Financial Advisers Bill

I have to confess that I may have misled the House during the second reading of the Financial Advisers Bill. I made the statement that advisers had told the House that only three clauses of the original bill would remain in the event that matters were completely redrafted from start to finish. Now that I have had a closer look at the bill, it seems there are only two: clauses 1 and 2. In the bill as reported back to the House it now seems that pages 9 to 70 have been struck out, with a fresh start being made on page 70 with clause 3, relating to the purpose of the bill, which is, of course, what we are here to discuss in the Committee stage today.

If we work our way through Part 1, and I know we are anxious to take a few calls—not several calls, but a few calls—on each part as we work our way through the bill, we find that the stated purpose “to promote sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of public advisers” is a pretty good summary of where we are at today. As I said in the second reading, it is impossible for any legislature to attempt to pass legislation to eliminate risk, and nor should a legislature attempt to do such a thing, because risk goes hand in hand with return. But this legislation seeks to require disclosure by financial advisers, in order to ensure that decisions about whether to use a financial adviser are informed. It requires competency on the part of financial advisers to ensure that this advice is available to investors and consumers, requires that they have the necessary experience, expertise, and integrity—I am not quite sure how one legislates for integrity—to effectively match a person to a financial product, and requires that financial advisers are held accountable for financial advice that they give.

Those are three broad and meritorious statements. The point of the three of them is that where an investor approaches a financial adviser and seeks advice on a financial product, whether it be a simple or complex product, or where an investor seeks advice on a more complex financial transaction that is to do with, for example, reverse mortgages, different superannuation schemes, and property investment companies, the idea is that a certain level of disclosure and a certain level of competency should be available to the investor at the time that that advice is sought. The purpose clause attempts to capture the essence of the following: it is not the intention to legislate to prevent the loss of money in investments, because that would have the outcome of putting the Government into the position of being a guarantor, effectively, of investments, and that is not the way that markets work, nor is it appropriate for Governments to find themselves in that position. But investors are entitled to a degree of advice and competency from those from whom they seek advice, so that they are put in a position where they are best able to make decisions.

What we heard at the Finance and Expenditure Committee was quite interesting, on some days. On one particular day, I recall the committee receiving a submission that went something like this: there were some financial advisers who were not disclosing the commissions that they were receiving when a particular product was sold, but, worse than that, where they were conceding that a commission, or a benefit, was accruing to them if a particular product was sold, not all of the benefit from, or the discount on, that product selection was being passed on to the investor. In fact, on some occasions, we were told, a portion of that benefit was being retained by advisers themselves. We found, at that point, that the legislation needed to be broad enough to make sure that disclosure did cover off those sorts of situations.

I think the other important thing about the disclosure regime is that even investors who consider themselves to be quite skilled and thorough—investors who may have a legal background, or may have been in Parliament for some time—and who go along to their financial adviser out of a sense of nervousness, to make sure that their investments are all in the right place and have sufficient protection, would find themselves in an unenviable situation if they were confronted with a 5 or 6-page document to sign on the spot. What we need to avoid with this legislation is the situation where investors are put in that situation and told: “This covers that stuff. Just sign here, and everything will be fine.” Even the most careful and confident of investors would not want to be confronted with that type of paperwork at that time, prior to receiving the advice, and feel as though they must execute those documents.

This legislation has to avoid that situation occurring, and I am sure the Minister in the chair, the Hon Lianne Dalziel, will give us an assurance in that regard. The legislation has to avoid the situation where an investor is simply presented with a wad of documents, told to sign them on the spot before financial advice is given or received, and then that, in effect, releases the financial adviser from any of the obligations contained in this legislation. The short question to the Minister is, can a financial adviser contract out of the provisions of the legislation by presenting the investor with a disclosure document that the investor executes at the point the advice is received, and are we making sure that pushing on the investor, at the time that financial advice is offered, will not create any problems for the investor at that point? I think we are all keen to know exactly how, in practice, the Minister sees that particular set of circumstances working, because the last thing we want to do is to put in place a necessary and comprehensive piece of legislation to deal with financial advice, and then find from day one that the financial adviser can simply contract out of it, or assume that those obligations are discharged on the spot because a particular document has been executed. We will be interested to receive the Minister’s advice on that point.

Let us move then to clause 5, “Interpretation”. We see that “document” is well defined there, as is “Commissioner for Financial Advisers”. I say that is an exceptionally good idea and one that National is supportive of. Although “financial adviser” is defined in Part 1, the definition refers to “section 8”, or clause 8 of the bill, which is slightly further on. That definition warrants some attention at this point, but before I come to it I just point out that Part 2 deals with financial advisers and their disclosure and conduct obligations, but the definition of “financial adviser” is contained in Part 1, just in case members are concerned about that.

Clause 8 states: A financial adviser is an individual who performs a financial adviser service …”—yeah right! That does not really clear very much up. Clause 10 defines a “financial adviser service” as one performed by a person who gives financial advice, makes an investment transaction, or provides a financial planning service. So I have one more question for the Minister, and it relates to the definition of “financial adviser service”. When we were on the select committee, we heard about the distinction between financial advice and opinion. I note that the reference to opinion is not contained in the definition of “financial adviser service”, and I would be interested in hearing from the Minister on the issue of an opinion that is given by a financial adviser. Clause 11 defines when a person gives financial advice. I presume that financial advice is—oh, here we go. Clause 11 states that a person who gives financial advice “makes a recommendation or gives an opinion or guidance”—I take it all back Minister; it is crystal clear there—“in relation to acquiring or disposing of … a financial product.” So that issue is covered; I give my apology to the Minister.

