Hon LIANNE DALZIEL (Minister of Commerce) Link to this
I move, That the Financial Advisers Bill be now read a second time. I would like to begin by thanking the Finance and Expenditure Committee, in particular Charles Chauvel, the chairperson of that committee, and Simon Power, the lead member for the National Party. I also thank all of the officials for the work they have done. We now have a bill in this House that will accomplish its objective of encouraging the sound and efficient delivery of financial advice, which should boost confidence in the use of such advice.
A number of comments have been made in the last few weeks—and, indeed, seconds—suggesting that the Government should slow the passage of this bill, primarily because of the extent of the changes the committee has made. However, I have personally made the effort to speak to, or meet with, as many of those people as I possibly could, and I am confident that we now have a way forward with this bill. I thank the industry for sharing its expertise with me in order to help us get this right. As I said to the industry, I did not want to lose the 6 months that a delay beyond the election would entail, because those 6 months can be put to very good use.
That being said, I have taken on board the concerns expressed by those who fear that we may not have picked up everything. Given that a lot of the detail of the new structure will be included in regulations, I have decided to establish a working group that will encompass representatives of the industry, the Ministry of Economic Development, and the Securities Commission to provide a feedback loop as we go forward.
The committee has recommended changes to the bill that, first, focus on financial products, in contrast to financial decisions, as was originally proposed in the bill; second, adopt a tiered approach to the authorisation of financial advisers that will provide two tiers of advisers, category 1 and category 2, based on the complexity of the products they advise on, and enable the adoption of a qualifying financial entity model, which will ensure there is appropriate regulatory coverage of advisers within these institutions while minimising the compliance costs that would otherwise be associated without that model in place; and, third, ensure that the bill provides clear and appropriate exemptions from the definition of a financial adviser.
The most fundamental of these changes is the adoption of what the committee has termed a tiered approach to regulation. The risk-based approach will see more complex advice, such as advice on derivatives, portfolio investment entity products, and other complex securities or financial planning services, subject to greater regulatory control than advice on simple products. These category 1 advisers will need to be individually authorised by the Securities Commission to provide financial advice. They will be known in the future as authorised financial advisers.
This does not mean that advisers who advise on simple products will be totally unregulated. Rather, the bill provides that advisers, namely those who are providing advice on products such as consumer credit contracts and insurance products, must comply with basic conduct and disclosure requirements. They will also be required to be registered and be members of a dispute resolution scheme, and that is dealt with in another bill that we will be dealing with before the House rises.
The third category of adviser will be employees or agents of a qualifying financial entity, and I envisage that they will be banks and insurance companies, credit unions, potentially, and other organisations such as building societies—that sort of thing. The qualifying financial entity status will be granted to those institutions that have appropriate processes in place to ensure that any employees or agents covered by that status operate appropriately. These entities will be able to meet all of the registration and disclosure obligations on behalf of their employees and agents, and, indeed, the membership of the dispute resolution body, as well. However, employees who are category 1 advisers or agents working for those institutions, or working to them, will still need to be individually authorised. That means they will have to be authorised financial advisers individually authorised by the Securities Commission. This will ensure that there is a level playing field between advisers who work for such organisations or to such organisations as agents and those who operate independently.
The most fundamental change proposed by the committee was one signalled early on in the process, and that is the proposal to shift away from the approved professional bodies co-regulatory model, which I announced nearly 2 years ago. The committee has recommended that the Securities Commission undertake all regulatory oversight of financial advisers. I agree with that, and, as I have said on more than one occasion now, the co-regulatory model could not have survived the level of mistrust and anger that exists amongst an investing public who feel they have been betrayed. I wish that was not the case, but it is the case, and that is why we cannot go forward with anything that signals any form of self-regulation in this environment. In my view, such a proposal at this time would not be sustainable. My regret is that I was not alert to this issue before the Financial Advisers Bill was introduced.
