industry is not in the best interest of consumers, as we have seen – but we need to be mindful of the task that is now at hand.

What is needed is true effort from insurers to make their businesses more consumer-focused. Regulation is just one element of what should be a comprehensive renaissance in this industry. When New Zealand has one of the lowest rates of insurance take-up in the OECD, that’s not just about law. And the current crisis of consumer confidence only makes it hard to increase take-up.

Clearly, we need to strive for relevance, simplicity and honesty in our relationships with customers, suppliers and partners.

Loss of trust is one of our biggest challenges, because it prevents engagement. Consumers don’t respond to the advances of organisations they don’t trust – particularly when, they can justify not making that insurance purchase.

The absence of trust puts the onus squarely back on the industry – we the insurers – to tell Kiwis why our services are necessary, and to make it easy for them.  We need to get back to the core of what our business is really about: protecting people.

This will require substantial changes in how our industry operates, and has very little to do with regulation. Rather, we need to address key problems such as churn, in which policyholders sit on an insurance merry-go-round while little is done to increase the overall number of insured. Too many people remain unprotected.

In 2011 we will tick the box marked ‘regulation’. The new challenge is consumer engagement. Sooner or later, insurers will have to get real.

As I alerted in my last blog we’ve started doing spot checks on advisers to make sure they are now registered.

One simple method has been to check the advertising or website of an adviser and if they are appear to be offering a personalised financial adviser service to the public we check the FSPR register to see if they (or the company they work for in the case of QFE advisers) are on it.  Not being registered when you should be is an easy way to end up on the wrong side of a new regulator eager for early results.

During this process we’ve come across several advisers who have registered but not applied to be authorised.  And some of these registered-only advisers are still advertising financial planning, investment advice, KiwiSaver and other services.  There’s no information on their website saying they intend to withdraw from those services and nothing to indicate they’re planning to apply for AFA status.

While it’s not illegal yet, with just six weeks to go* we think it’s misleading – your clients need to know the services you offer are about to change.

Come 1 July any adviser advertising or marketing those services when they are not licensed to do so will be breaching the ‘holding out’ and misleading, deceptive and confusing conduct aspects of the law.  We will be actively looking for instances of this and taking action.

If you haven’t already, you should now be reviewing all your marketing materials (website, brochures, business cards, advertising etc).  If you’re an RFA check any reference to AFA services is removed. If you’re an AFA make sure you’re describing your services accurately.

For example:

• check the scope of the services you describe is aligned with what you are registered or licensed to do.  Opt-in AFAs should ensure it’s clear for their clients that they can only advise on category 2 products.
• if you have described yourself as a ‘sharebroker’ in the past, under the new law you can only do that if you or your employer are a member of a registered exchange.  And I would caution against substituting ‘stockbroker’ or other analogous terms which could lead to a holding out or misleading conduct complaint.
• if you’re using the acronym AFA to mean Associate Financial Adviser, regardless of whether it’s a designation granted by a professional body or not, I advise you to choose other language to describe what you do.
• AFAs should check you’re not implying anywhere that FMA has endorsed or approved your business or advice (see Standard Condition number 7).

These are easy steps to take to protect yourself and your clients.

*Eligible Canterbury advisers do have extended deadlines and have been excluded from our checks.

Mel Hewitson

National governments seem to have a genetic disorder when it comes to savings schemes. They just don’t seem to get them and always make changes – often to the public’s detriment.

Schemes like KiwiSaver need certainty to continue to have investor confidence. KiwiSaver has been one of the most successful products ever launched in New Zealand. It has 1.7 million customers already and has been embraced by citizens.

It’s been embraced because of its simplicity, as well as for the $1,000 kick start. To a lesser degree the $20 a week “tax credit” has also been a selling point.

People will lose confidence in the scheme if this, or any other government, continues to meddle with it. As member balances grow the reaction to meddling will become stronger.

I take a view the government has to think about investing and retirement savings over the long term and has to take account of the economic cycles.

We know cycles happen and this should have been thought about at the design stages. What happens when the economy is bottoming out?

With the NZ Superannuation Fund National has acted a little like a typical mum and dad investor and done all the wrong things. The best time to be investing in the markets is when they are at the bottom yet they stopped contributing the NZ Super Fund.

In the past year it made returns of more than 20%.

Now we are told that KiwiSaver in its current format is unaffordable. That isn’t something which has been agreed on.

Again the government needs to think long term. KiwiSaver is about building up a pool of capital for the economy.

Key’s arguments about the member tax credit not being real savings is incorrect.

All this talk of cutting the member tax credit isn’t going to make a huge different to the government’s finances. Currently it costs around $800 million a year. If the MTC is cut by half that only equals about one week of what the government says it has to borrow. The stark reality is that there are far less productive things the government funds which should be cut ahead of KiwiSaver.

Overall it’s a ballsy move from the government. In an election year it is taking away money from 1.7 million people and putting more costs onto businesses.

Whether it is right or not; it quite possibly will become a circuit breaker for the election.

This week we’ll be asking some Authorised Financial Advisers to submit their Adviser Business Statement (ABS). We will select a small number of AFAs from across the country (excluding the Canterbury region) and they’ll have seven working days to get their ABS to us.

We will then review the ABS to check the systems and procedures it describes help ensure the adviser is conducting their business in a professional and compliant way. In particular we will be looking for information that describes the advice process they have in place. In some cases we may contact the adviser to clarify points or ask for additional information.

We expect to provide feedback to individuals within 15 working days. The possible outcomes include:

• No further review is required at this stage.
• Further information may be required to help us understand the adviser’s approach. We may or may not ask the adviser to submit a revised ABS it to us once changes have been made.
• A formal interview by phone.
• A visit to the adviser to review their services and the outcome for customers and to ensure they’re operating in accordance with their ABS. Advisers in this situation will be provided with further details about what to expect from a visit.

This is an excellent opportunity for advisers selected to receive feedback on their ABS. If there are themes for ABS improvement that emerge after the first few months of reviews, we are likely to issue hints and tips to all AFAs.

Going forward, we may contact the adviser again at any time. In addition to periodic checks, we may respond to information received about their business, or investigate a particular theme across the industry. We may also conduct short surveys on a particular topic.

Monitoring reviews will help encourage high standards of professionalism in the industry. If we do encounter a problem we will generally work directly with the adviser to help them meet the required standard. However we may also take action when standards fall below the required level.

By the way, in addition to calling for some adviser ABSs, we are running some spot checks on advisers to ensure they are registered.

Mel Hewitson
Director Financial Adviser Regulation