Financial Advisers Bill

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

I move, That the Financial Advisers Bill be now read a third time. The progress of the Financial Advisers Bill has not been as easy as I first thought it would be. The failure of a string of finance companies last year brought me to the conclusion just before Christmas last year that the bill as introduced was not the best way forward. After advice from industry, I concluded that the co-regulatory model would struggle with the disciplinary workload that could arise and would not survive the loss of confidence in the sector, which is the inevitable fall-out of finance company failures. It was necessary to make significant changes during the select committee process. At this point I again express my thanks to members of the Finance and Expenditure Committee and officials, who have engaged with the industry, the wider sector, and the public. I also acknowledge the Opposition’s commitment to working with the Government on finding a solution to these issues. In particular I acknowledge Simon Power, who has been open about concerns, and we have worked together to resolve them. I commend the whole committee’s engagement with the industry, and its willingness to listen and make such changes at a late stage. I am confident that the committee has produced a bill that is far more practical and suitable for its purpose.

Specifically, I support the bill’s new focus on financial products in contrast to financial decisions, and the development of the two-tier approach to authorised financial advisers, and other financial advisers, advising on category 1 and category 2 products. The bill enables the adoption of a qualifying financial entity model to reduce compliance costs for institutions with a large number of advisers, as well. Finally, the bill provides clear and appropriate exemptions from the definition of a financial adviser, so that people offering budget advice, for example, are not captured by this legislation.

I will just place on record here that in the legislation itself the definition of financial advice uses the words “recommendation”, “opinion”, or “guidance”. These are words that need to be read together; one follows from the other. “Guidance” does not simply mean setting out options for people then to take advice on or make a decision on. I want to make it absolutely clear that citizens advice bureau advisers will not be captured by the definitions in the legislation.

I will not go over the details of the legislation again. Suffice it to say that the bill’s passage today will ensure that the election period can be put to good use by officials from the Ministry of Economic Development and the Securities Commission, and by the industry as a whole, to inject the detail into a regulatory framework that should reinvigorate a much-needed sector. I say that it is a much-needed sector because we all need to be able to rely on advice in order to be guided to make good investment decisions, where we do not have that expertise ourselves.

I will make two more statements that again cover issues that have not necessarily been raised in this debate. If people are taking advice from an adviser now, I urge them to use one who is a member of a professional organisation that can hold that adviser to account. But I warn them not to use that advice as a proxy for their right to know the details of the investments being made, and the level of risk they are exposed to. The Securities Commission has a good range of information available, and I do ask people to use it. It provides good advice, including the advice not to be afraid to say no if the level of risk is outside people’s risk appetite.

The second issue is the question of financial literacy. We can build a strong regulatory framework, as we have done with this bill, but inexperienced investors must still understand basic financial principles, such as risk and return. That is why the Government has committed to the National Strategy for Financial Literacy, led by the Retirement Commissioner, engaging as it does with the private sector and the non-governmental organisation sector, as well. At the same time, the companies that have taken the hard-earned money of people who have saved over a lifetime owe a duty of care not to abuse the trust that has been placed in them. New Zealanders who have lost money, or whose funds are frozen, are disgusted by the flaunting of wealth by those who have left behind them a trail of devastation. Corporation law was designed to protect entrepreneurs from personal liability, so that they could take risks without facing financial ruin every time an idea did not pay off. But to see people driving around in Porsches and living in luxurious mansions, when others are seeing their life-savings go up in smoke, creates challenges for those of us who defend the underlying principle. It is a disgrace, and they should be ashamed.

Financial advisers stand in between those companies and clients, and it is their duty to identify the risk profile of their clients and to do the homework their clients cannot be expected to do—work up a balanced portfolio, read any prospectuses, identify where the risks are, ask whether the risk is appropriately priced, and be alert to the potential motive behind higher than usual commissions. It is very easy in this climate to blame all financial advisers, but I warn against imposing too high a standard on those who were faced with misleading prospectuses or who could not have foreseen the domino effect of the flight to quality that followed the initial failures.

In conclusion, I believe that the Financial Advisers Bill now meets the objectives I set for it when it was first introduced. It brings financial adviser regulation into the 21st century, aligns us with international best practice, and provides for an appropriate level of investor protection in New Zealand. I commend the bill to the House.

SIMON POWER (National—Rangitikei) Link to this

The Financial Advisers Bill has enjoyed support from the entire House from its first reading, and through the select committee process in the Finance and Expenditure Committee, its second reading, and the Committee of the whole House, and I suggest that that support will continue for its third reading. That tells us, as a Parliament, that the House regards this issue as being, in many respects, above the usual day-to-day political discourse that occurs on most of the legislation before it. Many, many New Zealanders have lost money through finance company and mortgage trust collapses. Many billions of dollars have been lost because of those failures. It is critical to rebuild trust and confidence in our capital markets. The issue of the disclosure of fees and remuneration contained in this legislation is a key part of reforming the sector.

I echo the Minister’s views when I say that many investors have received poor-quality financial advice. We in the National Party agree that there is a need to update the legislation that governs the activities of financial advisers, and since the time when the Leader of the Opposition, John Key, wrote to the Prime Minister, offering the assistance of the National Opposition with that process, the issue largely became a depoliticised process. I was dispatched on behalf of the National Party to be briefed by the Minister’s advisers, to discuss and negotiate with the Minister, and to cajole her into accepting the differing views on the initial version of the bill. I will return to that matter shortly.

