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Select committee guidance revealed

Reports made public from the Ministry of Business, Innovation and Employment reveal what official guidance was offered to the select committee considering the Financial Services Legislation Amendment Bill.

Monday, August 6th 2018, 6:00AM 19 Comments

by Susan Edmunds

There were 72 written submissions on the bill, and 33 oral submissions.

The committee was told in an initial briefing that there were clear themes to the submissions.

One was concern that there should be more of a distinction between sales and advice, to clarify which consumers were getting.

MBIE said it had consulted on an option that distinguished the two in 2016 but it was “not a preferred option”.

“We were concerned that creating a distinction would exacerbate some of the issues with the current regime, and pose a risk to consumers who might not understand the limited protections when dealing with ‘salespeople’.

“It may also reduce access to advice, as some businesses may choose to only provide ‘sales’ in order to avoid any additional compliance costs.”

The officials told the select committee the same standards would be applied under the bill to anyone offering financial advice, whether they were considering one product or the whole market. They would have to ensure the client understood the nature an scope of the advice.

Some submitters had asked for a ban on commissions, the briefing notes.

“This option was included in MBIE’s Regulatory Impact Statement on the Review of the FA Act but was not a preferred option as it would reduce access to financial advice for those who are unwilling or unable to pay for it. Rather than banning or restriction commissions, the bill aims to address the impact of these incentives through universal duties of conduct and client care, and improved disclosure requirements.”

The officials acknowledged concerns about the nomianted representative designation – someone operating in the industry under the umbrella of a financial advice provider, with less regulatory and compliance responsibility than a financial adviser.

Some submitters wanted those representatives to have more liability.

In its departmental report to the committee, MBIE said it recommended the bill clarify the policy intent   – that a nominated representative can only give financial advice that is tightly controlled by the processes and systems of the licensed financial advice provider, who is ultimately accountable for the advice.

The report noted the NZ Bankers’ Association recommendation for mandatory reference checks for providers hiring representatives.

“We are concerned that this proposal could be manipulated by coercive employers. Moreover, we note the proposals have not been subject to public consultation and could have broader implications for the industry. The bill provides adequate incentives on businesses to have robust recruitment processes.”

The officials also acknowledged concern about increasing compliance cost under the new FSLAB regime.

“The bill seeks to reduce compliance costs on smaller businesses through entity-licensing, which will allow multiple advisers to operate under a single licence. It is intended that the costs of licensing will be proportionate to the size of the financial advice provider, and the nature of the advice they provide. Details such as fees and levies and the licensing process will be designed with this in mind.”

The departmental report noted concerns around the wording of the conflict of interest duty, which requires advisers to give priority to client interests.

“A number of submitters have requested drafting changes to clarify that the duty would not require people who give advice to recommend products outside of their own suite of products.

"These submitters are seeking clarity that the duty is limited by the nature and scope of the advice and does not, for example, require a person who gives financial advice at a bank to send a customer to a competitor if another bank has a product that would serve the client’s interests better (e.g. a lower interest rate on a loan)."

But the officials did not think this was required.

"The duty to give priority to client’s interests is about conflict-management, and does not require advisers or providers to consider every product on the market.”

The next step is the second reading of FSLAB, which is up to the leader of the house.

In part two: What they thought of submissions

Tags: FSLAB

« Fund manager research: Where to from here?Simplicity in the black after two years »

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Comments from our readers

On 6 August 2018 at 9:45 am Brent Sheather said:
I have always believed that the MBIE are under resourced in terms of staff and conflicted as regards vertically integrated organisations. Again this “revelation” as to the guidance, if you can call it that, offered to the Select Committee, suggests that either the MBIE don't understand the impact of VIO's choosing to maximise profits by only recommending their own high cost products or are totally conflicted. Either way retail investors lose again thanks to the MBIE's lack of insight. The Minister with responsibility for the MBIE should have a good clean out of staff in my view.

Take a look at the MBIE's statement that "the duty to give priority to clients' interests is about conflict management and does not require advisors or providers to consider every product on the market". This is absolute rubbish as all the research shows that conflict management does not work. In fact Senator Elizabeth Warren wrote about this very subject on Bloomberg last week. She said "Your lawyer can’t take money from your opponent to give you bad legal advice. If you’re on Medicare, your doctor can’t take kickbacks from drug manufacturers for prescribing their drugs. But, under current law, your broker-dealer can receive monetary rewards and other perks for recommending certain investment products, even if those products aren’t in your best interest.

Each year, Americans lose billions of dollars because of brokers who are looking out for their own financial interests instead of their clients’."