Some industry organisations raised concerns about their ability to undertaken the disciplinary functions that were contemplated for approved professional bodies in the bill as it was introduced. If it had ensued that industry organisations did not have the capacity to undertake the necessary disciplinary functions, the Securities Commission would have been required to act in the place of approved professional bodies anyway. This would have required the commission to adopt an approach that catered to the diversity of standards that may have emerged across the industry. This in itself would likely lead to increased transaction costs for both the industry and the regulator. The approach we have adopted in the end aligns with the approach taken in respect of other occupational regulatory regimes in New Zealand, including the regulatory framework for accountants, lawyers, real estate agents, electrical workers, and architects, which means it is better placed for trans-Tasman mutual recognition, as well. Although some commentators have claimed that this would result in the loss of industry expertise and the development of rules, I believe that the committee has come up with a sensible and workable solution to alleviate this concern, as well. The committee has recommended that a commissioner of financial advisers be appointed to the Securities Commission, with the front-line focus of the commissioner’s work being on financial advisers.
A code committee and a disciplinary committee will be established under this bill, as well. Both committees will obviously need to include advisers with industry experience. This will allow industry representatives to be involved in the promulgation of the professional code of conduct to govern authorised financial advisers and the discipline of the profession. I think the select committee has done a good job of ensuring that we get the best of both worlds. Further, the code committee will obviously be obliged to consult with advisers more broadly, and with other stakeholders, when developing the code.
In conclusion, I reiterate my gratitude to the industry, especially to those who came to talk to me about their concerns; and to the Finance and Expenditure Committee. Again, I single out Charles Chauvel as an excellent chair of that committee, and Simon Power. They were both excellent to work with. The other thing I place on record is that I have really appreciated the fact that where there were concerns, people came and talked to me about them and we were able to address them in a sensible way. I also congratulate the officials, who worked long hours, well beyond the call of duty, and the parliamentary counsel officer assigned to work on the bill. This bill represents an extraordinary effort and a very good outcome. I commend the bill to the House.
SIMON POWER
Hon Darren HughesWhat does that member’s billboard look like! I take this opportunity to thank the Minister for her opening remarks. It seems that the Hon Lianne Dalziel and I ended up with two of the most complicated and difficult pieces of legislation to work on—this bill, and what is now the Commerce Amendment Act—over the course of the last 12 months. As I said also in the debates relating to that Act, the Minister has always been forthcoming, has made advice available, and has been pretty open-minded, on the whole, when I have made suggestions during the course of the development of this legislation, and I am grateful for that.
One or two things do need to be said in respect of the opening stages of this bill. First of all, the Minister has been generous in her praise of the officials, and I certainly share that view when it comes to the enormous amount of work those people on the committee did in the initial phases. But in fairness, and in no way reflecting on the Minister, who I think did her best in the initial stages, I say that the first draft of the legislation that was put before myself and others—and, to be fair, probably before the House—was poor. It was not up to scratch.
The Minister is prepared to say that it was fundamentally flawed, and good on her for saying that! Quite frankly, the legislation showed so many different drafting styles within the one bill that to the outside eye it was obvious that personnel and staff had changed during the course of the development of that first draft. It was hopeless legislation. It would have meant that the way financial advice was defined, and the way that financial advice was captured, was so random—for want of a modern term, for the sake of the Hon Darren Hughes—that big holes would have emerged instantly in different areas of financial advice. I think—and this is a personal view—that the first draft of the legislation that we looked at did not bear that good a resemblance to the original recommendations under the review of financial products and providers done by the ministry. To be fair to the Minister, when those issues were raised with her she took them on board and asked those officials for some changes.
It became clear early on that trying to define advice by occupation was simply not going to work. That meant, for example—and I know the Minister tires of me using these examples, but it is my 10 minutes—that if a bank teller standing behind a counter told a customer who had $10,000 in a savings account that the money should be put on term deposit, the bank teller would have been caught for giving financial advice. If a real estate agent put an advertisement in the paper to say that a rental property was currently returning a 5.7 percent yield on investment in rent, and that that was what it would continue to return, should the property be purchased at the current price, in my opinion that would also be financial advice. If a travel agent told a customer what insurance product the customer should purchase for his or her trip, that would be financial advice. We may not think about it in those terms, and, frankly, for nine out of 10 people purchasing travel insurance it probably would not have made the slightest bit of difference. But for the one out of 10 instances where someone in the family ends up ill—and I myself have been in this position—what is given in the advice and what is contained in the insurance policy does matter. But, again, that is financial advice, because it will have an immediate financial implication on what a traveller can or cannot do, based on the wording of the policy.
