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Join Up, Join Up: The latest adviser regulation twist

Thursday, July 10th 2008, 7:28AM 15 Comments

by Philip Macalister

I’ve commented before about the tortuous process adviser regulation has gone through and now it appears to have gotten to the mad stage.Discussion on how the sector should be regulated has gone on for years. There have been task forces, discussion papers, U-turns – the lot. The road has been as windy as crossing the Southern Alps, rather than being straight, sharp and direct. It appears the government is pretty hell-bent on getting this through Parliament before the election. While there was some thought this would be a piece of legislation which lingers, the fact that the select committee hearing it sat on a Monday (very unusual) and reports officials are advancing plans behind the scene, a pre-election passing looks highly probable. That’s fine, but as we report today it appears there is a whole new model being promoted which hasn’t had much discussion in the industry, particularly by the people who will be regulated – advisers. Under this accredited institution model advisers would have to belong to a product provider who would be responsible for regulating advisers who sell its wares. I’m struggling to see the benefits for consumers with this model. It seems that institutions are making a land grab for distribution; that they could shield poor quality advisers from scrutiny; and that they risk brand damage if an adviser goes off the rails. I met someone yesterday who told a story about an adviser putting all of a couple’s retirement savings (around $150,000) into one finance company. Under this regulatory model that company could be the accredited institution, and one would question (especially if it was someone like Bridgecorp) what sort of investor protection there would be. This new development, is major for advisers. I would like to hear your views on it, how much if anything you know about it, whether there has been any consultation and what you think the regulatory model should look like. Use the comments box below to leave your thoughts or email them to
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Comments from our readers

On 10 July 2008 at 8:59 am Barry said:
The question of Institutional Registration/Corporate membership to a regulator has always been in discussion since the Financial Adviser Bill came about. The problem was always where was the line drawn on who is captured as a "Financial Adviser". A draft or two back seemed to suggest that anyone talking to a client about a "Security" could be captured and no detail of institutional registration was given. That scared the large institutions thinking about how many staff may be required to jump higher hurdles than they do currently. Things have moved on since then and the definiton of who is an Adviser has changed. The problem is I don't think the submissions have caught up with the implications of this change. I also do not see any reason why an institution should not be able to take responsibility for ensuring that their tied/employed advisers meet the industry standards set by the regulator. That could infact reduce the costs to IFA's becuase then the regulator potentially has less administrative work to do at an individual adviser level. Also the regulator would have to be assured that the Instituion is capable of Recruiting/Educating/Training advisers to the correct level. Not all product providers would be able to do that. And if they were found to be in breach of the rules then you could always shut the whole operation down like they do in the UK until they fix the issue.
On 10 July 2008 at 9:32 am Norman Stacey said:
You may be being unfair in your mild criticism of the proposal for blessed institutions to regulate advisers who peddle their wares. Changes for consumers might include:
- a licence to operate could eliminate the need for pesky commissions;
- avoid 'churning' of under-performing products, ahead of the fund being frozen or the insto going broke;
- uniform service and office hours, as currently provided by banks (and better control of advisers dress, grooming and personal habits);
- carving that confusing choice. Six 'default providers' should suffice;
- protection of the Kiwi market from low-cost international investments;
- improved corporate profitability and expanded union membership would strengthen the democratic process thereby facilitating participation through supporting parliamentary parties.
There is an institutional precedent. The Weber Bros Circus 'Shokarn' Acrobats of the Orient, Auckland North, 23 July 2008 - 24 August 2008, licences its peddlers and is responsible for the standard of its show.
Thank goodness for Sam Stubbs of Tower.
On 10 July 2008 at 11:01 am John Williams said:
Perhaps NZ should now take "investment insurance" seriously, enabling investors to get a second opinion from an (independent?) insurer as to the stability of the firm (a) making the investment recommendation, and (b) the firm in which the investment is made.
On 10 July 2008 at 1:38 pm alan milton said:
The detail is sketchy but my initial reaction is that the idea is barmy.
Which institution prevails when several are being used?
What happens when an adviser is not using NZ unlisted managed funds at all? What happens when an adviser uses SX listed securities only and/or overseas managed funds?
Will a listed investment trust eg Infratil, be regarded as an institution?
All the talk seems to be about product when we all know asset allocation is an important part of risk management. Who has the correct view on that? Would ten advisers ( or their institution)assessing the risk profile of a client come to the same conclusions on asset allocation?

I think this idea just illustrates how little our current political regime knows about the real world.

I'm with Sam Stubbs and Norman Stacey
On 10 July 2008 at 4:14 pm Denis said:
(the future)

Mum or Dad investor - "I have lost my life savings because Cowboy Finance - who you recommended to me - has fallen over. What do you have to say?"

