Regulatory loophole lets rogue financial operators to stay in business

A regulatory loophole is allowing rogue financial service providers, such as mortgage brokers and financial advisers, to stay in business.

Monday, October 10th 2011, 2:12PM 12 Comments

That's because banks, fund managers and others who deal with such advisers and broker don't have to check whether those providers are registered or not.

This appears to be a gaping hole in the Financial Service Providers (Registration and Dispute Resolution) Act 2008 which makes any financial adviser who operates without registering liable for a prison sentence of up to 12 months and/or a fine of up to $100,000.
An Auckland mortgage broker discovered he had lost clients to two unregistered brokers and complained to the Companies Office, which keeps the register of both registered financial advisers (RFAs) and authorised financial advisers (AFAs).

The Companies Office replied: "There is no penalty in the Act for lenders (or anyone else) to use unregistered financial service providers."

The Financial Markets Authority says it "expects that any financial services provider will have procedures in place to ensure that any distributor of their products is properly registered."

However, this loophole is evidently allowing some rogue operators to continue in business because some lenders are prepared to deal with them, no questions asked, and are able to do so without fear of penalty.

The major banks and major broker groups say they do require registration of all brokers.

ANZ National Bank, for example, says checking a broker is registered is an integral part of its broker accreditation process.

Brendon Smith, general manager of mortgage broker aggregator Allied Kiwi says providing such information to lenders is "par for the course." Mortgage Link managing director Rod Templeton and Geoff Bawden at Prosper Group say the same.

Nevertheless, the Auckland broker whose business has been affected regards the situation as "a big loophole. If lenders had a legal obligation to check their introducers were registered, that would solve the problem in one hit," he says.

"Don't you feel that it makes a mockery of the whole drawn-out, costly, tedious process we've been through over the past few years?"

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Comments from our readers

On 11 October 2011 at 11:16 am Jeff Royle said:
The Regulations did not go far enough in my opinion, all Mortgage and Insurance Advisers should have to complete the new National Cert. This would give a positve message to the public that they are dealing with someone who can prove they know what they are talking about. There is no register of who has passed. Banks too are using questionable tactics, Westpac last week rewrote a deal I had brokered to them at the local Branch when the client took in their residency papers. I did all the work, the Branch manager stole the deal, nothing I can do about it. Legislation will never stop the rogue, it can however make product providers liable if they deal with unauthorised distribution, but hey, this is New Zealand!
On 11 October 2011 at 12:28 pm Paul Carrick said:
Hey jeff,
Dont use that bank again..
On 11 October 2011 at 1:05 pm Mortgage Broker since 1999 said:
All this is now getting to be a bit of a joke.

I was working towards AFA and was 80% finished and now i am putting it all on hold.

I was told that it would be better for my business and we would all have to eventually get to this level.

Over the last few months I have had more clients come to me from an AFA than my clients leave me to go to an AFA.
The reason being better service and advice on Cat 2 products.

Also i know of a new Cat 2 product adviser who started business last month and has done no structured training at all, and he had no problem getting PI cover and has signed up agency’s with 7 life cover companies, I don’t understand how this can be done in this new environment ????

We have been told that there has been very few complaints that have come through to this point for existing advisers, so this is obviously not where the problem is.

My concern is the new advisers starting, as apparently from my experience they can get PI cover and agency agreements with out any formal basic training.
Regulation has cost millions to set up and they seem to have missed this huge loophole……????
This would be so simple to fix…..if you haven’t achieved the correct training points then no PI cover which means no life agency agreements which means no broker….. Pretty dam simple.

Half the problem is the PI cover providers and Insurance Providers as well as banks not coming to the party in this new environment because of the extra costs involved.

One last thing….How can a MikePerro adviser who is not an AFA sell Kiwisaver products, apparently this is the case???
Apparently the reason for this is they are a big group and can be monitored.
I personally belong to NZ’s largest aggregation group (at least 5 times larger than the above)so we should have the same rights???

We are monitored as this is what the FMA shold be doing or maybe PAA, NZMBA, FPIA, etc should be used for.