So then the Minister decided that we would try to look at it from a product perspective, which I thought was a more sensible approach. It became clear, though, that even within that approach, trying to create a layered level of differentiation and differing regulatory environments, depending on the level of advice or product—whether it was simple or complex—provided its own difficulties. In that case, it would have been difficult to provide an overall framework that then allowed those more distinguished categories to fall underneath it. This was where the beauty of the select committee process was so helpful. On the first day of the select committee hearing, the chairperson of the committee, Charles Chauvel, decided that he would allow everybody 10 minutes speaking time—he had negotiated with me; there was nothing wrong with that. But it became clear, after we had heard a 35-minute submission from the first submitter, I think, from memory—it was certainly well over 20 minutes—that we would have to use the submission process to try to rewrite the bill. So at that point, as submitters were coming forward, I and others on the committee—the Hon Paul Swain was there; I remember that clearly because he had his disc with his CV on it, on the table—started negotiating in a way that put ideas on the table, at the time, for submitters to comment on. That was a bit unfair to the submitters, because they had not come prepared for that type of approach. But I think, in the time I have been here, it was one of the most constructive discussions we were able to have. Then we decided that an interim report was appropriate, in the first instance, and then, extraordinarily—in my time here I cannot remember this happening before—a second interim report would be made to the House, consequently driving further consultation with the industry, which was absolutely essential because of the massive changes being made.
I remember sitting in the committee one day and the poor chap from the Parliamentary Counsel Office was sitting opposite. We said at that time: “OK, if we were to make these changes, how much of the existing legislation would remain in place and how much would you have to redraft?”. He said we could keep the first three clauses. At that point we knew we had a big job on our hands—a big job on our hands. But to be fair to parliamentary counsel and to the officials on that committee, who were just stunning in the way they approached it, we managed to get the job done.
I do not think that the job is finished. I still think there will be a much more subtle refining of the categorisation of financial product, as time goes on, and I think that the flexibility around the regulatory regime at that level is important. That will develop and mature as time passes. I hate to say it but I do not think we have seen the last of a discussion about financial advisers legislation. I still think we will have to refine it as we go along. Having said that, I say that National certainly supports this bill in its second reading and believes it is an extremely good step in the right direction.
When we come to the detail of the bill in the Committee of the whole House—the financial accreditation—the Securities Commission as the sole regulator is a model that is absolutely correct. The Securities Commission should be the sole regulator. I believe that that is absolutely the right move, but I will talk about it in more detail during the Committee stage.
Before we move to the Committee of the whole House—and I know there will be other members in the House who will want to make a contribution—I say that I was very interested to hear the Minister of Commerce talk about a working-group being set up for further discussion. I think that is a good move. I believe she said that industry representatives, representatives from the Securities Commission, and officials from the Ministry of Economic Development would be involved. When we get to the Committee stage, I will be interested to know whether we will have any investor representation on that working-group—in other words, whether we will hear what the users of those people who are providing the product would be looking for. I would be interested in any comment the Minister might want to make in that regard.
We are dealing with an industry that we can talk about having losses or funds at risk in the billions. This is an extremely serious matter. It is a matter that the National Party will not delay during this urgency motion, because we are keen to give a signal very early on, as John Key did when he wrote to the Prime Minister many, many months ago to say we would work with the Government in a bipartisan way on this issue. I was then dispatched to deal with the Minister of Commerce, and this matter has been dealt with in a bipartisan way. Sometimes in politics, issues are too big for political discourse, and this is one of those issues. We have an obligation as a Parliament to ensure the security of our financial markets. This is a step in the right direction. We will deal with the detail in the Committee stage. National will support this legislation.
R DOUG WOOLERTON (NZ First) Link to this
I will take just a short call to say New Zealand First supports the passage of the Financial Advisers Bill. As the Minister of Commerce and Mr Power have said, this bill is long overdue. A few financial advisers and people who came before us in the Finance and Expenditure Committee thought there should be no more regulation around their activities. They believed that their business was a fast-moving one, and that the people they were talking to could judge in their own best interests whether the advice they were given was good or bad. Obviously, we disagreed with that, and so did the majority of the people involved in the industry. It was heartening to see that, with a few exceptions, people had a responsible attitude to the proposed legislation, and were keen to help.
