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Where is the line for 'disrepute', IFA asks

The Institute of Financial Advisers wants more clarity around authorised financial advisers’ obligation not to bring the industry into disrepute.

Friday, April 1st 2016, 6:00AM 12 Comments

by Susan Edmunds

Fred Dodds

Part of the Code of Conduct for AFAs requires advisers not to do anything, or make an omission, that would or would be likely to bring the industry into disrepute.

Advisers who think others have breached this requirement are requested to report it to the Financial Markets Authority (FMA).

Code Committee chairman David Ireland said there was not a set definition of what would be considered bringing the industry into disrepute. It would be decided on a case-by-case basis.

Institute of Financial Advisers chief executive Fred Dodds said many in the industry made public comments, particularly about the regulator, that did not seem to be in good form.

He cited examples of the FMA being described as lacking knowledge, and not trustworthy to critique a financial plan.

“That to me does not do the profession any good and from a consumer reading these comments just adds fuel to the fire of other negative articles about the very, very small percentage of advisers who get us bad press. A consumer reading this would only say to these sorts of comments – 'told you so’.”

But he said the Code note that the requirement did not prevent an AFA commenting in good faith on the business, actions or inactions of another person complicated the issue.

“At first glance, you have 'don’t do it' but if you do the hand on heart, the ‘good faith’ clause comes into play. The Final Exposure Draft of the Code is now available and submissions close on April 14. I will ensure we make a submission on this point.”

Questions were raised after an adviser, Tim Fairbrother, was in court recently on a charge of assault. He was acquitted.

The FMA said if an adviser had a conviction they must disclose it at renewal.

But not all convictions would be material.

“The FMA reserves the right to determine whether any disclosed conviction is relevant to their status as an AFA or not, or indeed whether an adviser’s conviction may bring the industry into disrepute - on a case-by-case basis.”
 

Tags: AFA FMA IFA

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Comments from our readers

On 1 April 2016 at 9:08 am Brent Sheather said:
This really is good stuff from the IFA, masters of irony – they are worried about bringing the industry into disrepute when, almost single handedly, many of their members through their recommendation of finance company debentures devastated their client’s portfolios and brought about the regulation of financial advisors.
On 1 April 2016 at 9:32 am Barry Read said:
The criminal convictions which affect registration as a financial services provider are quite narrow.

Crime involving dishonesty means any of the crimes or offences described in the Crimes Act

(a) sections 100 to 105F:
(b) Part 10, except sections 267 to 272, 298A, and 298B:
(c) the Secret Commissions Act 1910

So it would be fair to think Convictions affecting AFAs would be similar.

Also worth noting Convictions are different from Charges.

If the AFA discloses to the FMA any issues/charges/convictions the decision will ultimately rest with them as the regulator to refer to the FADC if they think it is breach of the Code Standard.

On 1 April 2016 at 11:42 am Ron Flood said:
Brent, I enjoy reading your rants from time to time but must correct you on your latest.
Your comment that the actions of IFA members "devastated their client’s portfolios and brought about the regulation of financial advisors" is utter nonsense.

The regulation process started in 2001 (5yrs before any companies collapsed) to bring New Zealand up to international standards when it came to financial regulation. We were, at that time, way behind our trading partners and seen as an easy target for fraudulent activities.

The collapse of the finance companies from 2006 onward simply added another layer to the standards being proposed and was not the reason for the regulations.

Disclaimer: I am a member of the IFA & NZFAA and advise on risk products only.
On 1 April 2016 at 12:56 pm Pragmatic said:
I know that it's been said before - but for the sake of keeping things accurate - it's important to understand that the majority of finance company investment was direct. Whilst not great; circa $1bn of the circa $10bn of finance company money that was 'lost' was the result of intermediation. I agree with Brent Sheather, that the bulk of the finance company proceeds that came via the advice-industry, was the result of greed &/or ignorance.
On 1 April 2016 at 4:16 pm Brent Sheather said:
Thanks for your comments Ron. We can argue as to whether the finance company debenture debacle hastened the regulation of our industry however you don’t appear to dispute the fact that a disproportionate number of IFA members recommended finance company debentures. This is certainly the conclusion Gareth Morgan arrived at in his book “After The Panic”. It’s discussed in chapter 9 - Independence Day. For example:
• “Roger Moses and Graham Stevens are past presidents and current life members of the Institute of Financial Advisers. They went on to become directors of Reeves Moses Contributory Mortgages (which lost around $20 million of capital) and were directors of Nathan Finance (in receivership).
• Muriel Dunn (Muriel Dunn Financial Services) and Kelvin Syms (Vestar) were two of the highest-profile IFA members of their time. Both sold Bridgecorp, CMF, MFS (which was a related party) and (in Dunn’s case) Five Star, often leaving clients with virtually no other investments.
• Ricky Bennett, Philip Holland, Phillip King and Alison Renfrew have all won awards from the IFA and been put on a pedestal. Bennett sold Bridgecorp and INGs frozen funds; Holland sold Bridgecorp, Canterbury Mortgage Fund and MFS (double brokerage), and charged a fee on top; King, the same; Renfrew sold Bridgecorp and frozen ING.”
So it seems the distinguished IFA alumni had one thing in common – bad advice.

