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Labour: Support for regulation change

Labour is likely to support the bill that will repeal the Financial Advisers Act, at least through first reading, if its fate ends up in the party's hands.

Wednesday, March 15th 2017, 6:00AM 5 Comments

by Susan Edmunds

Labour’s spokesman for Consumer Affairs, Michael Wood, said there was little chance that the Financial Services Legislation Amendment Bill would make it through Parliament before the election.

The bill replaces the Financial Advisers Act with new financial advice provisions within the Financial Markets Conduct Act.

It aims to simplify the regulation governing the sector but concerns have been raised about the designations it introduces, and its conflict of interest provisions.

But if National does not win the election, the fate of the bill may rest in Labour’s hands.

Spokesman for regulatory reform David Parker said the Financial Advisers Act in its current form had been a “cock-up” from Simon Power.

“Regulation of financial advice went right over the top.”

He pointed to the sale of state-owned power companies as an example of where it had gone wrong.

“So many broking houses were conflicted because they had a role as sub-brokers, there was nowhere someone in the street could go to get information.”

Parker said he suspected Labour would support the bill, at least until its first reading.

He was supportive of the idea of reducing unhelpful regulation on financial advice.

Meanwhile, adviser Murray Weatherston has submitted on the bill’s client-first provision.

He said the clause in the bill put into statutory form Cabinet’s decision to extend the client-first duty to all advisers and enshrine it in legislation.

The bill says advisers have a duty to put a client’s interests first.

If they know, or ought reasonably to know, there there is a conflict between the interests of the person to whom advice is being given, and their own interests, or the interests of any other person, “[the adviser] must give priority to [the client’s] interests, including by taking all reasonable steps to ensure that the [adviser’s] own interests or the interests of any other person do not materially influence the advice.”

“I applaud the fact that the duty is expressed so clearly. No-one should have difficulty in understanding the duty as expressed that way. The law is crystal clear,” Weatherston said in his submission.

“I submit that it is critically important that the statute defines what the duty means. It should not be stated as a bald principle and be left to be decided what it actually means elsewhere.

“I am not aware where the ‘client-first duty’ applies in any other statutory setting. I have not been able to discover any case law that has considered what a client-first duty means in practice. The meaning of the duty in the Code of Professional Conduct for Authorised Financial Advisers has never been tested in the Financial Advisers Disputes Committee.”

He said the idea that there should not be a conflict with “any” other person was too broad.

It was also not clear what “doing anything in relation to the giving of advice” would mean.

“I would be very concerned if the adviser in providing some service or services to a client was obliged to determine in all cases whether or not the services they were providing, whether regulated advice or not, were the appropriate services to be providing.

"That logic could be extended to a situation where an adviser declined to provide any advice – could she be second-guessed in hindsight that she should have provided advice? That would be akin to compelling an adviser to provide regulated advice. That does not seem to be right."

David Ireland, chair of the code committee, said he too would submit against the clause.

“Irrespective of your views on whether the standard should be client first or best interests of the client or some alternative formulation of that sort of concept, code standard one [placing clients' interests first] has been fundamentally altered and its application narrowed by the way it has been reflected in the draft legislation.”

Tags: financial advisers Financial Advisers Act Financial Markets Conduct Act

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Comments from our readers

On 15 March 2017 at 7:44 am Murray Weatherston said:
Can I be permitted to alert you to a possible misinterpretation that could come from your penultimate sentence ".....said he too would submit against the clause".
It is now obvious the Code Committee will be opposed to the clause.
But I did not submit against the clause - I submitted strongly for the clause but asked for a couple of tweaks.
My communication skills must be slipping.
Anyone who might be interested to see my full submission only has to ask.

On 15 March 2017 at 8:37 am Brent Sheather said:
There has been an awful lot of dancing around this issue by conflicted experts who pontificate about avoiding conflicts of interest when they themselves actually advocate for the sell side. The dancing is designed to deflect attention from the objective which is doing the right thing for retail investors and thereby devalue the requirement. The truth of the matter is elusive but it is obvious. It is that no adviser can put their clients’ interests first, where that means what a reasonable person would understand that to mean, and at the same time work for a product originator who requires them to put their products first.

Therefore to require individuals who work for vertically integrated organisations to put their clients’ interest first is asking the impossible. To say it is so when it is demonstrably not makes the regulations look duplicitous and the regulators complicit in the scam.
On 15 March 2017 at 10:11 am NormanStacey said:
If there is a statutory obligation on Advisors, it needs be defined in the legislation. To do otherwise would fail "to promote the sound and efficient delivery of financial adviser and broking services, and to encourage public confidence".
Leaving duty to be prescribed by anointed bureaucrats - guidance notes; regulations, or: Committee would damage confidence.
At core, the 'Client first' duty highlights the fissure between Financial Product Representatives promoting their mixed wares, and real Advice.
Change may be worthy. The current Minister seems to have been poorly served by her minions in this confusing & confused draft.
On 15 March 2017 at 1:59 pm dcwhyte said:
Thanks Brent. However poorly expressed, that was the entire point of my 26 January piece "Client first may be too big an ask for biggest players" - not my headline, but for biggest players read vertically integrated organisations. Employees of VIOs are retained to sell the VIOs products, so trying to shoehorn them into a 'client first' rule is a contradiction.

The unintended consequences that MBIE are seeking guidance and input on are evident across the ditch with ASIC now mounting a campaign against the activities of the bank's wealth management units.

As you've pointed out in the past, disclosure doesn't do it. Consumers in Australia claim that they were confused, misled, or didn't fully understand the implications of bank employees recommending the bank's own products. The VIOs claim to have followed approved disclosure procedures.

Who will the courts favour? Take a guess!

MBIE following this same path is simply setting a time-bomb for the industry.

In fact, MBIE with the replacement of AFA/RFA with FA/FAR is not only maintaining the confusion for the consumer, they're making the situation worse.

A train-wreck in the making.
On 15 March 2017 at 2:41 pm Brent Sheather said:
Hi David

Yes a train wreck in the making. Sooner or later there is going to be a class action for bad behaviour. Look forward to being an expert witness for the prosecution and wouldn’t it be funny if the MBIE, the FMA and the Code Committee were all named as co-defendants.

That would obviously take a change of government but change is in the air at the moment around the world and I’m sure Winston/the Greens will take a dim view of the current regulatory environment once the nuances thereof are explained to them. That’s on my agenda.

I think submitting to the MBIE and lobbying the current government is a complete waste of time as, as you pointed out their minds are made up for them by government just as they always have been. Must be very frustrating for some people to have to talk rubbish consistently when they secretly believe otherwise.


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