We have also heard from the two speakers earlier that a lot of changes have been made to the bill. In fact, when we look at the bill, we see there are many pages of ruled-out text, with new text following that. That is the way it should be. It is not until we come face to face with the participants in the industry, not just the ones chosen to help officials through the process of preparing the legislation—although that is a good process, as well—but the ones who are actively involved, day to day, with their customers, and until we hear about their problems, the distinctions they have to make, and the care with which they have to approach these issues that we can actually get a full handle on the situation. I also agree that refinements will be made to the legislation in years to come. It was admitted during the hearing of submissions that every time new regulation comes into force, somebody out there will find a way around it that is not in the clients’ interests, and that will need to be blocked off in the future.
There were days, years ago, when the Government of the day believed that there was no need for any of this regulation, and that both those who were seeking help with investments and those who were giving advice on investments could go about their business without any need for the Government to be involved in those transactions in any way whatsoever. We have come to rue the day when those thought processes were the rule rather than the exception, and we are now seeing something rather nasty start to happen in this country, of a similar nature to what has occurred elsewhere. In America we are seeing the Government has had to hop in and prop up institutions where the people involved were not, in fact, qualified to know what was going on and did not know what was going on, but proceeded without any caution nevertheless.
Just as with any other industry, the public have a right to know whom they are talking to when they seek financial advice. They have a right to know the qualifications of that person, the experience of that person, and whether that person has been involved in any shonky dealings hitherto.
I could not possibly comment. This legislation provides some of those assurances. I have to say, just before I sit down on this part, that it will not take away the risk to the public. It cannot do that, and it is not professing to do that. But it will give the public an indication of whom they are dealing with, and, in another bill, an avenue to redress the situation as well, because this is part of a suite of bills.
I say New Zealand First supports the Financial Advisers Bill, and we will be supporting the other bills that surround this issue.
Dr PITA SHARPLES (Co-Leader—Māori Party) Link to this
Tēnā koe, Mr Assistant Speaker, tēnā tātou katoa. The Māori Party is pleased to support the Financial Advisers Bill, to enable a clear distinction to be made between financial advice that carries significant risk for consumers and advice that carries minimal risks. The intention of the bill is honourable, but the bill is well overdue.
An analysis of 25 financial advisory firms by Stephenson Thorner and fi360 Australasia, released earlier this year, concluded that many financial advisers may look trustworthy but are potentially risky. The risk factor is all around the concept of trust. The study showed that most New Zealand advisers ran their businesses with an inadequate duty of care. In fact, the study went as far as to say their reports verged on becoming dysfunctional. Just how dysfunctional some of the sharks in the industry have been is old news now, given the fact that more than a dozen New Zealand finance firms have gone under in the past 18 months. That is nearly $2 billion of investors’ money gone down the tubes. It is not in dispute that something had to be done. There have been frequent and increasingly urgent calls for tighter Government controls, to tidy up the sector and make it more accountable to investors.
It is not as though we have not been down this road before. Many of us remember the mortgage scandals of the mid-1980s, when an unregulated sector of the finance industry extracted millions of dollars from what could only be called unsophisticated investors. That is a flash name for what the industry calls mum and dad investors: a segment of the population, including Māori, who have been investing their savings without necessarily realising the risk—
—yes—that they were exposing themselves to. In the 1980s the contributory mortgage companies screwed millions of dollars from New Zealanders lured by the promise of a quick buck and high interest rates. The classic was Registered Securities Ltd (RSL), which, when it collapsed in July 1988, had ratcheted up loans to the sum of $97.8 million. Overnight, more than half of that was deemed to be irrecoverable.
But there is a startling difference between the contributory mortgage companies and the risk of the non-regulated financial companies and financial advisers. Back in mid-1988, when RSL hit the bottom of the market, the then Minister of Justice, Sir Geoffrey Palmer, immediately took decisive action by amending the Securities Act. His amendments covered contributory mortgages and introduced sector-specific regulations, yet here we are, 20 years later, finally getting around to introducing regulations to increase prudential standards—a move we support, but action that should have taken place a lot earlier than it has.
