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Regulation - Panacea of protection?

Thursday, September 3rd 2009, 12:51PM 9 Comments

by Philip Macalister

ASB fessed up this week that one of its investment advisers has been involved in an elaborate fraud involving millions of dollars. There’s not a huge amount of information about what actually happened but the question I ask is this: Would adviser regulation have stopped this happening? I think the answer is no. Despite all the claims about how regulation will make the industry a better place and give investors a greater degree of confidence in the advice sector, it won’t stop this sort of thing happening. If someone really wants to rip people off they will find a way to do it, no matter what sort of regulations are in place. What the story does is show what a great advantage bank advisers have over most of the IFA market. First up, the banks in New Zealand have been good at training and providing professional development for their advisers. In many cases the banks have arguably been the leaders here. Secondly, investors have a high degree of confidence using a bank adviser, as the companies have the resources behind them to make things good (or at least better) when things go wrong. While no figures are available with this case, ASB has indicated it had made good where possible. Considering it is a multi-million dollar rip-off, that is probably a not insignificant amount of coin. This has also been shown at the ANZ over the selling of the ING CDO funds. And the third thing is that if investors are dissatisfied with the bank advice, they have recourse to the Banking Ombudsman. The ombudsman is an independent body who can rule on complaints and make recommendations, where appropriate, that the bank put things right. This is a huge advantage for bank advisers. I sometimes wonder if investors thought about this, they wouldn’t be that interested in going to an IFA. While the Institute of Financial Advisers does have a complaints scheme, it is of no benefit to customers as it doesn’t make rulings whereby the investor receives any payout. Now it appears the institute is the only winner as it makes cost awards against advisers. In one of the more recent cases, and one you will hear more about, an adviser was cleared of some charges but still had costs awarded against her. Many aspects of regulation are positive. But it’s not the panacea some are painting and it won’t stop fraudulent activities.
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Comments from our readers

On 3 September 2009 at 3:15 pm Bill said:
I'd like to complement you on your observations of bank based advisers. While I recognise that not every bank based adviser has the background or experience (yet) to have earned a trusted adviser status, as a Certified Planner / Commerce Degree holder with 10 years experience in financial markets globally, I certainly think of myself (and many bank colleagues) as meeting the highest of industry standards in a qualifications respect. Add in my salaried status in my own organisations situation, and no ties to fund managers, and I could argue the advice we provide is also as independent as anyone’s in the market.
On 3 September 2009 at 4:25 pm alan said:
I thought Anthony Quirk's article about financial services on page 43 of the NBR of 21st August well worth reading. It it, he says
"There is a recognition by some in the industry that dranatic changes need to be made to restore investor confidence but a 'head in the sand' approach is still too prevalent.
" An illustration of the latter was the recent IFA conference where too many sessions seemed to be motivational sessions to help advisers sell more financial products, rather than tackling the reality of poor current perception of the industry"
I think a comment like this from an intelligent commentator on the financial services sector needs to be taken in.
On 3 September 2009 at 10:08 pm Independent Observer said:
I heard a presenter at the recent IFA conference suggest that the industry needs to start standing up for itself - in the absence of anyone else, and a fragmented assortment of industry bodies.

I look forward to seeing evidence of his support for the good guys in the industry, which hopefully over time will assist in restoring some investor confidence (sadly there are some investors who have left the industry for good), and will protect us from the current blend of industry-apathy or self-interest.
On 4 September 2009 at 7:38 am Haydn said:
First off, I agree that regulation is in no way a panacea and will not stop bubbles and the subsequent bursts. In my view, Jo (or Jill) Bloggs with their overdrafts and cheap credit cards are as responsible for the recession as anyone else; you dont continue to borry what you cant pay back. And I agree that people will try and rip other people off until the end of time, and find ways to do so. But financial services should be regulated without a doubt, if nothing else than to see lines drawn in the sand and ensure that there are consequences for those that overstep them. Of course, any industry watchdog needs a bite, and heavy sentences are required for those who do rip people off - the likes of Bryers need to be made an example of and dealt with quickly, not allowed to continue in business with a smug smile on their faces.
On 4 September 2009 at 8:41 am Wayne Ross said:
Phil you seem to be advocating that investors should be happy there will be an ambulance waiting at the bottom of the cliff to at least get them onto life support. I would have thought they would be more concerned about not being led over the edge in the first place.

Clearly regulation will never protect from fraud. Nor will it change the current product sales mentality of so many in our industry. In fact the impending changes to the QFE regs will undoubtably provide the perfect environment for institutions to continue doing what they do best - looking out for themselves and their shareholders.
On 4 September 2009 at 2:40 pm paul said:
In response to Bill's comment regarding being employed by a bank, I am not certain that banks have "no ties to fund managers." Westpac owns BT, ASB manages it's own products and has ties to Soveriegn, ASB Securities and Aegis, ANZ have a half share in ING and own National Bank and BNZ has connections to AXA. Almost all banks now have their own PIE cash products and the bulk of client funds they manage would be held in unsecured deposit with the company. While Bill may not use any particular fund manager's products, it would be very hard to argue that banks are sources of independant advice. As Bill states, it probably is as independent as everyone else's, that is not independent at all....
On 4 September 2009 at 3:12 pm Mike said:
What almost perfect timing this issue with an ASB adviser. It totally highlights the issue with regulation. It does NOT protect the consumer - look lesewhere around the world and you will see that is the case.
So key now should be bold and clear statements that this is not consumer protection regulation but rather industry regulation which means that the person selling the product has some degree of knowledge and governance but "buyer, do still beware"!
As for the news about QFEs I feel the hand of the banks and institutions here and if the regulators have any sense and courage they will do their utmost to create a level playing field after all selling a financial instrument is the same whetjer as an IFA or a tied agent is it not?
On 4 September 2009 at 4:18 pm Independent Observer said:
Question: Why do banks want to play in the financial advisory space? Any aspirations to retain / nurture deeper customer relationships have long since been lost with growing consumer distrust over the banking fraternity, and their inability to effectively data-mine their databases. I'm sure as the cost of sourcing offshore capital increases, banks will actively promote their term investments (funding base) ahead of promoting the use of managed funds etc.

Is the financial advisory space the best use of bank capital, and has the experiment delivered the highest ROIC? My thinking is probably not, and that banks may not have a long term commitment to the future of our part of the industry... for thought...
On 9 September 2009 at 5:23 pm An ex-bank adviser said:
Phil I agree that regulation would not stop this type of behaviour, but I would have to disagree with the perception that Bank's are "better" than the independant adviser force. Granted no-one is truly independant, but my arguement and experience is that a bank will present an offering that works for it's stakeholders - sorry their shareholders. Yes the particular bank I worked for had an exceptional offer, but that was gradually wittled down to an offering that consisted of 70% internal fund managers (perhaps from a cost perspective) and the client suffered. So yes there are better protection mechanisms for bank clients currently, but wouldn't we see this regulation as affording the humble client the same level of protection (the Sec Com) regardless of where they approach? To be honest Bank's provide an ideal training ground for learning the trade, but to truly learn the craft and espouse your belief in helping the client I believe you need to be out in the fresh clean air of freedom!.
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Westpac 4.59 3.09 3.29 3.39
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