Financial Services Legislation Amendment Bill

Can I acknowledge that this piece of legislation has come about from a review in 2016 to, essentially, rewrite the legislation and regulation in and around the financial advice sector in New Zealand. Can I acknowledge that these changes have been a long time signalled, but, obviously, will come into force very soon.

As I said to a group of financial advisers at a forum earlier today, here in Wellington, we will be working alongside the financial advice sector to ensure that the change in the regime in the financial advice sector is one that is done in the best interests of consumers to make wise, informed, and motivated decisions, because, as I pointed out to that audience, some research done by the Retirement Commissioner’s office found that 68 percent of New Zealanders are nervous about making basic financial decisions. A lot of that will have come about as a result of the relationship or, in some cases, the lack of a relationship that many New Zealanders may have with financial advisers. This piece of legislation goes a long way to amending a number of Acts—the Financial Markets Conduct Act, the Financial Advisers Act, and also the Financial Service Providers Act—to ensure that a much better regime in the interests of customers is in place around financial advice for New Zealand.

I guess I have to put this piece of legislation into the context of other things that are happening in the finance sector. We had two reviews undertaken by the Financial Markets Authority and the Reserve Bank: the first one into the culture and conduct and practices of the banking industry, which was delivered late in 2018, and also a similar review by those two regulators into the life insurance sector, which was released in late January. As a result, a regulatory gap was recognised in the areas of conduct and culture that the Government has already committed to ensure that we will close. But, in a large way, the Government recognised that there was an issue, and it made a priority to get the Financial Services Legislation Amendment Bill that we are debating here this afternoon in train in order to make the changes that are required in the sector, both for the sector, to offer some surety given a long term of wondering what was going on because the review took place in 2016, and also for consumers, who I think have been crying out for some certainty and a better relationship between financial advisers as well.

I think, if we overlay that, some of the changes that are being made in Part 1 do pertain in somewhat of a way to some of the issues that have been borne out across the Tasman as part of the royal commission into the finance sector over there. We saw across the Tasman some blatant, awful behaviour from some of the players—actually, a lot of the players—in the financial services sector. As a result of that, both of those reviews have taken place, but I have great confidence that we foresaw some of those issues and progressed this piece of legislation.

I’m sure there will be some debate and some questions in and around the FSLAB bill, as we know it in our office. So I will listen to the debate with much interest and offer any answers to queries that may be offered up during the debate.

Mr Chair, it is with some surprise but much delight to be standing here and speaking on the Financial Services Legislation Amendment Bill at the committee stage. I hear what the Minister of Commerce and Consumer Affairs was saying in terms of lifting the financial capability of New Zealanders through this bill. I am intrigued, because, once again, this is one of the many bills that I haven’t actually had any involvement with, despite being in my whips role. I go from select committee to select committee quite often and cover the position; however, I haven’t come across this one in my travels.

I am intrigued, though. As I was looking at the bill, and leading up to this, I’m particularly interested in what the Minister has to say in terms of the provisions around here more around financial capabilities. I want to hear what the Opposition have to say about this, because I don’t know what their position is. I’m not too sure whether they have voted in favour of this at this first reading or against it, and, of course, we’ve seen many bills come through this House where the Opposition haven’t supported it and, because this is the Government with a majority, it’s carried through. But I am intrigued to know, actually, where the Opposition stands on this.

I note that this particular bill has been in the mix for quite some time—around 2011, from what I gather. I was reading while the Minister was speaking, and I note that there have been 72 written submissions in favour of this, so I’m not surprised that he was able to stand up with much confidence. I mean, he’s been able to deal with any question that’s been thrown his way thus far, but in this particular bill I was intrigued by what he had to say, and I am looking forward to hearing more. So on this side of the House we commend the Minister and the officials that have assisted him up to this point. Well done on getting to the committee stage. I’m very much looking forward to hearing what the National Party has to say about it.

Thank you very much, Mr Chairman. I would like to speak to the Supplementary Order Paper that the Minister has tabled, Supplementary Order Paper 195. It’s quite a substantial Supplementary Order Paper, and I would encourage members to give it a thorough examination, and I’d also encourage members to vote in favour of this Supplementary Order Paper, because I think it makes some thoughtful and helpful amendments to the bill that the Minister Mr Faafoi is progressing through the House.