The point is, we are not talking about people getting sucked into the Nigerian multimillion-dollar banking scams. Members know the type: “A tragedy has befallen us. Your long-lost Uncle Nigel has drowned, leaving you as the sole benefactor of his estate. All we need is your bank account.” Everyday New Zealanders—the mythical middle New Zealanders—are being stung here. We are not talking about businesses or corporates; everyday citizens have been placed at risk. We are talking about the people whom successive Governments have ignored: humble, trusting investors, many of whom have entrusted their life savings to finance companies. Their lives have been turned inside out by the callous squandering of their funds. Worse, not only do they have to endure the shame and guilt of having their funds squandered but also they are literally powerless and unable to afford the cost of legal advice.
The Māori Party has always stood up for people who too often are voiceless in the corridors of power, and our support for this bill is no exception to that. Sure, the bill is a good thing. The regulatory framework should promote confidence and participation in the financial markets by investors and institutions. That is all positive. But what about those who have been burned by financial advisers and who are teetering on the brink of collapse? What measures have been put in place to look after their interests? Will the Securities Commission launch an inquiry into how those large-scale losses were able to occur? What support will be available for clients who have lost money to enable them to launch court proceedings against financial advisers who have been negligent?
The issue all comes down to the basic truths around justice and the nature of power. One of the tikanga of the Māori Party around kaitiakitanga encourages us to promote the active exercise of responsibility in a manner that is beneficial to resources and the welfare of the people. In everyday language, that means we promote the goals of living in a society where crooks and shonky advisers are not welcome. In other words, there should be sanctions in place to ensure that those types of people—people who are negligent in their responsibility to care for the resources and collective good of their community—are not able to prosper.
One could say, as the National Business Review has said recently, that there have been sanctions against murderers and robbers for centuries, but society still has not been able to eradicate such crimes. But for my money, I want to live in a society where careful analysis and prudent assessment of risk are routinely part of the package for any financial deal, where credibility and experience matter, and where an individual can make an informed judgment about the qualifications and professional standing of a financial adviser before leaping in. In reality, Māori businesses do not usually use finance companies to finance their business developments. The interest rates are too high, and often security is required over land, so it is a no-go area. Banks are more likely to secure loans over cash flow, stock, equipment, and machinery, without having to rely on putting our whenua at risk.
The Māori Party will support this bill. We think it provides changes that are necessary to allow deposit takers to be better monitored and evaluated, and at the end of the day that has to be better for the nation and for all our people in moving forward. But, notwithstanding all the regulations, approvals, enforcement, and remedies included in the scope of the legislation, the key to success will rest in the conduct obligations outlined in the bill. The bill specifically obliges financial advisers to act with integrity and competence. Integrity cannot be regulated for, but it nevertheless must be a foundation in order for the changes to actually work. We need to have protection for consumers, and we need to have the changes provided in this bill in order to ensure an effective environment operates.
Finally, although we support this bill at these final readings, we wonder why it was separated out from a bill that is on the Order Paper to come up later, the Financial Service Providers (Registration and Dispute Resolution) Bill. Surely logic would demand that the two bills be read together to ensure due focus on the health of the sector. Thank you.
CHRIS TREMAIN (National—Napier) Link to this
Thank you for the opportunity to speak on the second reading of the Financial Advisers Bill. I pick up where my lead speaker, Simon Power, left off. He said that we are dealing with an industry where the losses are in the millions of dollars. I add to that by saying that the focus is not just on the industry, where the losses are in the millions, but, more rightly so, I think, on the consumers who have invested in those businesses and who have lost multiple millions of dollars in the process. That is really where the focus of this legislation should be. At the end of the day this House stands to protect the rights of individuals in the community, and to understand that there will always be risk in any investment across the range, but that, ultimately, we should be there to try to protect consumers as much as possible in their decisions around investments.
I want to pick up on the losses, just to make it clear to people who may be listening to this debate on this Wednesday morning what we are actually dealing with.
