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Licensing question needs to be considered: Dalziel

Saturday, December 6th 2003, 11:09AM

A few weeks ago I spoke at the awards ceremony for the
Financial Planner of the Year. I speculated as to the quality that each of those attending might identify as paramount to their business, and ventured that it may be reputation. Reputation is not only important to the individual adviser or the company that offers financial services, it is vital to the sector or industry as a whole. In all professions the actions of the few can tarnish the reputation of the majority - I am a lawyer and a politician; I should know.

Reputation is probably a word that I have chosen to express the broader concept of confidence. The confidence of investors in our capital markets is critical to their growth. For those who regard me as having a pre-disposition to rules-based legislative intervention, let me make this point. No-one can legislate for ethical behaviour. All that can be done is to create obligations (legislative or otherwise) that if breached bring about consequences that do not affect the honest and the competent, but which may act as a deterrent to the dishonest or negligent. In that regard the risk of getting caught must be high as must the consequences that follow. This means an effective policing and enforcement regime.

The best defence for the consumer, for whom protection is sought, is education about investment, the ability to understand what their adviser discloses and knowledge of best practice in the industry.

I have made the point more than once since becoming Minister of Commerce that we cannot legislate against ignorance or greed either. I don't recall where I learned that 'the higher the promised rate of return, the greater the risk', but I am amazed at the number of people who still fall for what can only be described as scams. This has led me to the view that not only do our regulators need to focus on the enforcement end of the spectrum, they also need to be focussed on the education end as well. A well-informed client may present an additional
challenge to an adviser, but my view is that there is, in fact, more protection for both the client and the adviser when they meet on a more equal footing.

For me this is one of the reasons why I approached the results of the review of the Investment Advisers (Disclosure) Act 1996 with some incredulity. Why was it that the least informed clients were the least protected? To leave significant matters to be disclosed only on request, created a vulnerability for those who did not know to ask in the first place. For example, the benefits the adviser may receive if they sell a particular investment, is an important consideration for an investor who is relying on the advice provided. I am aware that many advisers actually make full disclosure, so the decision to collapse them into one form of disclosure will not impose compliance costs beyond the re-formatting of existing documentation.

As you are aware, the government has picked up on most of the Securities Commission's recommendations, which are primarily designed to strengthen the disclosure regime, introduce a new offence and penalties regime and strengthen the enforcement of the Act.

As I said before, the current two tiers of disclosure will be collapsed into one - so that all the required disclosure will be required up-front before investment advice is given.
Some additional disclosure will also be required, including information about fees charged and availability of dispute resolution facilities, and advisers will need to provide updated information if material information changes after the initial statement is given but before the advice is provided.
There will also be a new offence provision introduced for when advisers recommend illegal offers of securities where they know, or ought to know, that the offer is illegal. I see this as an important step. Investors rely on information provided to them by investment advisers. They need to be able to have confidence that securities recommended by an adviser, at the very least, comply with the law.

A significant problem with the current law is the lack of an effective enforcement mechanism. Investors can take an adviser or broker to Court to require disclosure or for compensation for a lack of disclosure. However, this is not a realistic option for most investors. As a result, there is virtually no effective policing of the current disclosure requirements. To remedy this, we are proposing to give the Securities Commission the ability to take action to enforce investment adviser disclosure requirements. We also intend to give the Commission a broader range of powers to deal with deficiencies in disclosure - including an ability to suspend an adviser for up to 14 days if they are operating outside the law.

Of course, these proposed changes to the investment adviser disclosure provisions should not be viewed in isolation. They are just one part of a raft of measures that the government is introducing to strengthen securities trading law. Other measures include changes to insider trading and market manipulation law, and strengthening the penalties and remedies for breaches of trading law provisions.

Returning to my opening comments, these measures are designed to increase the confidence of both domestic and overseas investors in the New Zealand market.

Legislation to implement the package of proposals, including the investment adviser law changes, is currently being drafted and I hope to introduce a Bill containing the changes into the House by mid next year.

Which brings me now to the review of the regulation of financial intermediaries. This is not an area where we have made any decisions, largely because there are so many unanswered questions around the issue of occupational regulation generally, which is not just restricted to those offering financial advice or brokering services. It is a matter that needs to be addressed, and we need to look carefully at the potential costs and the potential benefits, which in may respects includes the risks of not regulating.

Introducing such restrictions, for example in the form of a licensing regime, could have a number of potential benefits, including:
· Raising the standard of financial intermediaries and as a result the standard of financial advice provided; and
· Aligning New Zealand regulation with international standards, further strengthening confidence in the rules that apply in the New Zealand market.
However, there are counter-arguments that would also need to be considered, such as:
· Whether such a regime does, in reality, raise the quality of financial intermediaries and investment advice; and
· Whether it would cut down the number of industry participants, pushing up the price of advice services for investors.
These arguments need to be looked at in the New Zealand context. In particular, we need to view them against the backdrop of current industry self-regulation and the size and depth of the New Zealand market.

We should also take the opportunity to consider the experience of other countries, like Australia, that have recently made changes to their regulatory regimes.

While the government has not made decisions on whether to introduce a licensing regime, or any other restrictions on financial intermediaries, we accept that this is a question that needs to be considered. This will be a specific topic for consideration by the Ministry of Economic Development when it commences the next stage of its securities law reform programme - the review of the Securities Act and other associated issues, which will commence early next year.

So far I have outlined the government's direction for regulatory reform. The other key player is the industry itself.

Clearly, your aims and the aims of government are aligned. We both want robust professional standards and conduct within a strong industry that inspires the trust and confidence of the public. This benefits the investing public, but it also benefits the financial services sector. It is easy to see how an industry that aspires to high professional standards can attract clients. This can only be good for the industry. Importantly, the availability of high-quality financial services also contributes to the government's goal of the promotion of savings.

So given this common interest, what is the role of the industry in standard-setting? I note that sector self-regulatory organisations and a number of major participants in the industry have been working to establish ethical and professional standards. These standards are part of the landscape within which the profession operates and will be significant in the government's consideration of the matter.

I would like to conclude by reinforcing the nexus between industry best practice and government regulation. As you can see, the government is committed to addressing some of the key deficiencies in the current investment adviser regulatory framework. These changes will, I believe, help strengthen the financial planning industry by promoting public confidence in the law and institutions that regulate this industry. But we cannot pretend that rules in themselves prevent unethical behaviour or that uninformed clients are active participants in investment decisions. The changes must be backed up by a commitment to education as well.

We will also be looking at the broader issue of the regulation of financial intermediaries. But the cost-benefit ratio will have to stack up in order for me to recommend a particular approach to Cabinet. What I am saying is that it is still an open question about whether the government needs to go further than the changes proposed, and the debate this question should generate will need to be influenced by the industry itself and investors in the market.

That being said it is important that you understand that I am supportive of the progress that the industry has made in establishing professional standards and your stated commitment to ongoing competence that should go a long way to develop the quality of the services provided by financial planning professionals.

Industry initiatives, along with government proposals to strengthen the current investment adviser laws, will improve both the credibility and robustness of financial planning services in New Zealand. These developments are, I believe, essential for growing and maintaining investor confidence in New Zealand. The question will be, do they go far enough to achieving the level of investor confidence we need to grow and deepen our capital markets? I look forward to discussing this with you over the months ahead.

This is a speech that Commerce Minister Lianne Dalziel gave to the Grosvenor group on Friday.

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