I note that it amends several aspects of Part 1, which we are currently debating. It amends clause 23 of the bill by inserting new section 403(4) of the Financial Markets Conduct Act (FMCA), a condition prohibiting or restricting a financial advice provider from engaging a financial adviser who is also engaged by another provider. I should imagine that is to ensure that there’s no suggestion that they are in any way operating against the best interests of the advice provider that is engaging them and, obviously, potentially operating against the best interests of any client who might be receiving advice from that provider. If I’m incorrect in that assumption, then I’d be very happy for any member to put me right on that. But that seems like a useful and sensible addition to the legislation.

Likewise, there are changes amending the transitional provision in new clause 76 of Schedule 1 of the bill to ensure that decisions relating to transitional licenses can be appealed under section 531 of the FMCA. That is what is usually considered a reasonably technical amendment to the legislation but is nevertheless one which I’m sure will make a significant improvement to the legislation.

It seems to be that, actually, in fact there are a number of changes to the transitional provisions of this legislation, and, of course, it’s always important to ensure that as we are moving to new legislation or making amendments to legislation we move from one regime into a new regime, we get those transitional arrangements correct. One of the things that I think all Governments hear—from business, from community, and from anybody operating under the legislation that we pass in this Parliament—is that they need certainty and clarity, particularly through transition phases, where it is important that people understand their obligations and they understand their changing obligations and what has been put in place in the legislation to support their transition from what they are currently obliged to do to what the requirements will be under the new legislation. So I applaud the Minister for bringing these amendments to those transition arrangements to bring more certainty and more clarity to the way in which those transitional arrangements will be implemented and to give certainty and clarity to those financial service providers who will be regulated by this legislation.

I think those are the particular aspects of this Supplementary Order Paper that took my attention, but I do note there are a number of changes in this Supplementary Order Paper, many of which pertain to Part 1. I have no doubt that those are matters that the committee will want to consider and examine at some length.

Seeing as the Minister Iain Lees-Galloway has taken some interest in Supplementary Order Paper 195, and in particular in new section 403(4) of the Financial Markets Conduct Act, I would like to just actually thank some of the advisers who we met during the process of consultation who raised the issue of advisers who may work for more than one financial advice provider—or FAP, as they are known in the sector.

There was some concern that those who are working for multiple FAPs might have conflicts in some of the advice that they are giving clients, but also the concern was, if something were to go wrong for a client of an adviser who worked for multiple FAPs—depending on the product and what product was being sold by which financial advice provider—where the accountability would lie.

I think at the outset there was a move through the consultation and through the Supplementary Order Paper to, essentially, ban the ability of advisers to work for multiple FAPs. But given that this legislation will, in a large way, reorientate the environment that financial advisers are working in, the Government decided to take a slightly different approach and, while trying to address the issue, leave some flexibility for the likes of advisers who might be working part-time and working for a number of financial advice providers. This was to ensure that that didn’t restrict the ability for those who might be—and I think we’re more concerned for those who are—working part-time and leaving the sector, or on their way to leaving the sector, from being able to work for multiple FAPs, while still giving the ability to have some accountability as to when something might go wrong.

So, again, good spotting, because that is something that didn’t necessarily come up as an issue, and that made its way to that SOP because it actually came from the sector of itself and was not necessarily something that the officials highlighted during the process. I guess, with just a minute to go, in particular around new section 403—[Interruption] I’ll talk very slowly!

Sitting suspended from 6 p.m. to 7.30 p.m.

Thank you, Madam Chair. I only had a matter of seconds left in my contribution before we interrupted the debate for the dinner break, and I was responding to a contribution from Iain Lees-Galloway around the Supplementary Order Paper (SOP) which inserts new section 403(4) to the Financial Markets Conduct Act. And the only other contribution I was going to make in relation to that was to thank Nick Stewart, who is a financial adviser out of the Hawke’s Bay who alerted us to the issue, amongst others, and was quite forthright in his advocacy for us to do something about that within this piece of legislation.

Madam Chair, thank you, and thank you for allowing me to make a brief contribution this afternoon on Part 1 of the Financial Services Legislation Amendment Bill.

My attention was brought to some of the more preliminary provisions in this bill—as you have just covered off some of the more substantive issues, but I’m sure that many of my other colleagues will want to contribute on some of those at a further date, and I myself actually might want to contribute to that debate. But, just as a very brief matter, Minister, my mind was taken directly to the commencement provisions. What we do have is you’ve got a couple of provisions right there that—

💬 Brett Hudson: We’re not on the commencement yet, are we?

Oh, I mean my mind was there, but I’m happy to go into the more substantive part of the bill which, of course, is Part 1.

