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What is regulation's purpose?

Questions are being asked about what the Financial Advisers Act is trying to achieve.

Friday, November 7th 2014, 6:00AM 7 Comments

by Susan Edmunds

The Act is to be reviewed next year but adviser Murray Weatherston said the industry deserved more clarity about what its objective was.

“Before you decide on regulation you need to decide what the problem is, then what are the possible solutions to that problem. Only if Government intervention is the way to do it do you go for Government intervention… what actually is the problem that we’re trying to fix here?”

He said, given the paucity of complaints that went to external disputes resolution schemes about investment advice, and the few that had gone to the FADC, there did not seem to be a large problem that needed to be tackled.

Smaller changes could have had better consequences for consumers, he said, such as requiring independent custodians to avoid future David Ross-style situations.

“When I read MBIE’s paper [the baseline review of advisers] the thing that sticks in my mind most is the idea that advisers will bridge the information asymmetry between fund managers putting a product out and investors buying it.”

If that was the problem, Weatherston said, the solution should be to improve the financial literacy of consumers, not subject advisers to heavy regulation. “If I had to guess I would say regulation has added $25 million of cost to the financial advice industry every year. There’s only one group of people that will pay that cost and that’s the people always forgotten, the people these reforms are supposed to help.”

Raising financial literacy standards was not advisers’ role, he said.  “I could say I’ll devote half my time to making the population more financially literate but the only trouble is I can’t capitalise on the benefit of that. Everyone who didn’t do it would be competing for the people who then go out and buy because they’re more literate.”

Claire Matthews, of Massey University, agreed the FAA had been a kneejerk reaction to a small number of cases where people who dealt with advisers had lost money in finance company collapses. “It was an overreaction. On that basis we shouldn’t have cars on the road because some people have accidents and get killed. There were issues but they were a small minority. It was a ‘sledgehammer to crack a walnut’ approach.”

Weatherston said he did not expect any concessions in the FAA review. “They will not back down. They will always want to be pressing ahead, doing more things.”

« Review a starting point for FAA discussionIFA working on pro-bono offering »

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Comments from our readers

On 7 November 2014 at 7:36 am alan clarke said:
I have written 2 books and my new one - published August 2014 - has had excellent reviews

"The Great NZ Work, Money, & Retirement Puzzle"

It is ticking along quite well and the publishers think it will sell 2,000 to 3,000 copies

There is even waiting lists for it in various libraries around NZ

But even though the FMA and the Commission for Financial Literacy cannot help but be aware of my new book, they have shown no interest in it at all

So are they really interested in anything that will add to financial literacy ?

It does not seem so

Sad but I feel quite good as I put a massive effort into putting my 26 years of experience in this industry onto paper, and feel it will help some of the mums-and- dads out there

We are getting lots of interest from the 55 to 65 age group

A couple of enlightened AFA’s are using it with their clients too

nb. you don’t make much money writing books, it is more of a vocation
On 7 November 2014 at 8:03 am alan clarke said:
I should add I would be happy to help the Commission for Financial Literacy or the FMA with my book in any way that would help Joe public

Even supply the book in bulk

at cost + 10%

or cost + $1

Or help them write their version of it

Or whatever else helps Joe public
On 7 November 2014 at 10:13 am Headmaster said:
I entirely agree with Murray's conclusions. I have often been at a loss to comprehend the logic of the current regulatory regime, and of the benefits which it purports to provide.

In my opinion the regime has taken away more than it has given. It has reduced the public's access to financial advice, it has imposed substantial cost burdens on the supply side of the industry and it has set adviser against adviser by dividing them into classes.

It is regrettably a true statement that the advisory industry was in better shape before the commencement of the current regime, notwithstanding the relatively few who gave inferior advice during those times.

There is of course no greater indictment of the current regime than the continuing incidence of poor advice and fraudulent practice by a few, since that was ostensibly what the regime was created to address in the first place.
On 7 November 2014 at 10:18 am btw said:
I'm sorry, but people are very misinformed if they think NZ is "heavily regulated". Most of the industry (so-called RFAs or QFEs) aren't even licensed. Neither are brokers or custodians. All of these businesses are licensed in AU and elsewhere - but not here. NZ Advisers can still contract out of huge parts of the regime by convincing clients to waive their rights - ala David Ross. Some advisers (who shall remain nameless) are actually becoming less regulated from 1 December 2014. Those that are licensed have had many obligations watered down by the legislation - not increased (as noted in the baseline review – AU, UK and USA have all enhanced or codified fiduciary standards for their advisors – NZ has not). Worse, unlicensed advisors can now claim a semblance of regulatory endorsement by pointing clients in the direction of the FSPA register - clients don't know it doesn't mean anything.
Much of this weakness is due to lobbying from the industry - and until the industry stops being part of the problem we are, rightly, never going to get the trust of the public. The public aren't as stupid as some would like to believe - that's why our capital markets are struggling, and our real estate markets booming. The constant resistance by many in the industry to properly regulated markets is only going to compound the situation. Worse, it actually results in bad regulation rather than good, as the lobbying and resistance leads to compromise, so nothing effective is achieved. The FAA is a perfect example.
On 7 November 2014 at 4:22 pm Pragmatic said:
Sadly BTW is correct - the NZ market is possibly one of the more unregulated jurisdictions for financial services.
The reality is that many industry participants simply don't know what they don't know, and the consumer ends up being sold yesterdays best idea - or worse still - ill researched & considered investments.
Until the financial services industry "gets this" then we're destined to be dictated to by a Regulator
On 9 November 2014 at 8:38 pm w k said:
@alan clarke: i've attended a cflri conference (2-day event), on the first day, it's all about statistics, statistics and more statistics, and no solution. furthermore some says got to understand the ethnic groups "culture" (in relation to money).
then, after several speakers have spoken, i told one of the speakers i haven't heard any mention of cashflow management. came the reply "people may get scared of that word" or "don't understand", something to that effect. btw, she came from an organisation that is teaching money management.
well, i think i've got their message, and of course, i didn't bother to attend the 2nd day.
On 10 November 2014 at 11:51 am Pragmatic said:
Back to Murrays comments: if you don't know where you're heading you'll never get there....

I would have thought that clarity around the objectives of the "rules-makers" is the first obvious step to announce to ensure that the industry complies.... If nothing else, it'll make the enforcement of the rules much easier

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