Time and time again I see banks selling short-form life products which are not always the best for clients.
I also see the y generation self sourcing life cover online because they don’t want to spend time with a Professional Adviser,
I personally feel this is a recipe for disaster when it comes to claim time.

Why aren’t all the loan Sharks Registered as this was always where the problem was in the first place

Something not quite right here.

On 11 October 2011 at 1:22 pm Craig Pope said:
Hi Jeff, I actually have it written in my documents that if the customer goes direct to the bank (or another broker) during the process, then I reserve the right to charge a fee of up to $x amount. My clients have no problem with it and it helps get some commitment from them.
On 11 October 2011 at 4:03 pm Jeff Royle said:
Hi Paul. done! Craig, I have too, enforcement is another thing.
MB. The ongoing joke is if you look at the Broker listings on this site they list qualifications as membership to NZMBA!
On 13 October 2011 at 3:27 am Sarah said:
Craig, what if they just don't like your service and decide to go elsewhere, isn't that their right?
On 13 October 2011 at 11:14 am Amused said:
Good point Sarah. The customer ultimately has the final say in who they have act for them on their mortgage. This goes without saying. There would obviously have to be a reason why a customer stopped dealing with a particular mortgage broker but in Jeff's case it was the bank poaching the client which has happened to all of us I am sure at least some point in time.
On 13 October 2011 at 2:11 pm Mark Jory said:
1st thing, if a bank screwed me over as happened to Jeff, why would you continue to deal with them?

I would firstly take this up with my BDM at the Bank to see if they will pay me the commission I earned.

If that was unsuccessful, I would tell every current and future client exactly what that bank did as justification of why I will never work with that Bank again. You might lose some clients, but most will continue to take your advice if you are good enough.

I believe Mike Pero advisers can give advice on KiwiSaver as a product, but not the specifics of risk profiling etc, and then offer the Fisher Funds product as an option. Something like that, or perhaps it is because they are a QFE. I agree it is a fine line between giving advice on a category 1 product or not. Mike Pero should probably clarify the situation if they are NOT doing anything wrong, as I've read this complaint a few times on this site.

Regarding the two unregistered brokers still opearting, surely you would have advised the FMA of who these individuals are, and surely the FMA will be in the process of prosecuting them.

I'm aware of some ex-insurance brokers who still have agencies with life companies, are not placing any new business and are not giving financial advice, but are still receiving renewal commissions!

If they are not registered they should not be earning income from the industry as they are unable to offer financial advice to their clients. Again this may not be illegal under the FAA, but the life companies should not be paying commission to Advisers who no longer give financial advice and are not registered.

Life Insurers should make these unregistered advisers sell their agencies, buy their agency off them, or simply cancel their agency.

It's possible this is also occurring with some ex-Advisers who have category 1 products in their client base.

On 13 October 2011 at 4:15 pm Craig Pope said:
To Sarah and amused, I've never really had to enforce the clause but have it there incase I do alot of work on a pre approval and clients play Dutch auctions with the likes of kiwibank. I value the time and effort I put in for clients and testimonials on my website back this up. You can't tell me no matter how good your service was that you never got given the runaround by a potential client. Happy to clarify further to people who have the courage to put their full name on the forum posts.
On 14 October 2011 at 11:22 am Andy said:
As much as a farce I think this is, i cannot see any reason why an adviser would NOT get registered. It is a little expensive initially, but not overly onerous! The unregistered ones would be the cowboys in the industry - I dare the FMA to highlight that point!

oops - can open, worms everywhere.....
On 14 October 2011 at 5:54 pm Carol said:
So a financial adviser who operates without registering gets a prison sentence of up to 12 months and/or a fine of up to $100,000. But you can crash an ship onto a reef and cause a massive disaster and only get 12 months and $10,000 fine. Bargain.
On 17 October 2011 at 5:12 pm Carol said:
A quick addition to my comment above. I'm not suggesting for a minute that it is OK for advisers not to get registered, or course it isn't, and the life companies must know who they are and should stop paying them their renewals. I just think that being careless and crashing a ship is worse, and rather bonkers that the fine is insignificant in comparison.
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