So, in terms of Part 1 of this bill, my mind was drawn to, I guess, some of the definitions and how some of those definitions have evolved. I saw, through some of the initial stages and deliberations of the bill, and I noticed that those definitions had changed quite substantively from the initial proposed measures to the ones that we have before us. There were some quite substantive discussions around what is deemed as an authorised body. So I was wondering if you can, perhaps, just give us some of the considerations or help describe the way that this bill has determined that in relation to the market services licence. It’s an entity that’s authorised under section 400, in clause 22, to provide that market service under that licence. I did see that there had been some quite substantive discussion around that.

In terms of what it means to be engaged in relationship to the financial advice provider, again this is an area that I picked up that there’d been some discussion evolution over the preliminary courses of the bill coming into this committee stage this afternoon. At which particular stage is somebody deemed to have engaged the financial advice provider? I know that there had been a whole range of contributions in that respect. So if you could help, I guess, enlighten the committee this afternoon as to why you’ve landed on that definition there in section 431DA.

Now, if I turn to clause 20, the substance of the bill has been amended substantively. So I guess I just want to commend all of the officials that have been working studiously over a long period of time to get the bill to this stage.

So if I just turn to the actual application for the licence for what the Financial Markets Authority (FMA) may determine that licence to be. The example there is provided in clause 20, inserting new section 395(1A). So it’s that we “(a) specify any of the matters referred to in section 548(1)(p)(i) to (iv);”—that they must be different matters for different classes of applicant or other circumstances, and it has been included there in the bill that those time frames must be specified within which different classes of the applicant must make an application for the licence, and then that the FMA may refuse to consider the application if the person does not apply for the licence in that specified manner, and there is an example provided for. I guess that there has been some amendment from the previous draft, and I was hoping that we might be able to just get some further considerations about why there needed to be this type of amendment for the application of the licence.

Thank you, Madam Chair, for this opportunity to speak on the Financial Services Legislation Amendment Bill. If you’ll just indulge me for 20 seconds, I actually researched this for my speech tonight. I gave a speech on it in its first reading, and I acknowledged my first financial adviser being my man who was here with the baby at the time, and time has passed since then—a lot of time has passed since then. Thank you to the Economic Development, Science and Innovation Committee that has worked on this and come back with the version that we’ve got today.

In my original speech I actually talked about disclosure, and I just want to refer to something that I said there, and then come to the sections and the proposed wording and amendments for that, and then I actually have a question for the Minister around that.

So I put in there: “Disclosure ensures that consumers have sufficient information about the person providing them with the financial advice before actually engaging these services. However, current disclosure documents are too long, they are too complex, and they are too jargon-filled, and so they often end up not even being read, and even if the statement is read by consumers, it is far too complex and, for most, it does not contain the information that consumers actually need to make informed decisions.

Now, I’m aware that there was a royal commission across the Tasman on this. My question for the Minister is: does he think the disclosure provisions in section 431—I was going to say new subsections “X Y Z”; it actually is W, X, Y, Z, ZA, B, C, D, E, F, and G—are actually in some way going to address the concerns that were raised on that? So if I could just get the Minister’s views, in particular, on the disclosure obligations for services for retail clients—on page 3, you can see them outlined there. Thank you.

I’ve been looking at this Financial Services Legislation Amendment Bill and the way it’s come back from the Economic Development, Science and Innovation Committee. That isn’t a committee I sit on. So I haven’t had the opportunity to discuss this bill in detail. One of the things I’m particularly interested in is the code of conduct that financial advisers will have to adhere to. Looking through the bill, what I’ve become aware of is that authorised financial advisers are going to have to comply with a code of conduct. As far as I can tell, the particular code of conduct is in existence already, or it may be being updated.

I guess one of the things that I know from my background in having taught business ethics, professional ethics, applied ethics, ethics ethics, and meta-ethics—at the time when I was lecturing in philosophy, that was a bit scary. But one of the known aspects of the codes of conduct is professional bodies, organisations can write the most beautiful codes of conduct and write the most fabulous codes of ethics, can have the most beautiful ideals, but what really matters is how they are communicated, how members of that profession take those codes of conduct on board, how they are updated from time to time in order to take account of changing situations, and, most importantly, how they are enforced. A code of conduct is just pretty words on a page if there is no mechanism for enforcement or if the enforcement is trivial or weak. If the penalties for misconduct really amount to a slap on the wrist with a wet bus ticket—probably a wet Snapper card would probably cause a little bit of pain, but the old bus tickets did nothing. So I am quite interested in that particular code of conduct: first of all, that aspect of how it’s actually developed, communicated, and enforced. I think that’s a very important issue.