A link to the full story can be found below:
https://www.bloomberg.com/view/articles/2018-08-03/worried-about-wall-street-conflicts-the-sec-isn-t
On 6 August 2018 at 11:13 am R1 said:
So it looks like MBIE will recommend and this Government will legalise what is considered unacceptable behaviour by the Royal Commission across the ditch. No wonder we don't need a Royal Commission according to MBIE and FMA.

Completely scurrilous and where is the main stream media on this critical issue for average Kiwis?
On 6 August 2018 at 12:53 pm dcwhyte said:
"Disagree that entity-based licensing will necessarily lead to poor outcomes for NZ consumers. It is unclear that this is the cause of problems seen in Australia. p21 MBIE Report to the Select Committee.
Have a look through the list of witnesses and, with the exception of aggrieved consumers, count how many are NOT from an Australian licensed entity.
The "duties of conduct" and the "strong enforcement regime" were also present in FSRA 2004 and subsequent amendments - but it will be different here - yeah right. The FMA's recent report on QFE misselling suggests otherwise.
On 6 August 2018 at 1:05 pm Graeme Tee said:
I liked the bit that the MBIE had consulted on an option to distinguish between sales and advice in 2016 but it was "not a preferred option". Preferred by whom one would have to ask? The banks and other VIO's would be the obvious answer. It would not be a preferred option to consumers if they knew!

Disclosure of conflicts of interest don't negate the conflict, they just make it legal. The whole consultation process was a sham if this was decided by the MBIE in 2016.
On 6 August 2018 at 2:10 pm Eyeinthesky said:
“We were concerned that creating a distinction would exacerbate some of the issues with the current regime, and pose a risk to consumers who might not understand the limited protections when dealing with ‘salespeople’.

The government is saying that it is better that people DON'T know they have limited protections when dealing with sales people.

We need a Royal Commission of Enquiry here. Lets rat out the thieves and crooks here as well.
On 6 August 2018 at 3:36 pm Ron Flood said:
I find it very disturbing that MBIE brushed off the concerns around advice & sales.

They state " it had consulted on an option that distinguished the two in 2016 but it was “not a preferred option”.

It certainly was a concern during the 2018 consultation, as evidenced in the submissions on the bill.

Are we to accept that earlier submissons from 2016 trump those made in 2018 and that MBIE has learnt nothing from the resent Royal Commission in Australia?

It is time for the 'tail to stop wagging the dog' and for the Minister to take ownership of this very important issue.`
On 6 August 2018 at 3:55 pm Barry Read said:
Surely Sale V Advice is defined. If the FMCA post-FSLAB defines Financial Advice. Then anything else where a retail client purchases a financial product is a sale?

I don't see the issue. Then it is up to the regulators to ensure that Financial Service Providers selling products aren't dressing up sales as advice, because advice is defined they would be in breach by not being licensed or of misleading behavior or fair trading.


On 6 August 2018 at 8:29 pm Ron Flood said:
Good luck with that Barry. The regulator is under staffed, under resourced and will be relying on 'whistle blowers' to highlight any bad behavior.

I can, from personal experience of laying a complaint, tell you that anyone acting outside the law will get a slap with a wet bus ticket.
On 6 August 2018 at 9:11 pm dcwhyte said:
The debate and discussion here and elsewhere suggest that the issue is far from clear to the industry.

And if there's this level of uncertainty and disagreement among experienced industry figures, what chance does the consumer have of understanding the impact of being subjected to product salespeople masquerading as Advisers?
On 7 August 2018 at 9:05 am Dirty Harry said:
“We were concerned that creating a distinction would exacerbate some of the issues with the current regime, and pose a risk to consumers who might not understand the limited protections when dealing with ‘salespeople’"

Aha! See, I thought the problem was that under the current regime, the issue is some people who think they have had advice that serves their best interests have in fact been sold a product that doesn’t. Or worse, they don’t know the difference.

Right now, everyone is an adviser. And every interaction involves ‘giving advice’. So what we’re going to do now is require everybody to be an adviser, and call every interaction ‘advice’.

There. We fixed it.

And: "They would have to ensure the client understood the nature and scope of the advice."

Oh yeah. That's miles better. It's sooo much easier and "less confusing" [lol] for the average punter to "understand the nature and scope" of the information they are comparing from an NR and an actual Adviser when it looks the same, sounds the same and is called the same thing.

NO! It's two different things! It must be, because "giving priority to client's interests" means different things to different people, doesn’t it?
On 7 August 2018 at 9:56 am Barry Read said:
Ron and David

So based on your responses the issue is not the definition in the legislation the issues are enforcement and consumer understanding of sales v advice.

So the answer isn't add more legislation, the answer is better enforcement and consumer capability around identifying sales v advice. Which I would argue will be easier under the proposed regime. Are you licensed for advice or not and the standards of advice are common to all.

