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[Opinion] The future of advice is at risk

In my 30-odd years covering this financial services I don't think there has ever been a more important time for the future than right now.

Monday, April 23rd 2018, 7:43AM 7 Comments

by Philip Macalister

It feels like we are at a real crossroad which will determine the future of particularly the smaller, independent (not that we are allowed to use that word) financial advice firms.

We have a Parliamentary Select Committee considering the Financial Services Legislation Amendment Bill (FSLAB) and the Code Working Group (CWG) is working on a new set of rules all advisers will have to follow.

On our shores it's easy to see the level of concern by the number of stories and comments being made on Good Returns. There are a group of advisers who understand the implications of FSLAB and CWG and are working to get a workable solution.

Unfortunately the two associations, IFA and PAA, are pretty quiet on the changes. While they are doing some work behind the scenes they are vocally, championing what they are doing for advisers. 

We should give thanks to the Australian government and its Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This enquiry couldn't have come at a better time.

In its first two weeks of hearings the flawed vertically integrated marketing model used by banks and big companies like AMP have been thrown into sharp relief.

Many in Australia said an enquiry wasn't needed. They have been surprised by what has been uncovered so far and have now done a u-turn.

This weekend we are hearing the same thing in New Zealand from people like the new Reserve Bank governor Adrian Orr, the Minister of Commerce Kris Faafoi and even the FMA. I'm not necessarily calling for a similar enquiry, but it is very hard to believe that these predominately Australian-owned organisations don't have some of the same issues as their parent companies across the Tasman.

The clear message which really needs to get through to members of the Select Committee reviewing FSLAB is that the new act, needs to address the issue of sales versus advice, and the threats that VIOs potentially present to consumers.

As the minister, Kris Faafoi, said on Good Returns TV all these changes are about protecting consumers.

One other change that is absolutely essential is that the minister must change the composition of the CWG. It has no practicing financial advisers, it is dominated by VIO representatives and there is no one of coal face experience in mortgage broking of advising on life insurance.

Formal complaints have been made to the minister and he must act. Before the CWG starts considering the submissions it is currently collecting.

Tags: Code Working Group FSLAB Opinion

« [Opinion] Four simple steps to a new code[OPINION] What is the future for AMP? »

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Comments from our readers

On 23 April 2018 at 9:37 am dcwhyte said:
Having worked for multi-national financial services corporation for over a decade, I am sceptical of the statements made regarding differences in culture between Head Office and wholly-owned subsidiaries.

VIOs represent a valid source of financial service for consumers, but they should come clean on the functions they undertake. Nothing at all wrong with marketing, recommending and selling your own products - but don't try and dress this up as advice.

VIOs are not in the same business as Financial Advisers and including these entities under the same heading will confuse consumers.
On 23 April 2018 at 9:52 am retired blogger said:
Totally agree with Phil

And I have filed a complaint

But there is another problem

The whole situation smells of people working with the regulatory circles - MP’s, MBIE and & FMA – currying favour with the BEOTs, hoping to advance their careers by eventually joining them

Is the composition of the CWG another example of this?

We need a stand down rule for 2 to 3 years where they may not jump from gamekeeper to fox

Putting the interests of Mum and Dad Kiwis first is both laudable and desirable

A 2 to 3 year stand down rule will contribute a lot to making this happen

Oh and thanks to the Ozzies for their Royal Commission, their timing is excellent
On 23 April 2018 at 2:41 pm AndyB said:
The problem with having a standdown period is that it would be near impossible for the gamekeeper to hire anyone without at least acknowledging the 'restraint of trade' such a stand-down would create and having to pay appropriately.

There is little chance of the regulators meeting market rates, let alone paying above them to compensate for the stand down.

But that is the exact problem... the quality of people at the regulators.... I don't have to go to far to find someone completely underwhelmed by the nature of the questions they have had by the FMA or RBNZ. Hire better people.. get better questions... results in better oversight.
On 23 April 2018 at 4:45 pm Brent Sheather said:
Yes good work Philip and many thanks for providing a platform for advisors to discuss these issues.

AndyB, the FT reported a couple of years ago that a number of countries in Europe, including from memory the UK, have implemented stand-down periods for regulators joining institutions which they regulate. I don’t remember the countries but I am pretty sure a number of countries in Europe have done that and there has been some discussion of the need to do it in the US as well.

FMA staff seem to have a knowledge of the law but frequently little knowledge of what “doing the right thing” looks like. In many cases they are helpful and pleasant but it’s outcomes that are important. A couple of friends are trustees of major pension funds and silly questions from FMA lawyers is a topic that keeps recurring.

As far as the FMA directors are concerned there is a trade-off between knowledge of the industry and being conflicted but for my money I think we would get better regulation from un-conflicted directors with no knowledge of the industry rather than the current situation.

Really the FMA needs to continually ask itself “would you invest your money in products which you deem as acceptable to retail investors?” When I worked in the pulp and paper industry we were told that Russian paper mills had to take water down-stream from where they released water after it had been used. The same rationale could apply to regulators and bankers – they should be forced to have their retirement savings invested with the highest cost product they sell/deem fair. That might change behaviour.

On 23 April 2018 at 4:49 pm Ron Flood said:
If the Reserve Bank, MBIE or FMA believe there are no issues with these institutions in New Zealand, they need to think again.

We consistently see clients insurance policies being churned by banks. In the past month we have had a client cancel their life and trauma cover under the threat of not getting their mortgage approved if they didn't.In the past such a demand was softened by the offer of a discounted interest rate for the first 12months but in this case it wasn't.

Not only is the cover more expensive, but the client is now not covered in the event of death "as the direct or indirect result of their involvement in an illegal or unlawful act, whether they are convicted or not".
Taken literally, this could be killed in a motor vehicle accident (as the driver) whilst speeding, on the evidence of other drivers. Another could be driving with excess blood alcohol.
The clients existing cover would pay a claim in both cases.

Another case this month involves a client who works in a very high risk occupation. When the client called to cancel their existing cover and told me which bank (the same bank as the previous example) he was insuring with, I expressed my surprise that they would offer cover and arranged to visit and view the paperwork.
His occupation had been incorrectly entered as 'clerical with minimum manual duties'. He had disclosed his correct occupation at the time.
This seems to suggest some Bank employees in New Zealand will use similar tactics, as those identified by the Australian Royal Commission, to achieve the sales targets imposed on them by their employers.
Today, I spoke with an industry participant who told me they had similar examples of the same behavior.

Not a problem in New Zealand, yeah right.
On 23 April 2018 at 8:51 pm w k said:
i found this clip quite interesting.
On 24 April 2018 at 8:59 am AFA Muggins said:
If a Enquiry happened in New Zealand, like in Australia, the degree of corruption that is rampant would be exposed, from the VIOs through to Government.

The lobbying, employment secondments, hidden agendas and vested interests would become exposed for all to see.

Bring it on.

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