In terms of that code of conduct too, one of the issues around the development is the extent to which the development of it draws on the expertise of people involved in the industry already. Now, that’s fine because people involved in an industry already obviously have an in-depth understanding of how the industry operates and what the particular crunch points are for people within that industry. But, of course, people within an industry can also participate in a mode of groupthink so that something that seems perfectly acceptable to them within an industry might seem quite egregiously wrong to someone from outside the industry.

So what I’d like to understand is to what extent in the development and ongoing growth in the regulation and the enforcement of the code of conduct to which authorised financial advisers must adhere—as well as drawing on the knowledge and the expertise and the lived experience of people in the industry—it also draws on the knowledge and the experience and the lived experience of clients of the industry, because they might have quite a different experience from the people who actually sell the services. And of course they are experts; the people who live the life are the experts.

But the other set of experts that I would like to understand the extent to which they might be involved is the people I would call the professional experts: those who actually do have the academic expertise in ethics and in business ethics, who’ve got the oversight over a number of codes of conduct and codes of behaviour and codes of ethics or whatever, can see the similarities, can see the differences, and can see the pitfalls. So I’d like to understand the extent to which those people might also be involved and if, at this stage, they’re not involved whether there would be a possibility for them to be involved at some stage, partly, as I say, to draw on a broad range of expertise, because I think that might be one of the best ways to get a very effective code of conduct in place. So I’d be interested to hear from the Minister in the chair on those issues if possible.

Just to address some of the questions that have come through from members who have taken a call so far in this debate. Can I begin with Deborah Russell and her inquiries around the code of conduct under this Financial Services Legislation Amendment Bill.

There has been for some months now a code working group that has been slavishly working itself away through consultation with the sector to ensure that it gets what I would call some pretty common-sense things within the code of conduct itself. The member did ask about the make-up of the code working group, ably led by Angus Dale-Jones. Probably, when I think about the make-up of it, a majority of them have been practitioners in the area, but I can assure you—as the member inquired—there is certainly a strong consumer voice on that code working group to ensure that some of the suggestions that they came up with in the code do have a strong consumer within it.

The code working group delivered a draft of the code to me at the end of February and we now have three months to consider that. In amongst that consideration, along with the ministerial office looking at it, also the Financial Markets Authority (FMA) has a duty to give feedback on it as well. Obviously the member asked a question about enforcement. The Financial Markets Authority will have the responsibility for oversight of that to a degree and also—and I don’t want to give too much away because it hasn’t been made public yet—it has within it the necessary qualifications so that there will be a bare minimum for those who are offering financial advice to consumers within that space. I noticed that Kiritapu Allan also talked about commencement dates. There is a transition period within the bill to enable the sector to get ready for the new regime—part of that being the new qualification regime—and I think that’s important to make sure that we do give some time for the sector to get ready for the new environment.

Just going towards some of the questions that Willow-Jean Prime asked around new section 431W, set out in clause 27, around disclosure, I think you’ll see what I would have hoped would have been the point, before this legislation came in, around disclosure before receiving client money and when that should be done. That is pretty plainly set out in new section 431W. But also a little further down—and I think she alluded to the Australian royal commission—on page 31 under new sections 431Y, 431Z, and 431ZA and 431ZB there are some new pieces of a regime there around conduct obligations for financial service providers.

This piece of work, I think, was done obviously foreseeing some of the issues that may have come down the line because of the Australian royal commission and concerns around the behaviour of financial advice providers in Australia, and of course, as I mentioned in my opening remarks, some of the conduct that we saw from the review by the FMA and the Reserve Bank into banks and life insurance providers. I am glad that we took these measures well before the FMA and the Reserve Bank instigated their reviews, because we recognised the importance of making sure that the financial advice sector was robust and that the issues around conduct and disclosure for the benefit of both the sector and the consumer were dealt with.

We’re obviously also looking at insurance through the insurance contract review and, as a result of both the FMA review and the Reserve Bank review, the gaps in the conduct and culture regulation will be addressed. We’ve already talked about the likes of soft commissions, which are driving bad behaviour in the sector, and, at the end of the day, that isn’t in the best interests of consumers, which is something that this Government has put very high on its priority list.