Adviser - " Well, blimey, it was an Accredited Institution so I thought it was OK. You must be gutted. Sorry! "

"Hello Government, you gave them Accredited Institution status. What do you have to say?"

Govt - "You'll never guess what they did - they told us they were solvent and it turns out they weren't! So we closed them down. That'll teach them. Your money? Liquidators might be able to give you an answer. "

"Hello Liquidators. What do you have to say?"

Cowboy Finance liquidators - "We might be able to pay you back 20c in the $ in about 10 years time, you never know. But no promises! You might have to take a class action of some sort against the former directors of Cowboy Finance to get the rest of your money"

"Hello former Director of Cowboy Finance. What do you have to say?"

Former Director of Cowboy Finance - "sorry, can't hear you - the reception here in St Tropez is shocking. Bzzzzt kSSCCCHHH!"
On 11 July 2008 at 1:40 am Peanut H said:
Accredited institutions will well and truly make the financial advisory industry a very sick joke. Advisers will become little more than a sales force for the insurance and investment industry. The result will be the extinction of independent Advisers and more tolls placed on the investors. A case of Auntie Helen and Uncle AMP know best. Play it again Sam.
On 11 July 2008 at 4:56 pm Nigel Tate said:
I find it interesting that Vance the chair of the ISI is stating that this is the view of it's members and yet one of it's members (assuming Tower still is) is coming out saying something totally different.

I would not at all be keen to see Accredited Institutions able to control the advisers out there, even as the suggestion is that they (the controlled advisers) could only sell product from that institution.

Congratulations to Sam for his stance, it is high time we advisers/planners were released from the institutional shackles to do what is best for the client without restriction as long as we do place the "Client First".

We will need to take responsibility for the advice we give and as long as we work within our area/s of competence this should not be an issue, however demonstrating our competencies will create the need for measures and wait for it, possibly better and ongoing training. Bring it on!!
On 11 July 2008 at 7:00 pm Charles LLoyd said:

This is my last year in this wonderful business of "selling" life insurance and other financial products, yes I am actually a salesman, I "sell" to my customers, seems the whole of my 20 years in business I have heard the people in the industry refer to themselves as any thing but a salesperson. All kinds of flowery descriptions they have given themselves. Having a degree from some university has not stopped hundreds of CFPs helping their clients lose over one billion dollars in the past 12 months, all you need to have in this business is integrity and a desire to help your customers, some thing you can not learn at UNI, after 20 years I fear there are more cowboys in the industry than at any other time. Happy Selling!

On 12 July 2008 at 9:10 am Chris said:
The circle will be complete. We will all be tied agents again and my memory and Mr Arkinstall's should remember recent cases of top flying tied agents (supervised by "the company") still managed to be completely unethical and spent time at Her Majesty's pleasure when discovered. Insurance Companies want their products sold and seldom question "the sale process". Their champions are those who sell the most of their products and these are the models who are held up as examples of what we all should do. The ramifications of this development would ensure the fox is in charge of the hen coop.
On 12 July 2008 at 1:34 pm Graeme Lindsay said:
For those of us with a few grey hairs, or maybe very little hair, it's not difficult to remember the names of the bad guys referred to above. Vance will certainly remember one of his stars from his prior life, resident in the Naki, who routinely won his sales competitions, until he was caught out! So much for institutional control. All insurers had their bad guys and very few would believe those of us who warned them. This situation existed back in the days before "Financial Planning" as a vocation even existed, and continues to exist today! But, it's not restricted to the life insurance world - there are bad guys in the savings and investment world too. So, I agree with the comments expressed above.

BUT, I suggest that we cannot all sit back and go Tut Tut, wring our hands and gnash our teeth! In 1975, many insurance people got in behind the opposition and worked to unseat the Rowling-led Labour government! Let's do it again! We should all now consider lobbying every politician, our own electorate member, any locally domiciled list member and anyone else who may be in position to defeat this absurd notion!

The ISI are clearly making a play to regain the control that they lost when we reared our entrepreneurial instincts in the early eighties. If their proposition gains traction with officials and the minister, we would be turning the clock back 25 years.

Let's not let that happen!
On 16 July 2008 at 2:27 pm Mike Shaw said:
Surely the ideal model is regulation based at the adviser level with advisers joining an appropriate professional body for regulation and competency purposes and the Securities Commission setting rules, enforcing them and investigating complaints. This model would result in increased investor protection and would greatly assist the building of trust in New Zealand's advisory industry.

Aligning advisers with product manufacturers doesn't make sense. It won't prevent poor advice, it won't stop institutions from introducing expensive non performing products, it will allow advisers to hide behind the legal muscle of institutions, it will effectively give control to overseas institutions who own most of New Zealand's financial institutions. It will result in overseas models being forced on the New Zealand investing public. This is already happening with a number of New Zealand investment institutions bringing in a ban on telegraphic transfers for New Zealand investors wishing to invest in Australia.