A number of solicitors and accountants around NZ get me to review investment recommendations for their clients. Back when finance company debentures were popular virtually every recommendation I saw by IFA members from Tauranga, Auckland and Wellington, all with pseudo financial planning degrees, allocated 100% of their fixed interest portfolios to finance company debentures. This was completely at variance with best practice not to mention common sense. So much for the training, so much for the skill, so much for their client’s money. Many of these same names had previously lost their client’s money recommending unlisted property trusts in the mid-eighties which coincidentally also paid high fees. Bit of a theme there.

We were so horrified by their behaviour we used to put on our disclosure statement that we were not and had never been members of the IFA and that was well before finance company debentures self-destructed.
On 2 April 2016 at 10:11 am Denis said:
I don't think you can or should define "disrepute". I think it's necessary to keep it broad so that any circumstance (some of which cannot be anticipated) can be tested against the spirit of the code. If the code said "you must not eat bananas", then there will be those that will make banana smoothies and drink them while wearing an "I love bananas" T- shirt. It's a ridiculous example - but it's the kind of thing that goes on once you descend into the pits of legal definition hell.
On 4 April 2016 at 9:27 am LPL said:
Obligation not to bring the industry into disrepute:

Author - Brent Sheather
...when, almost single handedly, many of their members [IFA] through their recommendation of finance company debentures devastated their client’s portfolios ....

I have lost count of the number of times I've read these comments from Brent.

It is my opinion that these comments (especially when repeated again and again and again) bring the whole industry into disrepute. While Brent may point the finger at a particular group it is unfortunate that by making such inflammatory and sweeping comments they actually reflect on everyone working in the industry.

There is a simple rule in business, don't try to profit by discrediting others. If you have a valid and justifiable complaint use the correct channels and address it. Otherwise shut up.
On 5 April 2016 at 11:26 am Dirty Harry said:
@ LPL
+1 and thank you.
On 5 April 2016 at 11:32 am R1 said:
LPL, Is your approach to not bringing the industry into disrepute to not publicise malpractice that occurs/occurred in the industry?? Without the whistle-blowers and on-going reminders of what has gone in the past we are sure to continue to do what is not in the interests of investors. The sad part about this is that few have acknowledged their wrong-doings and still want to play with the broad definition of disrepute so that they can sail as close to the wind as possible when it comes to compliance. The fact that the IFA want to fiddle with the definition brings the industry into disrepute I think. Seems a bit like the Prime Minister saying their is nothing wrong with having tax loopholes in our off-shore trust legislation (particularly with his background in the finance sector) and then wants to focus on NZ citizens only. Presumably he would be happy if NZ citizens use such offshore 'systems' to legally avoid paying NZ tax; perhaps he uses them himself. Legally okay; morally, it brings NZ into disrepute.
On 5 April 2016 at 2:40 pm Pragmatic said:
I want to defend some of Brent's rants by suggesting that every "healthy" industry benefits from being challenged. The alternative is complacency.

Where I have concern, is when a seemingly flippant remark is made publically, when it is unable to be supported by accurate data (for the record; tenuously referring to authors of equally flippant remarks does not constitute a robust argument). Specifically, the majority of finance company debentures were purchased directly by consumer who reacted to clip & call advertising. Whilst there were undoubtedly rouges in the advice dispensing industry, the quantum of their involvement in the finance company debacle was circa 10% of the monies lost. Not a great outcome - granted, although it's also not an indictment on the industry.

Well done to those many financial advisors who researched & refused to support finance companies in any meaningful way... as I'm sure that there was more than one of you
On 7 April 2016 at 12:18 pm Dirty Harry said:
+1 here Pragmatic.
I would love to see commentators such as Brent "challenge" the industry in the way you describe, rather than bringing disrepute to the entire industry with inaccurate sloganized generalizations and personal attacks which are repeated at every opportunity in both publicly viewable industry press, and very public national press.

I place far greater value on the contributions from folks like David White, Ron Flood, Fred Dodds, Mike Naylor and Claire Matthews - people who are both qualified and suitable to comment.
On 8 April 2016 at 8:44 am Brent Sheather said:
Thanks for that Pragmatic. Believe it or not I am interested in improving our industry and getting a better deal for retail investors.

By and large I am not taking new clients as I am very much at capacity. Your figures on finance company debentures intrigue me and others.

Can you provide a reference for your statement that “only 10% of the $10 billion lost on finance company debentures went through financial advisors”. I seem to remember a Government enquiry into the issue a long way back which had numbers but don’t remember the specifics.

Thanks
Brent

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