Thank you, Madam Chair. I was fortunate enough to be able to sit on the Economic Development, Science and Innovation Committee and listen to a lot of the submissions that came through from all areas of financial service providers. We had everybody from the Citizens Advice Bureau coming to present, through to the Financial Services Council of New Zealand. Everybody brought with them their own concerns, and I’m glad that we’ve gotten to the stage where the kinks are slowly starting to be ironed out, but I just wanted to drill down into something that kept coming up time and time again. That was the little section which talked about the duty on behalf of the financial service provider to give priority to the clients’ interests.

Now, this sounds really, really standard right? You’d think that everybody that offered a product as a financial service provider would actually do so ethically and with the clients’ interests first, but unfortunately what was revealed was that actually quite a few financial service providers were marketing their own products, they were in it for themselves, and they weren’t at all putting the clients’ interests first. A lot of our submissions centred around that, and argued back and forth about whether or not we should be looking after the clients’ interests first, or whether or not an employee of, say, a bank, has got a duty to the bank, first and foremost, to put the bank’s interests first.

That, then, gives rise to questions around commissions, and whether or not commissions are something that are ethical in that kind of forum. Bob goes into the bank; he is applying for a loan. The question is: is Rob, who’s sitting there and getting paid a commission to push the bank’s products, acting in the best interests of the client? And, actually, I would argue that, no, he’s not; he’s arguing in the best interests of the bank. So clause 27 inserts new section 431J into the Financial Markets Conduct Act, and that would impose a duty on financial advice providers to take all reasonable steps to put the client’s interests first. It is ideal, but it is fraught with difficulty as well.

Of course, there was the concern that was raised that Mary, who works at the bank, would then have to list every single product from every other bank available to try and understand exactly where the best product was for the customer sitting in front of them. It was kind of argued that maybe there needs to be carve-outs in that process. Maybe we need to take into consideration the fact that the financial service providers don’t actually know what every product on the market is, and whether or not that holds up that ideal of putting the client’s interests first. So I guess that I’m keen to hear from the Minister just how that process evolved.

Once we’d heard the submissions it was quite clear that there was a desire to put the client’s interests first, but actually drilling down into where we got to with that would be incredibly helpful. I guess the fact of the matter is that the financial service provider wouldn’t know all of the products out there on the market. They’d actually know the products that they’re selling, or that they’re getting commission for, as well. One of the submissions by the Citizens Advice Bureau was strictly around that—around whether or not we should be disincentivising that whole commission situation, whereby, if you are giving financial advice, maybe you shouldn’t be getting a commission. I know that there were a lot of submissions that centred around that whole debate around commissions.

So I would really like to know where the Minister got to with that, because, on behalf of all of the submissions that we heard, we should probably get an answer to that. As I say, it’s quite ideal, putting the client’s interests first, but, hopefully, this bill gets to reflect some of those submissions that were presented to the select committee when the time came. So if we could hear from that, that would be incredibly helpful. Thank you, Madam Chair.

Thank you, Madam Chair, and thank you for allowing me to make another contribution to this Part 1. I must say, Part 1 is a very substantive provision in this bill, stretching approximately 46 pages long. So I know that a number of my colleagues will be eager to address a range of the amendments it made. As my colleague Deborah Russell said before, she’s not on the select committee that did have the opportunity to consider this bill. Neither am I, but I am on the Finance and Expenditure Committee and we did recently have the banking inquiry before us. There are a lot of themes that, I guess, are aligned, and my colleague Tamati Coffey just touched on some of those. I think, for me, it was really interesting because when we went through the banking inquiry, one of the areas that we didn’t have an opportunity to turn our mind to, or that I recall in a substantive way, was the issue of offences that arise, and, of course, penalties that arise.

Now, I guess my considerations here, just with regards to the substantive amendments that you’ve made in new sections 431E through to—well, they’re pages long, they go right through to 431Q, I think, or further, set out in clause 27. But you’ve really stretched out, and, perhaps, amended the position under the previous bill. I was thinking in terms of the intentions of the original bill, it was, effectively, to bring in legislation that regulated what could have been called “cowboys’ territory” a little bit, because the financial markets and the provision of financial information at that time were completely unregulated. So it was good to see that there were a range of different mechanisms put in place but, I guess—without having had the opportunity to go through the substantive submissions—what I was really interested in is there have been substantive amendments to these provisions here in this offences component.