If you support "accredited institutions" you will be allowing the New Zealand "accredited institutions" to set rules which will result in them achieving a dominant market position, which will result in poor product choice for investors, expensive investment products and investment products producing poor long term returns.

Regulation at the adviser level will keep the institutions on their toes, assist with maintaining competition, drive down costs for the investor and assure good performing long term investment vehicles for the investing public of New Zealand to choose from.

Lastly, regulations have so far done a very good job of allowing the investing public to have transparency and disclosure at the adviser level. The greatest service the Committee could do for investors now is to bring greater transferency to the investment process by simply making it compulsory for each New Zealand investment institution to declare the gross value of each unit then simply showing all deductions following by showing the net unit price. The Committee should make this compulsory disclosure each time a new unit price has been set. As an adviser I am sick and tired of seeing underlying returns of 10%-15% gross being turned into 5%-8% net after all types of hidden costs are deducted.
On 17 July 2008 at 10:15 am David W said:
All valid points raised, but I would urge some caution here. The Minister's 21st April letter does not define "institution" - banks are certainly cited as an example - but there are a number of entities which "operate as financial advsers because of the nature of their business" (para 18).

The announcement of Camelot's formation, for example, is an entity which will operate as a financial advisory entity, so why could Camelot not apply for institutional accreditation? Alter the word 'employee' in the Minster's letter to 'retainee', and the prospect of adviser companies achieving accredited status, and all the attendant accountabilities and responsibilities, dilutes the fear of product providers taking us back to the dark ages of the tied agency system. Until the term 'institution' is precisely defined, much of the comment can only be speculative.

Nevertheless, in a market economy, it's hard to justify the suggestion that product providers should not be allowed to sell their own products, under a rigorously enforced (and standardised) disclosure regime.

Furthermore, there should be no regulatory barrier to advisers forming legally constituted trading entities which are formed for proper commercial purposes - with the same disclosure requirements.

I suspect that product provider concerns regarding the formation of dealer groups underpins a number of the recommended measures and structures currently being promulgated. Australian compensation structures were not distorted by FSRA 2004 which facilitated adviser group formation by corporate licensing/accreditation. However, rest assured that the Directors of the licensed corporate entities became extremely sensitive about recruitment practices. DKN in Australia is a prime example of this regulatory structure working effectively. An adviser sold investments outside the Dealer Group's approved product list; as the investment product provider collapsed, the accredited entity (DKN and the Directors) were held directly responsible. The adviser had no assets with which to compensate clients and PI didn't cover this situation. Remedy was achieved by appropriate and valid commercial measures which would have been beyond the individual adviser to arrange.

Considering the most appropriate structure, again I'd recommend some carerful consideration. In another location, the failure of the APB structure to provide either credibility to the adviser sector, or to provide adequate (if any) investor/consumer protection is well documented. Regulatees tend to 'capture' the regulatory process where APBs are created, and the independence of the supervisory body is problematic. The original UK model promulgated this structure and promptly saw a series of scandals from the Equitable Life debacle (ongoing), to the personal pensions mis-selling scandal, Robert Maxwell pilfering the Employee Pension Fund, Barlow Clowes gilts scam etc., all under the noses of the regulatory authority, and all, where applicable, authorised by the relevant Approved Professional Body. Now, it's easy to accuse the Brits of being slack or corrupt, but the NZ industry is structured in much the same fashion, and following the same path is likely to produce the same results.

As uncomfortable as it may appear initially, the single (external) regulator structure, appointed by our elected representatives, and independent of industry commercial pressures, remains the best hope for creating a structure which has sustainable credibility in the eyes of the consumer. The consumers' dollars are, after all, the main source of revenue for the industry, and any regulatory regime surely must be received positively by these stakeholders.
On 17 July 2008 at 4:24 pm Wayne Ross said:
It appears that the NZ Government is not content with limiting themselves to destroying value for investors directly via their efforts with Telecom, Auckland Airport, Foreign Investment Fund tax, etc. Now it appears they have bowed to industry political lobbying to water down the impact of the Financial Advisers Bill currently before the Finance & Expenditure Committee.

The most recent proposals to narrow the definition of a financial adviser and allow “accredited institutions” will directly result in poorer outcomes for investors.

To suggest that it is ok for anyone to offer unregulated financial advice as long as they don’t do it for a living is plainly absurd. Investors have a right to expect proper advice every time. The notion of “advice as an ancillary service” however infrequent is a flawed concept. You are either taking account of an investor’s goals, objectives and constraints or you are not.

