Financial Advisers Bill – First Reading Speech

 
I move, that the Financial Advisors Bill be now read a first time. At the appropriate time I intend to move that the Bill be considered by the Finance and Expenditure Committee and that the committee report finally to the House on or before the 20th of June 2008.

The reason for the choice of select committee and the report back date is to catch up with the Financial Service Providers (Registration and Dispute Resolution) Bill so that they can be dealt with at the same time. This is important as the Review of Financial Products and Providers and the Review of Financial Intermediaries are very interlinked and to separate them at this point would I believe do a disservice to what has been a very good process to date. Without wanting to comment on the approach that the Select Committee may choose to adopt, I suspect that there will be a number of submitters that will want to be heard on both Bills and it may be convenient that the hearings could be scheduled together.

When this Bill did not get its first reading before Christmas, I took the liberty of sending a letter to all the stakeholders to advise of its delay, and to draw attention to the fact that it had been introduced so that they could get on with drafting their submissions. Given the number of discussions I have had with some of those stakeholders since the Bill was introduced, there is no question that this Bill has been widely read and it has focussed the attention of a number of institutions and organisations on what it is that they do that could be caught by this Bill and what it is they do that ought to be caught by this Bill.

This Bill arises from the Financial Intermediaries Task Force that was established in 2004. The Task Force was asked to consider options for reform that would ensure quality financial information and advice is provided to the public and also assist New Zealanders to make the most of their savings.

In their report back to the government, the Task Force made three core recommendations for reform. They recommended the government:
• develop enhanced standards for financial advisers,
• enhance the redress, sanctions and enforcement applicable to financial advisers, and
• improve disclosure made by advisers.

In developing its recommendations, the Task Force consulted widely, including surveying the market for financial advice, holding meetings with industry and consumer stakeholders, and releasing a consultation document which attracted a wide range of submissions.

This government considered those recommendations; developed them further; and following a further discussion document has now introduced this Bill.

So getting the Bill to this point has been a long, thorough and open consultation process, but that doesn’t mean that the Bill is perfect.

The intention of this Bill is to foster consumer confidence in those who hold themselves out to be financial advisers; that those who claim to be professionals in this important area are held accountable for their performance, integrity and competence.

Recent events have shown the significance of the role of finance advisers – not only in terms of people making investments in finance companies, but also in property companies and other investment vehicles.

Which leads me onto the definition of financial adviser. The Bill was drafted with the intention of encouraging people to think about what is meant by the term “financial adviser” and how the Bill applies to them. This government wants to ensure that people who provide financial advice in the course of their business are appropriately qualified and are competent to provide that advice so that the public can have confidence in the quality of that advice.

However it is not the intention of this Bill to capture every person who discusses a financial matter with a client or offers a product or service that might have a financial implication.

Rather it aims to ensure that people providing financial advice in the course of their business or as their fulltime occupation are competent to do so. It is they who will be expected to be members of Approved Professional Bodies.

I am very happy for the select committee to listen to the submissions and to report back to the House on a tightening of the definitions in order to achieve this objective. I have said that a bank teller who just describes the interest rate on a product or range of products offered by the bank, is not a financial adviser. And in section 6 of the Bill we have made that crystal clear by stating that “For the avoidance of doubt, the provision of information, whether orally or in writing, is not advice unless it is accompanied by a recommendation, an opinion or guidance.”

I guess the question I have asked myself is who should the public be entitled to rely upon for advice if they are investing their hard-earned money? Recognising of course that we cannot legislate away all risk. At the end of the day people have to make their own decisions about what they invest in and given that the rate of return is directly related to the level of risk people are taking, then they have to be alert to the detail of what they are being offered.

From the consumer perspective, this Bill is about them needing to have confidence in financial advisers that they are qualified to undertake their role; and from the industry’s perspective competent advisers should not have their professional reputations tarnished by the bad that give everyone a bad name.

This Bill aims to do this by ensuring adequate disclosure, competence and accountability on the part of financial advisers. Any person who is bankrupt, has been convicted of certain crimes involving fraud, dishonesty, money laundering or terrorism financing, or is subject to orders under securities, companies or consumer law, will not be permitted to provide financial advice.
The Bill will also require advisers to disclose any conflicts of interest and fees and it sets minimum competency standards to ensure the financial adviser is equipped to recommend financial products that match a client's investment needs and risk profile. These include requirements for the adviser to act with reasonable care, diligence, skill and integrity. Conduct requirements also apply to handling money received by clients and not acting in a manner that may be misleading or deceptive.

This Bill sets up a co-regulatory framework for financial advisers, based on self-regulation by the industry through Approved Professional Bodies as frontline regulators, with oversight by a central regulator – in this case the Securities Commission. The Securities Commission will ensure that there is consistency across the Approved Professional Bodies, setting minimum standards with which the industry must comply while enabling the industry to deal with the day to day regulatory issues themselves. These minimum standards and the rules established by the Approved Professional Bodies will ensure that all advisers are held accountable for the advice that is provided.

The Bill establishes a regime for the approval of the Approved Professional Bodies by the Commerce Minister and provides enforcement powers for the Securities Commission and the Courts, based on the existing provisions of the Securities Markets Act.

Issues have been raised about the potential cost associated with a multiplicity of Approved Professional Bodies, particularly in relation to disciplinary processes and consumer dispute resolution. And I hope that the select committee takes careful note of the submissions it receives in this area as many of the professional organisations and statutory bodies will have insights into how this might be managed.

The proposed professional body is required to have rules which meet the criteria of rules set out in clause 51 of the draft Bill. The criteria have been adapted from International Organisations of Securities Commissions (IOSCO) principles. This ensures that all APBs will have the requisite governance, systems and processes in place to appropriately monitor and supervise financial advisers.

It is important to note that the application of the proposed Bill is wide and, as I said earlier, this was intentional. We want everyone who works in the area of providing financial advice to think about this Bill and its implications. But at the same time, we do not want to use a sledgehammer to crack a nut.

I would like to invite the Select Committee to ensure that the Bill meets its objectives. I am open to, and indeed anticipate, there being changes through the Select Committee process to better reflect this intention. I encourage the stakeholders to remain actively involved in the development of the Bill through the Select Committee process. This will ensure that we have legislation that is workable, and effective in achieving its objectives.

I would like to record my appreciation of the participation of the industry through the consultation process, the work that has gone into the drafting of this Bill by officials, and to support parties for their backing of this important piece of legislation which contributes to the building of a sound and effective regulatory environment.

I believe that by creating such an environment, we will encourage market participation, facilitate investment growth and put us further along the path to transforming our financial sector into one that is a world leader.

I commend this Bill to the House.