We’ve got everything from things as small as terminology that deletes the word—for example, in new section 431K “Duty to exercise care, diligence, and skill”, there is “prudent person engaged in the business”. You’ve deleted the word “business” and amended it to “profession”. I understand what the intention is to do there; it’s to place a higher onus on those that are in this line, or in this sector, giving this advice. But I want to know what the actual substantive implications of those types of amendments are. That was one minor amendment I was interested in.

Then I looked at new section 431G, “Liability for [those] duties”, set out in clause 27. Now, what we’ve got there is you’ve really got the separation between who is civilly liable, and who isn’t. Now, those that are in the provision of the advice—so there you’ve got the financial adviser; they’re not deemed to be civilly liable for contravention. But if we skip down to new section 431G(4)(c) the entity “may be civilly liable for the contravention”. So it seems to be that the adviser, they have been let off the hook a little bit in terms of what they are liable for, but the institution and the organisation bear the burden. I understand that, in terms of the fact that the organisation, I guess, has a higher onus of responsibility. They’re the ones that have to employ, and, I guess, they have the insurances and so on and so forth.

But if you have somebody within the organisation that’s undertaking a practice which intentionally is undermining what we think a prudent and responsible professional would provide as their advice, I just wanted to understand whether there was another ability to be able to ensure that they were held liable to the extent possible. So if you would be able to enlighten the committee through this phase about that distinction between those standards of liability, that would be most pleasing.

I move, That the question be now put.

Thank you, Madam Chair. I didn’t sit on the Economic Development, Science and Innovation Committee for this bill, but I have sat on what was formerly known as the Commerce Committee for a number of years. So with reference to Part 1 of the Financial Services Legislation Amendment Bill, this is a brickbats and bouquet speech—a bouquet to the Minister in the chair, the Hon Kris Faafoi, for moving ahead with the important work around identifying what needs to change in this space. I feel quite horrified, actually, looking at the figure that’s been given by the Commission for Financial Capability that 68 percent of New Zealanders have money worries and at the complexity of the financial environment and how difficult it is for people, particularly people on low incomes, to navigate their way through our financial system. I will come to a bouquet also, actually, to banks, or at least one of the banks in my electorate which actually is doing some very good work about trying to reach out to vulnerable communities.

But the brickbat is, essentially, to the behaviours of financial advisers. Despite the terrible history that resulted in the formation of the Financial Markets Authority, and for any of those sitting across the Chamber tonight, I’m not sure—oh, Melissa Lee, who would have maybe been sitting on the select committee around the time that we heard the submissions from the small investors that had lost everything due to the awful behaviours of companies and individuals that led to all those collapses back in the 2008-2009 period that resulted in an inquiry, that resulted in the formation of the Financial Markets Authority, that resulted in really important legislation that is the base legislation here. But we’re still seeing behaviours where the people who are coming for financial advice aren’t being put first.

I ask myself, you know: to what extent do you have to go to hold people to account who are giving, quite frankly, crap advice? Sorry, Madam Chair, if that’s an unparliamentary term, but I think in this particular instance it’s quite apt. I’m sure that the people listening tonight would agree. One of the things that appalled me back then, during the 2010-2011 period was the advertising marketing strategies that were being delivered to the people of New Zealand to convince them that going with this product or that particular organisation was somehow going to reap them heaps of benefits, when in fact it resulted in them losing their lifetime earnings. New section 431J in clause 27, which is the duty to give priority to the client’s interests, which is the clause that I’m referring to—it’s such a shame that here we are in 2019 and we still haven’t quite got there. So I applaud the measures.

I give credit to my local Westpac branch in South Dunedin that regularly reaches out to me to talk about the social issues around in the 10,000-odd community in South Dunedin, one of the most vulnerable communities, as to how they can offer better ways of communicating difficult complex financial terminology and practices in ways that actually enrich people’s lives rather than putting up barriers. That is what we need in this country, that is what we want to see from our financial sector, and let’s get on and move this bill.

Madam Chair, I don’t want to prolong the debate too much, but a number of my colleagues raised questions, which I think are probably worthy of a response. First of all, to Kiritapu Allan around liability of advisers, I just want to also point out her concern in this area should be allayed by the fact that advisers are still subject to disciplinary committees, can be banned from the industry, and can be fined up to $10,000 if they’re found to be in contravention of their own code of conduct or anything within the bill itself.