But we look forward to hearing from the Minister about the signing of documents at the point of investment advice being sought, and what that means for any downstream effects or for the protection that the legislation may offer.

It is with great anticipation that I rise to speak in the Committee stage of this bill. I would like to touch on clause 6, “Act binds the Crown”. Obviously, the Crown is exempt from the regulations around this bill. But, firstly, I shall turn to clause 3, the purpose clause.

Clause 3 states: “The purpose of this Act is to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers, by”. I was thinking somewhat laterally, as I do, about a situation in which the Crown were to give financial advice, then to renege on that financial advice—and I know that the Crown is exempt from this legislation. I give the example of the “chewing gum tax cut”, where people were given advice in a Budget, they made financial decisions and plans based on that advice, then the Minister of Finance reneged and took the “chewing gum tax cut” off the table. I would be interested to hear the Minister in the chair, the Hon Lianne Dalziel, make any comment at all on that matter. I know that it is a lateral thought, but if the public are to have confidence in the financial services industry, as is outlined in the purpose clause, then surely they need first of all to have confidence that the regulator, the Government of the country, will be true and hold to its word.

I turn to the interpretation clause and the definition of “advertisement”. It is plainly obvious that it is some form of communication. We recently had an example in Wellington that is not addressed by this bill or the disputes bill, but may fall under the Commerce Act, I guess. An organisation had a billboard outside its retail outlet offering funds at 8 percent interest, and at the bottom of the advertisement was the statement “8 percent p.w.”—per week. Most people who went in there to borrow money had no idea what “p.w.” meant. In fact, 8 percent interest per week compounded amounts to thousands of percent per annum. Under the Commerce Act, that organisation was being quite open, because the billboard stated “p.w.”, but the people using that service did not have the financial literacy to know what it meant. Perhaps we need some more financial education in the public domain, in our schools—and probably in Parliament.

I go back to a point I made before. Someone was interjecting on one of our previous speakers, who was speaking about real estate. I note the definition of “category 1 product”. Whoever interjected said that real estate is excluded, but the definition states that “category 1 product” means “any estate or interest in land for which a separate certificate of title can be issued …”. There you go! That is a derivative, because someone can own the land, can use it as a guarantee, can use it as collateral, can use it as security, and, way down the chain, someone can borrow against it to buy a car—someone whom the landowner has never ever met. There may be three people in the chain. That is why real estate is a category 1 product. I would be interested to hear the Minister clarify that. I do not whether she was the interjector. I give her the benefit of the doubt—perhaps she was not.

Complex derivatives, etc., are also category 1 products. The definition refers to futures contracts, or any other contracts that may be specified along the way. The crisis we currently have in the financial markets is in and around those complex products. Events that occurred initially in New York and Cleveland are affecting people right down here in New Zealand. Unfortunately, or fortunately, that has been part of the global financial system we are in.

In looking at clause 5, “Interpretation”, I point out the obligations of financial advisers, and who they are. As earlier speakers have noted, they are not liable for the return on any investment, as long as everything is declared upfront and disclosed, be it a category 1 product or a category 2 product. That is all well and good, but we must distinguish what they are, because in these current times, when New Zealand is in a recession, many people are looking at the advice they were given. They need to determine whether they were given the full information, and if they were not given it, whether that impacted on the return on their investment. Someone may advise someone else to invest in, say, Australian equities, and that adviser may forget to give that person the relevant foreign exchange advice. As I said earlier, it is all about risk.

I would be interested to hear other members speak about trust accounts. I refer to the definition of “trust account records”. Under this bill, we interpret “trust account records” to mean “records relating to a trust account; and (b) includes any information that relates to a trust account and that is recorded or stored by means of any tape recorder, computer, … and any material subsequently derived from information so recorded …”. As we all know, and without going into the detail, interpretations of trust accounts and what goes through them—the interpretation of them—and the impact on not only the trustees but the beneficiaries of those trusts, declared or otherwise, is a very pertinent issue before this House and before the public right now. On issues like that, the public has to have full confidence that the legislators in this House abide by the same rules that we ask the public and the financial advisers for whom we are regulating to abide by. We should put ourselves under the same microscope and regulation that this bill will put the financial sector under. Thank you, Mr Chairman.

The question was that Part 1 stand part, and we have—

💬 Simon Power: I raise a point of order, Mr Chairman. I am sorry for interrupting when you are just about to take the vote, but there were a couple of questions, and one in particular, that I had asked the Minister in the chair, the Hon Lianne Dalziel, during my contribution on Part 1. They related to circumstances where financial advisers were asking clients to sign documentation relating to disclosure. I just wondered whether before you put the vote, in order to keep the Minister’s contribution in order, she would be prepared to offer me some advice on that matter.

💬 Hon Lianne Dalziel: Part 2.

💬 Simon Power: Part 2?

💬 Hon Lianne Dalziel: All the disclosure is in Part 2.

💬 Simon Power: OK, well I am happy to wait until Part 2.

The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 1 be agreed to.

Amendments agreed to.

Part 1 as amended agreed to.

Part 2 Financial advisers and their disclosure and conduct obligations