Not that many! We are talking about $1.925 billion of losses, which is significant. That was highlighted in the May Financial Stability Report. That is huge money. We are talking about $300 million out of Provincial Finance, $459 million out of Bridgecorp, $149 million out of Nathans Finance, $187 million out of Capital + Merchant, $127 million out of Lombard Group, $141 million out of Geneva Finance, and $319 million out of MFS Boston. This is huge money—$1.925 billion. These companies have gone into receivership or into moratorium over that period. There have been a few more since that financial stability report came out. By no means have all these companies fallen over because of shonky dealings—not by any stretch. It was due mainly to the credit crunch and not due to fraudulent activity. It is important that people understand that.
I am saying that by no means did all of those companies fall over because of fraudulent activities. I think the Minister would have to acknowledge that. Certainly some of them did. The credit crunch has caused a run on funds. Many of those companies, under the market as it was before, had quite sound—
—just listen—balance sheets. Some of them have fallen over because of the credit crunch, not because of fraudulent activities. A number of high-profile companies outside the finance sector have also recently gone into liquidation, and I will talk about Blue Chip properties, which have gone under in very dubious circumstances, and are still under investigation.
A heck of a lot. The member will understand that many financial advisers actually recommended their clients to go into that company, and that is whom we are trying to regulate.
No financial advisers that the member knows? A heap of them out there recommended Blue Chip properties. I ask the Minister what world she is living in.
I could do that, but I think I would be breaching parliamentary privilege. I will not go there. I will not enter into that argument. Most of the investors were referred by way of a strong commission incentive and were referred by financial advisers around the country.
A number of constituents have come to see me in my office about this particular issue. One woman, whose husband died in the middle of the process, had been encouraged to gear up her house to buy not one but two apartments. Recent valuations on two properties she owns show that if she sold on today’s market she would stand to lose the majority, if not all, of the equity in the property that she owns. She is faced with the liquidation of Blue Chip and no rent guarantee. She cannot afford the monthly commitments to mortgage costs and has therefore been forced to sell her apartments at a significant loss.
Financial advice like that puts some people into very difficult situations. With all this contagion around the global financial market place, the Government has seen fit to introduce a suite of legislation not to remove the risk from financial investments, as there will always be risk, but to raise the bar on those who enter the financial markets either to provide investment products or to proffer advice and to benefit from that advice by way of a fee or a commission. The Reserve Bank of New Zealand Amendment Bill (No 3) was the first in this suite of legislation. That bill addressed prudential requirements of the non-bank deposit takers, and it was passed during the previous sitting period. National supported that legislation.
The Financial Advisers Bill, together with the Financial Service Providers (Registration and Dispute Resolution) Bill, aims to address the regulation of financial advisers, and to lift the benchmark and rigour around those who can be financial advisers, their qualifications, and the means by which consumers can seek to resolve disputes with financial advisers and those who provide financial products. The Financial Advisers Bill is being debated in its second reading today, and quite clearly National supports it.
The purpose of the bill, which we will cover in the Committee stage, is quite detailed in Part 1. The first purpose is to require disclosure by financial advisers, and the second purpose is to require increased competency in the financial advisers who are proffering a range of products. Some advisers out there—and the Minister begs to differ with me on this—were proffering advice not only on financial products but also on some real estate investments in Blue Chip. The third purpose of the bill is to ensure that financial advisers are held accountable for the financial advice they give.
The first round of submissions on the bill received much debate and we have covered that in the debate today in the House. The draft legislation hit the Finance and Expenditure Committee, which my colleague Craig Foss and I are on, and was ultimately thrown out. In fact, as the Minister agreed, it was totally amended.
There are four key areas of change that I would like to address today in my remaining time. Firstly, the bill now amends the coverage of the bill—whom it applies to and what is covered. Secondly, the new legislation amends the Securities Commission, which will now have the sole responsibility to undertake the regulatory oversight of financial advisers. As such it is proposed that the commission will be responsible for approving, monitoring, and having oversight of all financial advisers. The third area of change is to amend the bill in relation to statutory offences, obligations, and a penalty framework. I propose to spend the rest of my speech focusing on the coverage of the bill where there have been five significant changes to the bill as first mooted.