I think the consumer capability is a tough one to solve with legislation but should be raised with the commission of financial capability and the industry associations.

Enforcement by the regulator to your one complaint isn't a measure of it not working. But I think the new legislation will make identification of those who are licensed to advise and those who are not easier for the regulator. As the FMA states, enforcement is based on risk, so not all alleged breaches will be investigated. Like the fact not all speeding drivers get caught.

Lets move on and see what the code proposes for competence and what the costs of licensing will be and stop purporting an issue that doesn't need more legislation.
On 7 August 2018 at 10:41 am Paul Flood said:
Barry - you wrote: "Enforcement by the regulator to your one complaint isn't a measure of it not working."

With respect, if you knew the details of the complaint and the (poor) outcome, you might instead conclude that the current system is fundamentally broken.
On 7 August 2018 at 11:21 am Pragmatic said:
I remain concerned at MBIE's / the Minister's myopic view (ignorance by another name) of the industry and what is occurring globally, and strongly encourage them to start looking at global trends and considering the impact of these upon the NZ industry.

All of the above blogs make good points, including Brent Sheather's reminder of what is occurring over the Tasman and further afield.
On 7 August 2018 at 1:55 pm Murray Weatherston said:
The Bill should be renamed "MBIEs grand scheme for financial advice regulation."
The FAAReview team was formed within MBIE
They wrote the Issues paper
They considered all the submissions.
They then wrote the options paper
They considered all the options
They advised the govt what should be in the Exposure draft
I suspect they had a big hand in the Exposure Draft
They considered all the submissions from everyone else and determined go/no go
They advised Govt on the changes to ED to make the Bill introduced to the House
They serviced the Select Committee
They considered all the submissions
They wrote a report to Select Committee telling them which ones they should agree with and which ones they shouldn't agree with
They made their own submissions on additional changes to the Bill.

I haven't done an exact count of the fate of outside submissions to the Select committee, but the impression I had when I skimmed their 100 page plus Departmental Report which set out submissions clause by clause effectively was that they disagreed with submitters about 75% of the time, noted the submission (without recommending change) about 20% of the time, and agreed perhaps 5% of the time.

A visitor from Mars might well have asked - how come Officials with little experience in the area got it right almost all of the time, while submitters with loads of experience got it wrong most of the time?

I am sure a good cartoonist would answer with a cartoon showing the Officials with the whistle in their lips self-refereeing the game.
On 7 August 2018 at 3:23 pm R1 said:
Well said Murray.

I would also add to your comment re the cartoon; they would all be wearing bank logos on their polo shirts as key sponsors of this team and game.
On 7 August 2018 at 5:26 pm Pragmatic said:
...and the irony is that large financial institutions have signaled their departure from the wealth management industry...
On 8 August 2018 at 8:52 am R1 said:
Pragmatic - how do you maximise the value of your wealth management business and get yourself a bonus for doing so?
On 8 August 2018 at 11:16 am Graeme Tee said:
Murray & R1, I'm not sure it’s a laughing matter, more of a constitutional hijacking by a government bureaucracy. When I was taught how the law was made, in particular the Select Committee process, I don't recall government departments having such a big say in policy. Select committee was the forum for the public to have input directly to Parliament on new law. At least that's what I thought at the time but obviously times have changed.

So, how has a government bureaucracy been able to take over the law making process to such a degree? Members of Parliament should take notice. Where is Sir Geoffrey Palmer when you need him!
On 8 August 2018 at 2:07 pm Murray Weatherston said:
@Graeme Tee
I certainly didn't mean to suggest it was a laughing matter. I deeply share your concern about the Select Committee process.

When the original legislation was being passed in 2008, there was an activist Minister supported by a joined-at-the-hip Shadow spokesman. Of course both moved on within 3 years to other things -Dalziel to Christchurch mayor and Power to Westpac.

We have had 4 ministers since then - none of whom has left a footprint in the ground - I can recall hardly any significant speech or comment from any of them with any personal philosophical input about the need for regulation or its design. Rather, they have all appeared to deliver the lines given to them by their respective Sir Humphreys.

There appears to have been zilch political input from the politicians.

The Select Committee process seemed perfunctory - 1 day in Wellington and 1 day in Auckland. Only 5 MPs turned up in Auckland - one didn't say a thing all day; another left mid afternoon. Still the box of "opportunity for personal presentations" was well and truly ticked.

PS I've done a rough count myself of fate of submissions in the MBIE Departmental Report; of the roughly 300 individual points, only 6% were agreed with. The other 94% were almost evenly split between Disagree and Noted (no further action.} David Whyte's assessment of the process seems to have been amply vindicated.

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