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MED dismisses risk-based fee model

Levies and fees "inevitably have an impact on how the market structures itself" and the role of the Ministry of Economic Development (MED) is to minimise the subsequent market distortions.

Tuesday, June 21st 2011, 7:30AM 3 Comments

by Benn Bathgate

Speaking at an MED forum in Auckland yesterday on the discussion document outlining fee and levy options to fund the FMA, MED acting manager, corporate law and governance, Jivan Grewal, said whatever options were adopted, "I don't think this won't have any distortionary impacts."

Grewal said the aim of the discussion document, and the forums, was for the MED to outline its thinking and to listen to the industry for "arguments we haven't thought about."

During the hour long session he outlined the MED thinking on a number of the fee/levy options and responded to questions from the 20-strong audience.

He said the suggestion of a risk-based model to determine how the FMA was financed, with those involved in riskier and more regulatory demanding practices paying a greater share, had been rejected for a number of reasons.

"Risk based models are hard to determine, he said, adding a risk based model had to be reviewed as risks change, creating different distortions.

Also such a model would be "unnecessarily complex" for the small New Zealand market.

He said another factor that had complicated the MEDs thinking was calculating to what extent market participants would benefit from the regulation.

"Identifying beneficiaries is quite complex" he said, and that as with a risk based model, the results were likely to change over time.

Another pitfall Gerwal said the MED was trying to avoid was not examining the issues raised from all perspectives.

"We have to look generally, not through a sector-wise lens."

The divided opinion in the room on the different options was best highlighted when the discussion turned to the option of a tiered FAA levy that would see AFAs pay $680 against RFAs $140.

Gerwal said the theory was that such an option would level the playing field between the QFE adviser and the sole adviser, however it was also conceded that higher fees for AFAs could force them into the arms of QFEs, a move that would reduce consumer choice.

This was one of the many issues Gerwal said caused the MED to be "grappling with how to minimise distortions."

The MED is holding two further forums to discuss the funding options on July 12/13 in Wellington and Auckland respectively, and the closing date for written submissions in Friday July 8, 2011.

Once the consultation process is finalised the MED will put its proposals to Cabinet then, according to Gerwal, "ministers have to decide what works best for the industry."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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Comments from our readers

On 21 June 2011 at 10:47 am regan said:
Scariest quote I have seen in a while:
"ministers have to decide what works best for the industry." Like that will work out well (hasn't so far - the first fincos fell over about 5 years ago now).

The debate should not be about who in the industry pays what, but why the advisers should cop the bulk of the cost at all.
On 21 June 2011 at 4:17 pm Giles Thorman said:
It is great to see that this is all about as clear as mud, so nothing much has changed. This whole process has been been made excrutiating by the ever changing rules and what is required of us all and when. Just last week there was a blog from Nigel Tate talking about MED fee's to fund the FMA at $1,715 for AFA's and $1,140 for RFA's. Now a week later we have Jivan Grewal from the MED talking about fee's of $680 for AFA's and $140 for RFA's; this is also apparantly to fund the FMA. Either this means we are in for two levies or else we have two people coming up with completely different figures from the same document. I have got to the stage where I will pay virtually whatever levy they want, just leave me alone to get on with my business before I go broke from being unable to do any business. I am not sure the lunatics have taken over the asylum just yet, but it is begining to look that way.
On 22 June 2011 at 9:43 am w k said:
Why is it that advisors have to disclose fees to client in clearly worded disclosure statement before any work is done otherwise risk facing hefty punishment, whilst the authority can make all advisors comply with fuzzy regulations, then bill advisors at "yet to be decided" fees later? Any one enlighten me on this one? A word from the authority would be great.
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