Financial Advisers Bill

This is the part that attempts to deal with how to define authorised financial advisers and qualifying financial entities. I think that it is the most elegant part of the legislation but it is an extremely tricky thing to legislate for, and the officials are to be congratulated on coming up with such a neat way of categorising advice, in such a short period of time. This is essentially the part of the bill that creates the tiered approach, if you like, and National is supportive of that approach, as we modestly suggested throughout the process that such an approach would be appropriate.

One thing about institutional accreditation still sits in the back of my mind. I am pretty sure, although I stand to be corrected by Charles Chauvel or any other member of the committee who was there at the time—in fact, the officials might be able to correct me, directly through the Minister—but I think it was Sam Stubbs from Tower who came before the committee and made a comment that went something like this. When it comes to dealing with a professional after something has gone wrong, and what I think he termed the eye-to-eye conversation across the kitchen table has been had with that individual about the particular advice or product—in fact, I think he drew a parallel with a dentist, if I recall correctly—the responsibility should lie with that individual, in the event that the financial advice has proved to be inadequate or inappropriate. That issue has sat for the last 2 or 3 months at the back of my mind—a reasonably crowded and cluttered place for it to sit, over the last 7 or 8 weeks—

💬 Hon Mark Burton: It’s such a small receptacle.

I say thank you to Mr Burton. I will miss those sorts of comments after the election, although I am sure it was meant in good humour, as all of the member’s comments have been over the last 9 years.

In the situation where that individual who sat across the kitchen table gave financial advice to the person concerned—after a level of trust was built between them, and discussions occurred; it was that personal connection that saw the investment decision triggered—we do not want to create a regulatory framework that sees that individual escape responsibility or escape accountability because he or she happens to belong to a large organisation that is institutionally accredited for the range of advisers who come under its umbrella. I think the submitter who raised that issue raises a fair issue. We cannot afford to have a group of financial advisers structure themselves in a way that sees that grouping being given an accreditation at an institutional level, and thereby inoculating its individual salespeople, financial advisers, representatives, and financial planners, from any direct accountability or responsibility for the very nature of the trusting relationship that that one-on-one discussion built.

That is the only question, the only comment, and the only thing on which I seek feedback from the Minister in Part 3. Thank you.

I am happy to respond to Simon Power’s comment on accountability and say that that is the reason why the qualifying financial entity approach that has been adopted in the Financial Advisers Bill is, as the member himself described, such an elegant solution. It says that the qualifying financial entity, which is required to meet a standard in order to have that status acquired through the Securities Commission, takes responsibility for defining who falls on either side of the line. On one side of the line we have the ones who are to be individually authorised and therefore individually accountable, like any other authorised financial adviser. On the other side of the line we have the category 2 advisers, who are dealing with the lower-level products based on that risk assessment. I think that is a neat way of allowing the institutions to take responsibility for employees and agents who are operating to sell, essentially, products that are in that lower-level risk category; the higher-level advisers will be required to be authorised financial advisers.

To go back to a comment another member made about the sequence of events around budget advisers, I say that is a very good example to use to explain how we have got to this particular position. When we started off by defining people by their particular occupations, we ended up in a situation where budget advisers necessarily were included in the definition because it was so broad. We are trying to bring that back but at the same time we are very mindful of the fact that if we exclude an occupation, then all of a sudden people will redefine themselves as budget advisers instead of financial advisers in order to avoid coverage, which is why we tried to link it to the funding from the Ministry of Social Development. That was not the best mechanism. The select committee came up with a better one, and I am grateful to it for that. Then the officials and I have come up with an even better one, which is the one in the Supplementary Order Paper.

But that is the exact point I am making: that the qualifying financial entity actually taking responsibility for dividing the two groups—one requiring the individual authorisation of the Securities Commission and the other coming within the responsibility of the qualifying financial entity—is, I believe, the best of both worlds. We get really good coverage and we get that eye-to-eye contact for those who have made bad professional judgment.

I thank the Minister of Commerce and acknowledge those points. I agree with the qualified financial entity part of this bill—Part 3. It is another part that was totally rewritten, and for the better, as we have all acknowledged. I have some questions, though—and perhaps I need to read somewhere else—about the qualified financial entities.

Many of the submitters, particularly the larger players, are already doing something along those lines anyway, so the burden is not huge. They operate across many jurisdictions, and therefore need to keep control and account of who is doing what everywhere. In this mobile world, where one can call a local bank and end up talking to someone overseas, keeping control does become tricky, and the bill acknowledges that we can go only so far here in New Zealand.

Among the three obligations and responsibilities of qualified financial entities that are mentioned in the bill—and I agree that the Securities Commission having that call is exactly right; it is the gateway of all things regulatory around financial markets, along with the Reserve Bank; I think it is a good fit—is to ensure that staff are authorised. Most of them took that on board, particularly the larger ones. They do not really have a problem with it, because all their staff are authorised in some way, shape, or form in order to get into the building, to use their websites, or to do whatever it might be.

They are also obliged to provide a list of names to the Securities Commission, and to keep that list up to date. I would be interested to know what “up to date” means. I had a quick look at the definitions and I did not see it there. Common sense would say it meant quarterly reports, or something like that, but it could cross a financial year, or it could be an entire cycle. What is up to date for one qualified financial entity operating here in New Zealand on its own may be different from what is up to date for a qualified financial entity that is incorporated here but is essentially overseas owned. Is there consistency of timeliness? I am sure the Securities Commission would give encouragement and guidance, but perhaps it is one of those areas that the select committee could have defined a bit further. I am open to be advised that the definition is somewhere in the bill.

My colleague Simon Power pointed out earlier that all of us here agree that the single regulator model of the Securities Commission—leaving the expertise in that place—is very good. The bill acknowledges that a Commissioner for Financial Advisers will be appointed. The commissioner will be a member of the Securities Commission, and that is all very well and good. I presume that more funding will be required to enhance whatever operations it does.

Also in this part—and I acknowledge the foresight of this provision—is alignment of the fines outlined in the Securities Act, those in this bill, and those in the Financial Service Providers (Registration and Dispute Resolution) Bill, which I assume we will be talking about this week. There will be consistency across the sector, and that takes away the ability for someone to do regulatory arbitrage, to exploit one piece of legislation over another—to do fine arbitrage, if one likes. In this bill as it was first drafted, there was the possibility of five industry bodies, and one person could have moved around the other bodies.

National members are voting for this bill and this part. We endorse where it has got to now. We endorse the consistency of it, and the recognition of where the expertise lies in this particular sector. I think it is very good. I acknowledge the qualified financial entity model and the authorisation of two tiers, category 1 products and category 2 products—complex and run-of-the-mill, if you like. I think it is a very good fit. Yes, there may be further work to do.

I shall talk a little about the types of institutional accreditation. There are those registered under this bill as category 1 products and category 2 products, and authorised by the Securities Commission. That is nice and clean. There are bound to be some organisations that fall outside or very close to it, but I am sure we will find them on the way through. Having category 2 will totally do away with all the fears of the various insurers, agents, and people who operate call centres for banks. Basically, they are transacting run-of-the-mill business. I acknowledge the Minister in regard to where we have got to on that. On a cost and compliance issue, it was a great leap forward, because everyone had looked on it in horror.

The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 3 be agreed to.

Amendments agreed to.

Part 3 as amended agreed to.

Part 4 How financial advisers are regulated