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Don't give professional bodies regulatory role: Committee

The committee that administers authorised financial advisers’ code of conduct does not want professional bodies playing a more active role in regulation and licensing in the sector.

Monday, February 15th 2016, 6:00AM 6 Comments

by Susan Edmunds

In a submission on the Ministry of Business, Innovation and Employment options paper on the Financial Advisers Act, the Code Committee said having a framework that allowed professional bodies to set their own rules, without an independent disciplinary process or regulatory overlay, risked undermining the regime’s objective of improving consumer confidence.

“Ill-informed or aggrieved sections of the public will view separate segments of the profession regulating their own with a high degree of scepticism, exposing the regime to the complaint of looking after its own. We believe the outcome would be negative for both financial advisers and consumers alike,” the submission said.

It said even allowing professional bodies to have input into the licensing process would be problematic.

“The Code Committee firmly supports the concept of professional industry bodies assisting members with compliance, CPD, and best practice, and acknowledges the positive work existing bodies have been doing in this space in recent years, but does not see a formal place for those bodies in the legislation to directly influence either the Code or the licensing process”

Another concern as the number of professional bodies in the sector, it said.

Other aspects of the options paper were received more favourably, though.

The committee’s submission said it supported moving the requirement to act in clients’ interests first into legislation and locking in a statutory principles-based competency obligation.

It was supportive of the idea of one code of conduct applying to all financial advisers.

“The biggest constraint on the effectiveness of the Code under the current law is its lack of universal application… The ability of the Code to meet the statutory objective of promoting public confidence in the professionalism of financial advisers has been hamstrung as a consequence.”

Committee chairman David Ireland said people needed to realise that the code that would apply under new legislation could be quite different from the current code.

“It doesn’t stand still. Under the new regime it could mean expanding or adjusting the code to cater for a wider range of financial advisers.”

Ireland was supportive of the proposal to license entities rather than individual advisers. He said it was the only way to allow for roboadvice in New Zealand.

“And the downside with individual licensing when you are removing the category one and two designations is the risk that’s going to create a huge number of individual-type authorisations. How do you manage that?"

But he said any future licensing would not necessarily be the same as the current system for AFAs and could be adjusted to suit. “It will need to be very streamlined, there’s going to be a lot of them.”

Ireland said the overall consultation process with MBIE had been well managed so far.

He said it was positive that MBIE had recognised that accessibility of advice was an issue. “The future regime need to be structured minimize the extent to which regulation is adding to that problem.”

Tags: Code Committee financial advisers Financial Advisers Act MoBIE

« Time to tackle issue of advice for less wealthyLVR restrictions to be reviewed »

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Comments from our readers

On 16 February 2016 at 1:53 am henry Filth said:
“Ill-informed or aggrieved sections of the public will view separate segments of the profession regulating their own with a high degree of scepticism. . . "

As will well-informed and UN-aggrieved sections of the public.

This industry is too important to be allowed to go the way of the real estate industry in public perception.
On 16 February 2016 at 11:05 am Brent Sheather said:
One step forward one step back from the Code Committee. Obviously professional bodies should have no role in the regulation and licencing of financial advisors. But how on earth could the Code Committee “support the concept of industry bodies assisting members with best practice”? Indeed does the Code Committee know what best practice looks like? A few years back one of their members went on public record advocating “bad practice” in respect of fixed interest portfolios when he said “interest rates are too low, leave all your money on short term deposit and wait for higher rates”. Incidentally any bond fund manager advocating this radical strategy, whether it worked or not, would have been fired and would never work in the industry again because it was high risk.

I don’t know about other industry bodies but members of the IFA for example have a long track record of bad practice - notably as regards finance company debentures but also involving non-diversified equity portfolios. Furthermore a member of that industry body, employed as an expert witness, told a court a few years back that best practice in respect of fixed interest portfolios was to have one third of the portfolio in finance company debentures. I don’t think so.

One obvious way of squaring this circle is to assume that best practice is being defined as what’s best for the advisor not the advised.

Brent Sheather
On 17 February 2016 at 12:20 pm doomben said:
"he said “interest rates are too low, leave all your money on short term deposit and wait for higher rates”. Incidentally any bond fund manager advocating this radical strategy, whether it worked or not, would have been fired and would never work in the industry again because it was high risk."

I know what you are saying, but I do find it amusing that orthodox financial theory thinks that using short term deposits can be "high risk" that should lead to being fired.

Really shows the gap between the way clients and the industry thinks.
On 19 February 2016 at 11:26 am Dirty Harry said:
We need to organize a nice little get together to celebrate the upcoming 10th anniversary of Brent repeatedly slagging off the IFA and its members over the finance company thing. I'll bring the rope.
On 20 February 2016 at 8:26 pm Mike Naylor said:
Its obviously too soon for professional bodies to be totally in charge of regulation. However the ultimate aim of all FA regulation has to be to create a 'profession'. One key aspect of this is a trustable professional body which deals with 95% of regulation issues. So regulation needs to allow this to come in eventually.
As a starter step membership of a registered 'professional body' should be made compulsory. Note this has to be a 'professional' body not a member benefit society. Because membership is required then that body's disciplinary committee will have clout, and debates about rules will be dealt with seriously. Like the Law Society.
As this body proves itself, then MBIE and the Code Committee can slowly delegate powers to it. The public will slowly start to trust it. Its a chicken & egg situation, the public can't trust FA as a group until they are professional and the govt can't let FA's can't act as a professional group until they are trusted.
On 22 February 2016 at 8:13 am Brent Sheather said:
Dirty Harry you are too kind but facts are facts and Gareth Morgan did a far better job than me in his book, After The Panic. What’s more he names names. Get yourself a copy, you never know you might even get a mention.
Brent Sheather

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