Financial Service Providers (Pre-Implementation Adjustments) Bill

Hon NATHAN GUY (Minister of Internal Affairs) on behalf of the Minister of Commerce) Link to this

I move, That the Financial Service Providers (Pre-Implementation Adjustments) Bill be now read a second time. I would like to begin by thanking the members of the Commerce Committee for their thorough examination of this bill, including their extensive consultation with stakeholders. I am confident that the proposed amendments to the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act will go a long way towards simplifying compliance for business, particularly in the lower-risk areas, while providing high levels of protection for retail consumers and, indeed, investors. That is vital if we wish to give effect to the Government’s goal of increasing the level of confidence in New Zealand’s financial markets.

The bill contains many technical amendments to the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act that will provide greater clarity for both investors and the industry as a whole. The bill narrows the scope of the Financial Advisers Act, to apply it only to persons who provide financial adviser services in their ordinary course of business, and to persons who provide advice in the course of providing another financial service. It excludes financial advice that is provided incidentally to the provision of other services. This focuses the regime on those persons who are generally understood to be financial advisers. Furthermore, the scope of the definition of “financial advice” has been clarified. Therefore, advice on the procedure for requiring and disposing of financial products will not be caught by the provisions of this legislation. Similarly, broad statements about classes of products, such as: “KiwiSaver is a good product.”, will be outside the regime.

Another key clarification has been made to the definition of “financial planning services”, which are now termed “investment planning services.” The amendment proposed to this definition by the Commerce Committee clarifies that this term is focused on investment planning. It also clarifies that advisers who work only with category 2 products, such as mortgage or insurance products, or advisers who work for a qualifying financial entity and sell that entity’s products, can deliver a professional level of service and comply with the regime without needing to be authorised. However, such advisers will still be able to voluntarily become authorised financial advisers.

Both the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act have also been made more flexible, by adding a number of regulation-making powers. The Securities Commission can now provide limited exemptions from the obligations of financial advisers. However, the Minister of Commerce does not expect the commission to consider exemptions for every individual adviser who does not consider himself or herself to be the true target of the regime. He expects the commission to focus on exemptions for classes of persons for whom the cost of compliance with certain obligations would be unreasonable or unjustified. These new flexibility mechanisms are important to ensure that the regime can adapt with the market and imposes obligations that are proportionate to the risk created by different services.

Another group of amendments relate to the regime’s application to wholesale services where customers either have the necessary sophistication in financial matters or have sufficient bargaining power to look after their own interests. The challenge is to ensure a balance between minimising the unnecessary regulation of those who deal with wholesale customers, and preventing mum and dad investors from falling into the wholesale category by accident or through manipulation by unscrupulous advisers. The bill’s proposal to combine a number of wholesale client categories with a self-certification opt-out provision, with appropriate protections against misuse, delivers what the Minister believes is the required balance. Financial advisers who deal exclusively with wholesale customers will now be exempt from the obligations to be individually authorised to make disclosure, to belong to an approved dispute resolution scheme, and to adhere to the code of professional conduct for authorised financial advisers. However, the obligation to act with due care, skill, and diligence will apply to all financial advisers.

A number of other amendments are designed to reduce compliance costs for business, including clarifying that entities can provide any financial adviser service to their clients through their employees, provided that those employees are appropriately regulated; allowing entities to provide generic advice that is not tailored to a specific person’s needs; and enabling businesses that operate as groups of companies to make use of the qualifying financial entity—the QFE—model efficiently. These changes to simplify compliance for wholesale products are intended to allow entities to operate more effectively, clearly focusing the regime on the personalised services provided to retail clients.

Correspondingly, the role of the Securities Commission is now focused on supervising the people who provide the service. In order to ensure that the Securities Commission has the tools it needs to perform its supervisory functions with regard to personalised retail services, the bill also includes a number of new powers. For example, the Financial Advisers Act can be enforced against persons who committed offences while authorised, but who cancelled their authorisation before enforcement action could be taken. The commission can also impose temporary banning orders on people who act inappropriately, and it can apply to the courts for those bans to be extended for up to 10 years. The commission also has a reserve power to declare that a product of any qualifying financial entity must be sold only through individually authorised financial advisers. This will not require the commission to vet every product that a qualifying financial entity sells, but, rather, it will allow the commission to step in under exceptional circumstances. This is an appropriate approach, as entities will need to demonstrate their capacity to comply with the regime before being granted qualifying financial entity status. The Minister considers that this provides certainty to qualifying financial entities as to their ongoing obligations, while at the same time enabling the commission to act when required.

