Wilson speaks out on regulation

As Minister of Commerce I am vitally concerned with the effective and efficient operation of New Zealand’s capital markets. Well-regulated markets generate investor consumer confidence to invest in financial products. Financial service providers play a key role in the decisions people make about investing their money; it is therefore essential that we regulate appropriately those giving investment advice so consumers are encouraged to seek counsel from a professional industry in order to make the most of their savings.

Last year the government announced regulatory changes to investment adviser and broker disclosure requirements. These changes will have implications for the industry and I believe they will help strengthen the financial services industry by promoting confidence in the law and the institutions regulating this industry.

The question of regulation does not stop there. There is still an open question about whether the government needs to go further than the changes proposed. We need more debate about the appropriate way forward. The industry itself and investors in the market will influence this debate. And I am keen to have you involved. Today I would like to briefly mention the changes that have already been announced and touch on some of the key issues in the ongoing debate about broader regulation of the industry.

Changes to the Investment Advisers (Disclosure) Act 1996

As part of the Securities Trading Law Reform Bill, changes are being made to the Investment Advisers (Disclosure) Act. These changes are designed to strengthen the disclosure regime, introduce a new offence and penalties and ensure there is robust enforcement of the Act.

More specifically, the disclosure regime will be strengthened in the following key ways:

• The current two tiers of disclosure will be collapsed into one – so all the required disclosure will be required up front before investment advice is given;
• Some additional disclosure will be required; and
• Advisers will need to provide updated information if material information changes after the initial statement is given, but before the advice is provided.

The changes acknowledge the current regime, where information is provided on request, is problematic. Many investors are simply unaware they can request certain information. In creating a single mandatory disclosure regime it has been recognised information currently falling under the request disclosure requirements, such as benefits the adviser may receive if they sell a particular investment, are important considerations for an investor who is relying on the advice 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, the offer is illegal. Again, I see this as a crucial 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 comply with the law.

One of the biggest problems 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 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.

The Bill is due to be introduced into the House later this year and will be referred to a Select Committee, which I expect will call for submissions from the public.

Further regulation of financial intermediaries

While the Bill’s reforms regarding investment advisers represent an important step forward in terms of providing a more effective regulatory regime for the provision of investment and financial planning advice in New Zealand, the question remains whether more comprehensive regulation is required for financial intermediaries in New Zealand. This is a question to be taken up in the forthcoming review of the Securities Act and other securities law issues.

There are some tough issues to be addressed. You will be aware of the growing call for reform, both in the media and as acknowledged by some sectors of the market. In addition, last year’s International Monetary Fund Financial Sector Assessment Programme report on New Zealand raised some difficult issues about the current system of regulation of financial intermediaries. Minimum entry standards for some market intermediaries, systems for the demonstration of ongoing competence, and appropriate disciplinary structures are just some of the questions we will look at.

In undertaking law reform in this area, my broad objective is to strengthen public confidence in the financial services industry by raising the standard for the provision of financial services in New Zealand. I have an open mind as to how we might best achieve that. Self-regulatory organisations, such as the FPIAA will certainly have much to contribute to the debate. I am therefore looking closely at the best way to involve the industry in the policy development process.

Part of that process will be to consider the corresponding laws in similar jurisdictions and to learn from the experience of those jurisdictions. The Australian and New Zealand governments have announced they want to move towards a single economic market. Therefore in developing proposals for the regulation of financial intermediaries we will need to look closely at Australia’s experience under the Financial Services Reform Act which took effect in March this year. As you will be aware, that Act imposes a more stringent licensing and disclosure regime on anyone selling financial products or providing financial advice. Each product must now be accompanied by a detailed disclosure on commissions, risks, and charges. The Act is designed to give consumers better information about financial products offered to them and to ensure advisers are qualified appropriately to act in the interests of consumers.

We will need to consider whether the approach taken in Australia might be more suitable for the smaller New Zealand market, what features of the Australian regime work and which do not. For example the new Australian regime has been heavily criticised by industry for the compliance costs it has imposed. Whether it actually delivers better information or advice to investor consumers also remains to be seen.

Intuitively, introducing in New Zealand restrictions as to who is able to provide financial advice or brokering services, could have a number of benefits, including:

• Raising the standard of financial intermediaries and as a result the standard of financial advice provided; and
• Aligning New Zealand regulation with accepted 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:

• Dispute about whether such a regime does, in reality, raise the quality of financial intermediaries and investment advice; and
• Whether it would simply cut down the number of market participants, pushing up the price of advice and brokering services for investors.

These, and other arguments, will 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. As I have already said, I am keen to involve the industry in our policy development process and I am looking at ways of doing this.

Conclusion

The changes I have discussed today, and potential future changes, create challenges for the financial services industry. I see these challenges as beneficial to the industry. In the near term, higher standards for disclosure and better enforcement will help strengthen public confidence in investment advisers and brokers generally. As for broader change, I look forward to working with you in creating the regulatory conditions that deliver a higher standard of advice, that encourage investor participation and ultimately lead to greater prosperity for New Zealanders.

These are speech notes from an address Commerce Minister Margaret Wilson gave to the Wellington branch of the Financial Planners and Insurance Advisers Association on 22 June 2004.

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