Also raised by another colleague of mine was the issue of commissions. I just want to make sure that we address the issue, because a number of submissions that came to the select committee were around commissions. I think, putting all these issues together from the Financial Services Legislation Amendment Bill, but also too the issues that were raised as part of the Financial Markets Authority and Reserve Bank reports and concern around commission structures, they’re certainly a part of commission structures that the Government does want to crack down on, and this may have come up during the select committee, and that is what is commonly known in the sector as soft commissions, when advisers are churning life insurance policies just to get the likes of an overseas trip to Rome or that kind of reward from an insurance company.

We certainly have made some clear statements that those types of commissions are going to be gone, but also we said that we’d consult with the sector and look very closely at the other commission structures, many of them that may be within the financial advice sector, to make sure that any changes to commissions are done in a balanced way, and also look at ensuring that any kinds of outcomes that aren’t in favour of a good outcome for consumers are dealt with, but we don’t necessarily need to throw the baby out with the bathwater. So we will consult on that. I think we’re getting some advice on that from the Ministry of Business, Innovation and Employment soon and we’ll consult with the sector in May to make sure that we get the balance right with the industry on commissions as well.

Clare Curran did talk about vulnerable consumers, in her contribution, as well. I guess I’d like this piece of legislation to be thought of in the context of some legislation we hope to introduce into the House soon, and that is the amendments to the Credit Contracts and Consumer Finance Act that the Government will be looking to introduce in cracking down on loan sharks. Again, that is in the financial advice realm. We’ve seen plenty of examples where those vulnerable consumers have been preyed upon by the third-tier lending sector and they’ve got the most vulnerable consumers into huge debt spirals. I don’t want to go too much into that, because it’s not a piece of legislation that is yet before the House, but I did want to put this bill into the context of measures that we’re taking to ensure that consumers are protected.

Thank you, Madam Chair. Might I commend the Minister on the work around conflicts of interest, which have for a long time been seen as a real issue in respect of financial services.

I want to go back one step and just inquire of the Minister as to the workings of the various clauses around competence, in particular. I’m looking at new section 431H, “Duty to meet standards of competence, knowledge, and skill.”, in clause 27. Now, that section relates back to what must be delegated legislation in terms of a code of conduct. I’m just really inquiring as to the interface between the legislation and that code of conduct, and also how that might relate to new section 431K, “Duty to exercise care, diligence, and skill”, which is perhaps a wider duty. In terms of legislative efficiency: competence, knowledge, and skill, and exercising care, diligence, and skill seem to be somewhat redundant. I wonder if there is some explanation as to whether the need for both of those sections is warranted, in particular.

But also, new section 431I, “Duty to ensure client understands nature and scope of advice” is obviously very, very important when we’re dealing with what can be quite complex financial products, and the fact that some people may not have good English, may have English as a second language, or may just be hard-working people with a bit of money in the bank, but particularly astute. Exactly what the scope of that duty might be, and whether in fact that duty—the duty to ensure the client understands—requires further filling out, is another issue, as is whether that will be done by, perhaps, regulations or in some other way. So those are a couple of issues that it would be useful, perhaps, if the Minister could respond to.

Let me just deal with some of those questions directly, because I think they are good ones. I think, Mr Webb—well, I know, Mr Webb—that the details of the code of conduct, which are yet to be released and which the sector itself is quite keen to see, will have a lot more fleshed-out detail of a practical nature, which will enable them to know how they should properly meet those obligations. It’s fair to say, I think—and I said in an earlier contribution—that the draft of the code of conduct was delivered to us on 28 February, and it’s fair to say that I think that the sector probably wanted to see it on 26 February. When I spoke to a group of advisers at the Financial Services Council of New Zealand this afternoon, the detail of the code of conduct is really where the rubber hits the road for them.

So I think the number of new sections that you alluded to will directly link to the code of conduct that will have some obligations in terms of the qualifications that advisers will have to have in a couple of years’ time to ensure that they have the level of qualification and skill to offer advice in a way that meets the obligations under the bill. Again, I’m not wanting to give too much detail away on the contents of the code of conduct; a lot of that practical detail will be fleshed out there. You’re obviously keen to know that, and the sector is too, but I can assure the member and the sector that we’ll get that detail to them in a timely manner once we’ve gone through the process of consulting with the likes of the Financial Markets Authority to make sure that they’re happy with where that lands too.

I’ve been looking at the commentary that’s come back from the Economic Development, Science and Innovation Committee, in particular one of the changes that they’ve recommended, because if the committee’s recommended a change, that always says they’ve examined that particular clause particularly well.