The extended supervisory and enforcement powers of the commission will help to ensure that the regime is complied with effectively, to enhance overall investor confidence. The Minister knows that the industry shares this goal with him, and once this bill is passed, he expects businesses to engage constructively with the commission in order to help to achieve their mutual objectives. I commend this bill to the House.

CHARLES CHAUVEL (Labour) Link to this

Labour continues to support the Financial Service Providers (Pre-Implementation Adjustments) Bill, as it makes necessary changes to the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008, which were passed under the previous administration. I chaired the Finance and Expenditure Committee that heard submissions on both Acts, so I can pay an informed tribute to Lianne Dalziel, who was the sponsoring Minister of that legislation and who went on to chair the Commerce Committee in this term of Parliament, which dealt with this bill. Lianne Dalziel worked diligently to ensure that there is an improvement to her own legislative agenda. Thanks in large part to her efforts the changes that the House considers tonight will mean that the legislation passed originally under Labour can be implemented in such a way that it restores confidence in our financial services sector. I was pleased to be a member of the committee that worked under Lianne Dalziel’s chairpersonship on the current bill. I want to compliment all of its members, regardless of whether they are present in the House tonight, on their diligent and non-partisan approach to the legislation.

I also mention in passing Cashmere Avenue School in Khandallah, which had its production of The Moral Machine tonight. I had applied to our whips for leave to attend that production and support that very fine school, but unfortunately this bill, along with duty, called, and I was unable to do that. But I wanted to make sure that there was at least a reference in the Hansard to that fine school and its creativity.

The bill is important because the changes that it will make to our financial services regime are about protecting everyday investors. Mum and dad investors deserve not to be exposed to a predatory environment. Never again, if we pass this legislation, will this country have to put up with the lack of regulation in our markets that in recent years has seen the collapse of finance companies, resulting in families losing their life savings and their homes. This bill will not outlaw risk; no bill could or should do that. But it will have the effect of assisting people to achieve more robust financial advice, and of making sure that that is available to them in the future. But we must remember in passing that this by no means lessens the harm that has already been done. I think, in passing at least, the House should remember those people who have lost everything. In remembering those people, we need to recommit ourselves to preventing the financial markets from running wild, with little regulation. We do owe it to those who were badly affected by finance company failures not to let that situation ever repeat itself.

The changes to the bill that the Commerce Committee has recommended are extensive, and they are technical. I do not propose to traverse them all in this speech. They will be exhaustively canvassed, along with the provisions in the Supplementary Order Paper that the Minister has proposed, in the Committee stage, which, as the result of the urgency motion the House has just passed, will take place tomorrow.

I will summarise the key points that the committee made in its report. The changes that the committee recommended will attempt to ensure that people have better access to robust financial advice, so as to avoid situations where uninformed investment leads to massive harm. There are three main ways that this will be done, if the committee’s recommendations are adopted. First, a qualifying financial entity will have to name all of its contractors, whose advice it will become responsible for, instead of there just being a presumption that the qualifying financial entity is responsible for all advice. Secondly, the bill as amended will allow contractors of the qualifying financial entities, rather that just the immediate employees of the entities, as is the status quo, to provide financial advice on complex investments without them having to be individually licensed. Thirdly, both contractors and employees will have the ability to provide advice for products that the entity promotes under the Securities Act. At the moment, that can only be done for products that the entity issues, not for products promoted by it. In combination, those three principal changes will reduce costs and increase efficiency, and hopefully ensure that advice is readily available to those who participate in our financial services industry.

This is a sensible bill. I commend the House for working so constructively to find solutions to protect mum and dad investors and vulnerable consumers in our financial services industry. I congratulate Simon Power, because he has clearly recognised that there is a power imbalance between a company operating in the finance industry and the ordinary consumer. It is obvious that there is a need to protect those more vulnerable parties when those deals are being made. There is an obvious asymmetry of information and often a massive imbalance of skill. It is important that we make sure that we protect the ordinary investor when we try to regulate the industry.