Firstly, the focus now shifts to financial products whereas the original focus of the bill was on financial decisions. We now have a definition, which we will cover in the Committee stage, for two categories of financial product: category 1 and category 2. There are effectively seven products that have been divided into two tiers of financial product. The seven products are complex securities, investment broking, savings or investment planning, simple securities, insurance, credit, and real estate. These are very important distinctions now, because the complexity and level of risk that accompany these products are significantly different between each product. Some products at the higher end certainly involve a lot more risk, and we believe more regulation needs to be provided for the level of advice given in the higher categories. We heard in the select committee process from many different submitters, from the high end to the low end, but it was in respect of those who provide financial advice at the lower end—the salesperson at the Noel Leeming store who is providing pretty basic advice under the Credit Contracts Act—that the level of financial regulation that we were initially looking to impose was really out of control.
The second area of change is the adoption of a tiered approach to the authorisation of financial advisers, which I have spoken on briefly. Effectively, the products I have just described are broken into two tiers and there will be two levels of regulation that deal with those two tiers.
Thirdly, we are going to ensure that those providing financial advice on securities or investments, savings, and planning now become authorised financial agents. Members will see references to “authorised financial advisers throughout the legislation. An authorised financial adviser will be required to have certification to deal with tier 1 advice on tier 1 products.
Fourthly, in terms of changes to the bill, we will be adopting certified financial institutions. Large institutions dealing with significant franchise networks will be able to apply to be a certified financial institution and effectively take responsibility for their advisers and make sure that they are imparting not only the knowledge but the responsibility and accountability for their advisers going forward.
Lastly, the amendments that relate to the scope of the bill will ensure that the bill provides clear and appropriate exemptions from the definition of financial adviser. I will use my time in the Committee stage to focus particularly on the exemption of budget advisers, who originally were in the legislation but have now been taken out of it. Thank you, Mr Deputy Speaker.
CRAIG FOSS (National—Tukituki) Link to this
I rise to continue the National speeches in support of the second reading of the Financial Advisers Bill. Colleagues have talked about the suite of bills—and I am sure that the Minister of Commerce covered it; I missed her speech—that hold hands with this particular bill: the Reserve Bank of New Zealand Amendment Bill (No 3) and the Financial Services Providers (Registration and Dispute Resolution) Bill. It is all good stuff and quite timely—even more timely now, I guess, given the condition of, and events in, the financial markets since this bill was referred to the Finance and Expenditure Committee on 19 February 2008.
There is one thing. My colleague Mr Tremain gave the example of someone caught up in the current crisis, and I heard someone from the Government side of the House—I do not know whose voice it was—say that real estate agents are exempt from this bill. Yes, real estate agents are exempt from this bill, but that comment showed the incredible naivety and the lack of financial literacy of whoever it was who shouted it out. The commentary on the bill talks about “category 1 products (complex products such as a security other than …”. The bill excludes property quite explicitly—that is right. But if members look at the cause of the current subprime mortgage crisis around the world, they have to ask what a subprime mortgage is. It is not the initial transaction of purchasing a property for sale; it is the ongoing leverage or de-leverage of the financing of property. That is what a subprime mortgage in the United States is. Investors around the world, including some in New Zealand, have been caught out by lending on property with a somewhat dubious valuation and, perhaps, associated transactions and fees. So, yes, those investments in property are affected by the intent of this bill; they will be caught up by it.
At the end of the day, it is all about asset classes, be it hard assets such as property, the derivatives of property, or financial instruments down the chain. They will all be picked up. Property is explicitly excluded here in the first instance, but if we go down one or two generations of any transaction, of any of the current crises, we see that the core asset devaluation, the core deflation of those balance sheets, is about property. Yes, those investors might not be the initial owners of the property, but if we look down the titles, we see that they are guarantors and there is cross-party lending on the titles. Yes, this bill and the other two bills pick up some of those issues, but let us try to talk sensibly about the financial markets.