One of the things that the Minister of Commerce and I, and, in fact, that Labour and National, agreed on very early was that it is impossible to eliminate risk from financial decision-making, and, indeed, that it is impossible to legislate against such risk. So a balance had to be struck between minimising the risks for investors and minimising the costs of a new regulatory regime for investors. Of course, legislation is not the only response to minimising the risks of financial investment. Improved financial education and literacy need to be part of improving New Zealand’s investment culture. Fundamentally, the proposals in this legislation to require greater disclosure of financial advisers’ remuneration, commissions, royalties, and other such payments, greater disclosure of qualifications and conflicts of interest, and a higher level of competency on the part of financial advisers are necessary. So too is the need to hold financial advisers accountable for the advice they give.

This bill, very appropriately in our view, establishes the Securities Commission as the sole regulator of financial advisers, and abandons the original co-regulatory model. It allows institutions to be accredited and responsible for their employees, rather than, in many instances, requiring all individual employees to register. The two-tier regime, which provides heavier obligations for more complex advice and lesser obligations for more simplistic products, makes sense and is practical.

On the issue of the financial adviser, the definition of that term has been covered extensively during the Committee stage. There was no doubt that the attempt in the original bill to define advice given by referring to the occupation of the individual or the organisation giving that advice was based on a faulty premise, not because that was not a good place to start the discussion about what a regime should look like, but because it provided too many loopholes for people to avoid the regulatory framework. Indeed, on the other hand, it would have captured, in our view—and, in fairness to the Government, in its view as well—a group of advisers who were never intended to be caught by a more complex regulatory regime, rather than a more simplistic regime relating to more straightforward financial products.

During the select committee hearings we saw the emergence of a model that virtually developed itself as submitters gave their views to the Finance and Expenditure Committee. It was actually quite a remarkable discussion, with members of the committee putting alternative models to submitters as the submitters appeared, and asking for their comment on the workability and practicability of those models. As those discussions went on, it became clear that they were forming up in the minds of the committee, and of the chair, Charles Chauvel, a useful model to explore beyond the model first offered at the bill’s introduction and first reading. To the credit of the officials who were advising the committee, they swallowed hard and started, effectively from scratch, to draft the legislation that is now before the House in its third reading.

During the second reading debate, I said that parliamentary counsel made a remark in the drafting stages, when I asked how much of the original bill would stay intact—my recollection was that the answer was three clauses. We later found out that it was two clauses, and there was a suggestion during the Committee stage that it was only one clause. That meant there was a buy-in by the committee and by the Minister, who corresponded with the committee on at least one occasion that I can recall, offering to buy into that model and offering some suggestions about how it could work in a more practical way. I have to say the bulk of the work and, if I can reuse the word I used in the Committee stage, the elegance of the legislation that was put before us was largely a burden that had to be shouldered by the officials who advised the committee on that matter. They are to be commended for and congratulated on those efforts.

I conclude by thanking the Minister of Commerce for making the officials available, and for discussing this legislation in a positive and constructive way. I think, in the end, the House has delivered legislation that will begin this process in a comprehensive and thorough way.

I will finish by saying one thing—and the Minister will be relieved to know that I am the only National Party member who is taking a call in the third reading—which is that this legislation, in itself, will not prevent people from losing money when they make investments. That is a very trite thing to say, but it is an important statement to make, because whatever happens after the election on 8 November, and whoever occupies the Government benches, will not change the situation that some people will lose money on various investment vehicles. All that the Government, or for that matter, Parliament, can do is to provide a regulatory and legislative framework that is designed to put the best possible information before investors, and to ensure that those people who are in the investment advisory business are competent and are required to disclose matters material to the investment decisions that are being made. The legislation cannot prevent loss and it cannot prevent risk, but it does go some way towards requiring those who are giving financial advice to meet a far higher standard than that they have had to meet up until now.

R DOUG WOOLERTON (NZ First) Link to this

New Zealand First supports the Financial Advisers Bill, as we do the suite of bills that surround it. We look forward to bringing to this House in the next Parliament other measures to help investors in this country. We need to encourage people to invest in our businesses, and the sort of behaviour we have seen recently does exactly the opposite. Successive Governments have tried to steer people in this country away from property, which New Zealanders have a preference for, and one cannot do that if people see their money disappearing down the tubes. This bill goes some way towards making sure that the people who advise investors are at least registered, which means they can have some faith in the advice that they get.

I think it is great that the people who advise at the budgetary advice level, like those from citizens advice bureaus, have been left out of this bill, thus ensuring that people who give advice to others, like my friend Clayton Cosgrove, are not caught up by this sort of thing. Where Mr John Key gets his advice from for his share trading we do not yet know—that has yet to be seen—but we suggest he would probably come into a category 1 or 2 situation whereby the level at which he operates is somewhat more sophisticated. We were pleased to see that those who advise people in good faith and without receiving any recompense need not feel that they could suffer a fine because of their good works. We think that is absolutely appropriate.

As I said at the beginning, and I will finish on this note, New Zealanders need to have faith that the investments they make, usually at the latter end of their working life, do have some sort of surety around them and, in particular, that the people giving them advice are qualified to do so, that they understand the situation people are in, and that they give advice appropriate to people’s age, their risk profile, and those sorts of things. This bill goes some way towards ensuring that without taking away any of the entrepreneurial activity that we seek to encourage in this country.