But I wonder why, if the Government can see the importance of the imbalance in this sector—or at least in this part of the financial services industry—and can acknowledge the severe consequences that can result from inadequate regulation in this case, it cannot apply that approach across the board. It is all very well to protect the sorts of investors who were very badly tricked by companies like Blue Chip and lost their savings as a result. Indeed, as I have said, that protection is a good thing; I am glad that Parliament is addressing those issues. But there is an obvious inconsistency when the Government is unwilling to protect the most vulnerable consumers, particularly the lowest-income consumers, who are experiencing the loss of everything they have because of having entered into arrangements with payday or marginal lenders—loan sharks, in the vernacular. I am astounded that members of the Government have expressed the indication that they will not be supporting the referral of my colleague Carol Beaumont’s Credit Reforms (Responsible Lending) Bill to a select committee on the next members’ day.

I do ask members to reflect on that inconsistency. It is not logical to provide a decent level of protection to financial services industry consumers, such as those for whom it is proposed in this legislation, but to fail to look after the most vulnerable and the most financially illiterate consumers at the lowest end of the financial services market. This Parliament runs the risk of doing that if the Government maintains its approach to Carol Beaumont’s bill. To be properly consistent, the Government must reverse its decision on that legislation, and I hope it will. Meanwhile, I look forward to further debate on the Financial Service Providers (Pre-Implementation Adjustments) Bill. I commend this bill to the House on its second reading.

PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this

I rise to contribute to the second reading of the Financial Service Providers (Pre-Implementation Adjustments) Bill. It is a pleasure to speak to this bill, and I commend the Minister of Commerce, Simon Power, for the work that he has done in moving this bill to the House. It is, as the previous speaker, Charles Chauvel, referred to, a bill that amends two different Acts, the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008, which were enacted under the previous Government.

The work done by the Commerce Committee, as has already been stated, was quite extensive. I thank my fellow committee members for the collaborative way that we worked towards getting the bill to this point. I also want to acknowledge quickly the officials who worked tirelessly behind the scenes, getting the advice ready at short notice, and often working on weekends and late into the night in order for us to get this quick turn-round of the bill. I salute the officials.

As has already been stated, the financial services sector plays an important role for businesses to raise capital. This legislation is partly a response to the need to protect unsophisticated investors. Those were the investors who were affected by the collapse of over 30 finance companies in the past 4 years. Many people out there know of, are related to, or have friends who were affected by these collapses, so this bill goes a long way towards addressing some of the issues, particularly around financial advisers and the advice they give. Let us be clear, though, that this bill does not regulate risk—it does not regulate risk. Risk is important because, as many people will know, with risk comes return, and there is a risk-return trade-off. The Government is not into regulating risk, but it is regulating those who operate within the capital markets. This bill not only balances the regulation of advisers who provide financial advice but also bears in mind that compliance-regulation red tape sometimes stifles commerce and the transactional nature of capital markets. That fine balance is what we had to look at when we went through each of the clauses of this bill.

The Commerce Committee has recommended a number of amendments in order to strengthen the provisions of both Acts. I will not go into all of those in any detail, but suffice it to say that the bill does narrow the scope of the Financial Advisers Act to apply it only to those persons who provide financial adviser services in the ordinary course of business—and that particular qualification is important—and to persons who provide advice in the course of providing another financial service. It provides for a carve-out, and it excludes financial advice that is provided incidentally to providing other services. We heard a number of submissions during the select committee process relating to those who provide some form of financial advice that is incidental to the main provisions of the businesses and organisations that were represented. Of course, those include citizens advice bureaus, lawyers, accountants, business advisers, and investment bankers. A whole raft of organisations and businesses provide advice without financial advice being the core to their business. This regime really focuses on those services that are generally understood to be those provided by financial advisers.

The advice that we looked at, in terms of clarifying what constitutes financial advice, states that advice on the procedure for acquiring and disposing of financial products will not be caught by this legislation. We also looked at the type of advice that leads to broad statements about classes of products, such as “KiwiSaver is a good product.” Statements like that, made by customer service agents at retail banks, will be outside the scope of this legislation. We also looked at the definition of financial planning services, and made a clarification of what those financial planning services will entail. Those services will, no doubt, be discussed during the Committee stage of this bill. What is most important is that advisers will still be able to voluntarily become authorised financial advisers, even when they are not compelled to do so under this legislation.