I have here the first version of the bill, which was referred to the select committee. I notice only one Government member of the committee here, and I am looking forward to her speech on this bill. The bill that was referred to us on 19 February 2008 and the bill that we have before us are a credit to the process, but, goodness gracious me, the first 70 pages of the original version are struck out—the first five parts are totally gutted, struck out, rewritten. That is a good reflection of the process, which Simon Power alluded to—well done. Yes, we acknowledge the Minister and her ambitions to have good, robust, and long-lasting legislation—we fully appreciate that—but we went through a fair few hoops on the way to get there. Who is to blame? I do not know. Perhaps those who were involved in the first draft needed a bit more input from the real world. What we see before us now is a better reflection of the real world, because it is a reflection of the risk of investments and advice, and that is entirely what financial markets are about. They are about the pricing, applications, and return—reward—of risk, rather than individual occupations, individual products, etc. As Mr Power said earlier, there is still some work to do, but this bill is a good start. I am pleased to have been able, with my colleagues on the select committee, to contribute to the bill before us now.
My colleague Mr Power also made the point about travel agents. I remember during the submissions process asking about travel agents, and we seemed to park that issue, saying that it was just travel agents and insurance. But we made the point that many people ask their travel agent when they should buy some foreign exchange. They say they are going to the United States, and they ask whether they should buy US dollars now or in 6 months’ time when they go there—and we have all seen the volatility of the foreign exchange markets. The travel agent’s response qualified as financial advice; the travel agent is doing his or her best, and maybe is just reading something off a computer screen, but, under the original bill, that information would have constituted financial advice. There are myriad different examples like that, from the hire purchase example in the commentary to the car salesman who offers advice on which loan to take, or even which deposit to make—a 3-month, a 6-month, or a 12-month one—if the rates for each one are the same, because, as those with some financial literacy will know, they are not actually all the same.
My colleagues have spoken about the current conditions in financial markets around the world, which are under major stress. I think about $5 billion is either frozen or very, very stressed within New Zealand. But I acknowledge that New Zealand has many robust institutions—banking and non-banking—that are performing very well, and their depositors’ funds are very, very safe indeed. I acknowledge those institutions, and I appreciate the tough times they are having as they search for funding and capital.
I would like to make the point that the original bill was referred to the select committee on 19 February 2008, and the closing date for submissions was 4 April 2008. As submission after submission came in, goodness gracious me, it was pretty obvious by that stage that the bill would need amending. So there was the first interim report, and the closing date for submissions on it was 16 May 2008. Then the second interim report came out, and that is pretty much what we have before us today, and the closing date for submissions was 22 August 2008. I sat in on many of those submissions and there were common themes. As I said before, I acknowledge the path that this bill has taken to get to the more realistic and real-world form that it is in now, but again I question why it needed to take such a tortuous and long path in the first place. It was almost an example of real-time submissions and bill-making, as Mr Power alluded to earlier. Engaging with the submitters was a very healthy process. They knew their stuff, and, for a lot of it, they knew it better than many of the members sitting round the committee table did.
It is interesting to have this example, because, at least, better legislation come out of the select committee process. Imagine if that process had been extended to the Electoral Finance Act, which was raced through under urgency prior to Christmas last year. That legislation is creating all sorts of problems. Imagine if the same process had been extended to the emissions trading scheme bill. A thousand amendments to that bill were not submitted on, and another 785 amendments were made to the bill that arrived back in the House. A total of 1,785 amendments that had not been submitted on were raced through the House under urgency. Even KiwiSaver was in the same bucket. Good legislation does take good select committee time, but most members would acknowledge that they are on a select committee to, at least, make legislation as good, robust, and long-lasting as possible.
During the Committee stage I will be picking up a few points. My colleague Chris Tremain picked up that about $5 billion is under stress at the moment within New Zealand. Some of that is because of allegedly fraudulent and dodgy activities, but much of it is from the market going against the investors—whatever they were. We have to distinguish between the two, because the Serious Fraud Office, the Securities Commission, and the police are investigating many of those instances right now.
I again make the point in this House that in the current environment—and I am sure the Minister said the same thing—with the stress in the financial sector, now is a terrible time to be getting rid of the Serious Fraud Office. This bill is forward-looking—it is not retrospective—but at least we have the Serious Fraud Office to look at alleged misdemeanours that this bill cannot address, yet the current administration is trying to wipe that office off the face of the earth. What an absolutely absurd time to do that, with the stresses and the strains that the financial markets are under!
I look forward to the Committee stage. I look forward to robust speeches from the other side; as we are sitting under urgency, they must urgently want to speak. I will speak again in the Committee stage.