It is seemingly based on the false premise that good financial advice can be equated with the product you are flogging at the time and highlights a complete lack of understanding of what adds value. Just ask any of those investors left holding impaired finance company debentures, $1 down apartments or guaranteed income structured products. Or wait a couple of years and ask those currently being bombarded with the benefits of cash PIE’s or the ability to transfer your KiwiSaver fund.

The latest suggestion that all advisers would have to be aligned with a product manufacturer is beyond belief and surely a case of being lost in translation. At least we hope so as it is difficult to follow the official’s twists and turns in this drawn out affair and we have been “surprised” before.

The reality is that investors struggle to separate product selling from advice and good advisers from bad (until it is too late). To be fair it is a rod that the industry has created for its own backs. Far easier to gather funds and make money using “sausage factory” financial planning and product pushing than to educate investors on the value of seeking out and paying for good advice. The new PIE regime and KiwiSaver just reinforces this behaviour.

Earlier drafts of the Bill had promise but somehow what constitutes good advice and the principle of focusing on what is being said rather than who is saying it has been lost in the charge to “rebuild investor confidence.”

Assuming all are equally effective, administration by the Securities Commission, APB’s, ICANZ or Law Society makes no difference to the end investor. Surely what is important is that anyone providing financial advice as defined in the Bill should be accountable to the same rules and offer the same minimum capabilities.

In a perfect world there would be no requirement for legislation but extraordinary times call for extraordinary measures and given the current state of the industry we need a catalyst for change. Regulation will undoubtedly result in added costs for investors so the real question is whether it will add any value to them. A pointer here might be the real benefits enjoyed with the introduction of mandatory disclosure statements which forced dubious business practices to change overnight. This legislation is supposed to be about protecting investors not creating loopholes for advisers or institutions to wriggle out of their obligations to consider a client’s individual circumstances. This will do nothing to rebuild investor confidence let alone deliver value.
On 20 July 2008 at 2:54 pm Red Dog The pirate Guy said:
Interesting news for Vestar clients this week,with the C & M payout now predicted by the receivers to be 8 cents in the dollar.

Even more interesting to reflect that on Radio NZ News dated 1 Dec 2007 it was reported that Perpetual Trustees chief executive Louise Edwards said that she was "optimistic that investors will get a substantial amount of their money back."

Under the concept of a normal trusteeship,a trustee who has charge of assets which lose 92% of the value,would be litigated against.

May I suggest that NZ's legal minds need to turn their minds as to how the trustee deeds relating to the care of funds issued under such circumstances need to be tailored to give the public a little more protection.

What is the point in having a "Clayton's " trusteeship ?

I hope that having the likes of Dover Samuels as an MP involved as an investor in the murky Vestar world can assist in bringing some of these people to account for their woeful advice to investors.

Yesterday's Courier Mail stated that MFS Australia had set aside 23 cents in the dollar for creditors,including MFS Pacific Finance.
MFS Executive Director Chris Scott said ''If the creditors reject it,it's off to the knackery.'"
He warned that the group could not survive unless it reached a deal with creditors,and he warned that they would receive only 13.9 cents in the dollar if the company was wound up.

While reading one of Vestar's portfolio reports in respect of the six months ended 30 September 2007,published on 18 October 2007,I was intrigued to note the following preamble....................

"There have been a number of events worying investors in recent months,predominantly bank 'runs' overseas and finance companies here at home.The good news is that financial conditions seem to be settling down somewhat:even though we're still feeling some of its aftershocks,with the odd small finance company having to close its doors,the worst of the panics had gone away.

[by that stage we had N F 2000[small] Provincial[large and one which Vestar appeared to have a substantial exposure to]Western Bay[small]Bridgecorp[Large and one which Vestar appeared to have a substantial exposure to]Property Finance Ltd[small but Vestar is the only planner I have seen supporting this group].

So the template Vestar fixed interest client is sitting there in Spring 2007 with three investments in receivership{though I acknowledge PF did extract itself in due course},and Vestar is informing him to feel comfortable.{Not that some could do much about it as Vestar's template investment term was 2 years,apart from the "keep the boss happy "30 day MFS Pacific Finance stuff}.

We all know the story after that.

The preamble to the reports for the six months ended 31 March 2008,dated 14 April 2008 states "whilst it is certainly not pleasant to see personal investments temporarily go down in value,it is part and parcel of investing in anything other than risk free assets.One can take comfort in the knowledge that whilst the going may currently be tough,if selected carefully an investment porfolio eventually will rise again on the crest of the next market "high tide."

I have always had the opinion that the sadly missed late great Billy T James,and Aussie resident John Clarke aka Fred Dagg, were NZ's best comedians of all time.

The author of these reports might just squeeze into third place.
On 24 July 2008 at 4:01 pm Hamish said:
ummmm whats the point of this bill apart from trying to eradicate independent advisors?
Commenting is closed



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