This bill also provides a more flexible regime by adding a number of regulation-making powers for the Securities Commission. Currently the commission can provide limited exemptions from the financial adviser obligations, but it is expected to focus on exemptions for classes of persons for whom the cost of compliance with certain obligations would be unreasonable or unjustified, and that is a particularly important point. This legislation is not designed to capture those who obviously are not in the business of providing financial advice, or those who obviously cannot afford to be part of the regime. We heard some very good submissions from various credit unions and other businesses whose primary focus, in terms of the service provided, is not providing financial advice.

I conclude by saying the wholesale carve-out within the statute was a difficult process and a difficult question, and the Committee was torn, in many ways, when considering who should be included in the carve-out and who should be excluded. In the final analysis, I think we worked together well as a team with the officials and also with the industry. We were constantly in touch with various players within the industry, who provided us with some very good advice. I support this bill in its second reading.

STUART NASH (Labour) Link to this

I would like to correct one thing the previous speaker, Peseta Sam Lotu-Iiga, mentioned. He said that the Financial Service Providers (Pre-Implementation Adjustments) Bill is not legislating for or regulating risk. I disagree with that because the risk of dodgy, incompetent, negligent financial advisers is not a risk that anyone should have to factor in when considering the merits of an investment. However, as the House is well aware and as New Zealanders are well aware, it is a risk that has proven so deadly to thousands of ordinary New Zealanders. So in a way this bill is regulating risk, and I am hoping that it is removing a risk that should not be part of any investment decision, but has been. In that sense, the bill is regulating risk.

I rise in support of this bill. As Sam and all the other speakers have mentioned, it has cross-party support. I support it for a number of reasons, which I will outline in the next 5 or 6 minutes. The bill is designed to tighten the rules and regulations around the financial advisory sector. I congratulate the Hon Lianne Dalziel on her excellent work as Minister of Commerce in the last Labour Government, and now as chair of the Commerce Committee. I also congratulate the Hon Simon Power, who picked up on this legislation and made very, very necessary changes to tighten even further the rules around this sector. The bill has cross-party support because it is sensible, it is necessary, and it is important for a number of reasons.

The Act that this bill amends was way overdue. Many, many ordinary Kiwis out there believed in those people; they trusted those who masqueraded as financial advisers and called themselves experts, but in reality had no education, no qualifications, no experience, no registration, no checks or balances—nothing that a reasonable person would expect people who marketed themselves in such a way to have. We have all heard the sad, sad stories of ordinary New Zealanders who have worked incredibly hard their whole lives, only to wake up one morning and find that the savings they had put away have now disappeared. No one has been made accountable; no one has been held to account. Can we blame it on the financial crisis? Quite simply, it is not good enough. I cannot imagine being in the situation where I had saved and planned for my twilight years—maybe my grandkids’ education; maybe a holiday away—only to find the money did not exist, it had gone. I cannot imagine being in that situation, and the fact that thousands of Kiwis have been is a real, real travesty. That is why this sort of bill is absolutely necessary to ensure that that never happens again.

To see the people who perpetrated these crimes against ordinary New Zealanders get off scot-free is a travesty. I am not so much talking about the Watsons, the Bryers, or the Hotchins. The latter, I understand, is holidaying in Hawaii for an obscene amount of money. I ask members to listen to this: his house is the house that the savings of thousands of New Zealanders built. It is a half-finished $30 million mansion. It is the size of 13 average houses, just on its ground floor space. It has seven bedrooms, a 25-metre swimming pool, and a garage for 12 cars. Its study, games room, and home theatre alone are as big as the typical house—without counting any of its living space, including seven bedrooms. This house is built on a graveyard of the broken promises and shattered dreams of ordinary New Zealanders. It is the house of a man who is holidaying in Hawaii. I think it is obscene, and if the man had any sense left he would keep away from this country. We do not want that sort of person in our country, at all. It makes me quite angry when I think of what he has done and that he is holidaying in Hawaii. I think it is obscene.

I must admit that using New Zealand icons like Colin Meads and Richard Long as marketing tools was, in my view, unethical. There is no doubt that Colin Meads was a legendary All Black, but what the hell did he know about finance companies and investment? Richard Long was the face of news for many years and was viewed as reliable and trustworthy—the type of image that a company would love to have. Well, the company died and it took a whole lot of Kiwis with it. I suppose we cannot blame Colin Meads or Richard Long, but hopefully this crisis will make iconic Kiwis a little more wary about how they use their own personal brands. In my view, although their accomplishments in their respective fields can never be taken away, the brands of Colin Meads—