Taskforce calls for even tougher regulation on financial advisers

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The Capital Markets Development Taskforce fears the new Financial Advisers Act will fail unless it is accompanied by additional stringent measures to govern the ethical conduct and description of financial advisers. 

Tuesday, August 4th 2009, 4:19AM 2 Comments

"If incorrectly implemented, it could produce an occupational licensing regime which ultimately benefits service providers rather than retail investors," says the taskforce, headed by Wellington-based merchant banker Rob Cameron, in its second report, issued yesterday.

The new report makes a slew of new recommendations aimed at numerous big capital markets issues besides the perceived integrity of the New Zealand managed funds and financial advisory industry, but dwells on the D-minus showing in the Morningstar report published in May that ranked 16 countries' fund management industries.

"In at least some parts of our market, we have a long way to go to come into line with international best practice and thus cultivate preferable outcomes for investors," the report says, recommending "more principle-based regulation focussed on ethical standards for issuers and advisers".

 The report made a number of major recommendations relating to the funds management and advisory industries, including:

• Impose a fiduciary duty on financial advisers which requires avoidance of conflict of interest, independence from outside influences such as commissions, and competence to advise;
• Regulate the words "independent adviser" to protect the meaning of independence;
• Develop standardised, short form documents that clearly explain risks to relatively unsophisticated investors;
• More standardised fee disclosure;
• Make regulators able to be proactive, biased to the investor's perspective, and to penalise;
• Overhaul New Zealand's settlements and payments system, in part to make capital-raising less intimidating and expensive for New Zealand small businesses, many of whom struggle to get beyond capitalisation by family and friends;
• In upgrading the settlements system, explore also whether New Zealand has new global financial services opportunities in a post-credit crunch world
• Develop a New Zealand-based derivatives market;

Perhaps most radically, the report recommends five principles be applied to investment advisers:

1. The fair treatment of customers is central to the corporte culture of firms;
2. Consumers are given effective, clear and accurate information about products and advisers;
3. If customers receive advice, it takes account of their circumstances;
4. Products perform as firms have led customers to expect, and service of an acceptable standard;
5. Consumers do not face unreasonable barriers if they want to change product, switch provider, submit a claim or make a complaint.

Download full report here

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