The clause that caught my eye is clause 27 of the bill. It introduces—well, actually—a whole lot of new sections. But the particular one that I’m interested in is new section—gosh this is long—431J(2), which imposes a duty on financial advice providers to take all reasonable steps to put the clients’ interests first. Now, obviously that’s ideal. We do want financial advisers to put the clients’ interests first. I guess, in the ordinary course of events, a financial adviser who has no particular financial stake in the products or the services that they’re reviewing for their client, that’s not going to be an issue for them because they haven’t got a financial stake in it themselves. That would be a simple protection there, but what I’m puzzled by is, really, just how realistic it is to expect a financial adviser to put someone else’s interests first. That’s what we’re trying to do, that’s the objective, but I do want to understand it, and—

CHAIRPERSON (Poto Williams): Order! I just want to apologise to the member. We have started to stray into areas we’ve traversed before. There is plenty in this part to discuss, but we have talked about this particular area several times already in this part of the debate. So I’d be encouraging members to find other areas of discussion.

Thank you, Madam Chair. The particular reason this caught my eye was that there was a change at select committee, which is what I want to have a look at in new section 431J(2). That made me go and read the section very, very closely—so it’s not just part of the code; it’s a particular section. And what was going on was that the committee felt that was a very broad obligation imposed on the financial adviser. So they wanted to make it a little less broad.

I’ve been looking at the drafting of it and I can’t quite see how that makes it less broad. It’s still quite a broad duty for the financial adviser to make sure that they place the client’s interests first, and the particular way that the select committee has come back is they’ve changed “(B)” to “(C)”—so that was a particular change. I can see why they’ve done that, and they’ve added a bit of a discussion about a person who is connected with the giving of the advice, as a change from someone who is “associated with” the advice giver or the person’s own interest, and things like that, to the connection with the giving of the advice. It’s just a slight change in the drafting there, and what I’m hoping to understand from the Minister, possibly, is just how that, I guess, makes life a little bit easier for the financial adviser. So that’s a particular change that I’m interested in.

I can see the various steps that it goes through there—“person associated with A”; you know, the financial advice provider and so on—and it talks about “interposed” persons and “a person associated with an interposed person.” But why exactly those particular changes? If I could just have a little bit of enlightenment on that and, in particular, as I said, how it makes life easier for the financial advisers without actually also removing the duty of care, and just how it was that that particular change came about. So it’s not an urgent request—if you’ve got time to answer it, Minister, I’d be happy to hear some views on that.

Before we go back to the Minister and hear some of the answers to some of the questions that have been put forward, I thought I may as well pop on the schedule. Just a little bit about the dispute resolution scheme: if I remember rightly, it was Consumer New Zealand that came to the select committee and they identified the number of dispute resolution schemes that are out there. In their opinion, there were too numerous and too many dispute resolution schemes. In their assessment, they needed to be slimmed down quite a bit. So that was what they presented on.

One of their submissions was that actually not all of the breaches of the Act actually were reported back and, in their opinion, they should be reported back. I know that in the select committee we did do a lot of debating around whether or not we should actually be reporting every single infringement back or whether or not we should just report the big stuff and leave the small stuff. So I’d be interested to hear from the Minister just exactly where we landed on that. Dispute resolution schemes are numerous and plentiful, and we need to make sure that the mechanism is in place for those people that have got an issue when they go to see a financial services provider. But, obviously, that question still remains about whether or not we need to report everything or whether or not we need to just report some of them. Regulators, regardless, should be informed about infringements, but should they just be significant breaches of the law?

I noticed that, in the commentary report back as well, there was the view that reporting back about breaches should only apply when there are reasonable grounds to believe that the participant has breached or is likely to breach the law. So there were a couple of recommendations on just how we might be able to mitigate that and, as I say, I would be really interested to hear back from the Minister about exactly where he landed with that particular one. I remember, in the select committee at the time, we did have the discussion about whether or not everything should be reported back or just the big stuff, but I’d be interested to hear regardless from the Minister about where exactly he landed on that. Thank you for that, Madam Chair.

The question was put that the amendments set out on Supplementary Order Paper 195 in the name of the Hon Kris Faafoi to Part 1 be agreed to.

Amendments agreed to.

Part 1 as amended agreed to.

I seek leave for the remaining parts of this bill to be taken as one debate.

Leave is sought for that purpose. Is there any objection? There is objection. Unfortunately, we will be taking it part by part.

Part 2 Amendments to Financial Service Providers (Registration and Dispute Resolution) Act 2008