Savings Industry: Three main challenges face industry

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ISI boss Vance Arkinstall warns the financial services industry to be wary of the unexpected this year.

Monday, January 28th 2002, 12:40PM

by Vance Arkinstall

At the highest level there are three key issues facing our industry and which have precluded New Zealand from experiencing the same dynamic growth and rapid accumulation of funds under management seen in other countries. All three have existed for nearly a decade:

1. Lack of politically acceptable long-term savings policy.

2. Taxation system that contains barriers to savings and provides far from a level playing field.

3. The perception that the current self-regulation coupled with disclosure legislation does not adequately protect consumers.

As a consequence of the efforts of the board, Investment Savinsg and Insurance Association (ISI) is now clearly positioned as a "peak industry body". The industry’s views and input are regularly sought by politicians and officials, which suggest for the first time in a decade the industry is in a position to influence positive outcomes.

Being an election year we will not see specific legislation but we will see political manifestos outlining policies if elected to power.

Both Labour and National appear to accept the ISI view that long-term savings policy should be based on the World Bank's three pillar approach of:

Tier I – Mandatory publicly funded.

Tier II – Mandatory privately funded.

Tier III – Additional voluntary savings.

The Minister of Finance Michael Culleb has clearly expressed his preference for a change to the taxation system to encourage savings. He will recently have received the Treasury paper, which the Minister requested in the 2001 Budget. Even though Treasury may continue to be philosophically opposed the realisation is dawning that there is a political will and that factors outside economic growth make increased savings essential.

Possibly the 2002 Budget may spell out the Minister’s plans in greater detail. Fiscal constraints coupled with the competing claims from education and health probably do not permit generous tax concessions and therefore we might see a progressive approach introducing modest provisions increasing as the economy grows.

National is developing its savings policy but it is not yet clear when this will be released. However, National have signaled that the "voluntary" approach they held whilst on the Treasury benches is no longer supportable and it is most likely they will include tax deferral as part of their savings policy.

One thing is clear, superannuation/savings issues are again set to be a major election item.

In addition to contributing to the political debate ISI will be working with the financial editors to encourage "press articles" to educate the voters.

For the first time in over a decade we may see policy announcements which could be the first steps to move NZ away from TTE (taxed, taxed. Exempt) onto a path leading to EET (exempt, exempt, taxed), the model most common throughout the rest of the world, particularly Europe.

The McLeod tax review, released last year, contained good material but was so badly handled by the media that it lost its momentum.

Once again, the election manifestos of the political parties will provide a guide to how, or if, the McLeod recommendations may be utilised, but we can expect to see no major tax legislation introduced in 2002.

The issue of gst on financial services will be the subject of an Inland Revenue Department discussion document expected mid-2002. It is expected that the economic argument will propose that gst be paid on all explicit fees. This would allow product providers to recover gst, which would be a small advantage, but would require investors to pay gst on fees and charges, making savings marginally less attractive.

If our expectations are true then a fierce debate will likely occur before any final policy results.

In addition to building bridges with politicians and officials, ISI has developed strong relationships with "like-minded" organisations.

On matters of mutual interest we work closely with the Trustees Corporation Association, the Health Funds Association and the Bankers Association. This working together adds considerable strength to our argument and brings a certainty that the officials welcome.

One of the most difficult issues for 2002/2003 is adviser regulation.

On this subject I am expressing personal views, which do not represent ISI policy and which a number of people may disagree with. I don’t believe that the existing self-regulation coupled with light-handed disclosure regulation is sustainable into the future.

I readily acknowledge that there is no evidence that the prescriptive adviser regulations existing in Australia, UK etc, have solved the problems of mis-selling or poor advice. None-the-less a strong perception exists in New Zealand that legislation protecting the consumers' interests is not sufficient and pressure will continue for change.

The Securities Commission will shortly release its response to the discussion document "Law Reform: Investment Advisers".

The legislative timetable will not permit the commission’s recommendations to become law before the election and probably until well into 2003.

The industry should seriously consider the immediate voluntary implementation of the proposals.

Further, the various interested groups must find ways to tighten up the self-regulation controls to better meet the "perception views" that exist.

As an industry we should not take lightly the background of the new chairman of the Securities Commission and her drive to implement changes more consistent with the International Organisation of Securities Commission's standards.

The answer is clear, either the wider financial services industry moves of its own accord to strengthen the self-regulation environment and closes the gaps between the current position and the requirements of a regulated environment such as exists in Australia, or we will quickly find ourselves defending a weak position against tough regulation.

I advocate that if the industry takes a voluntary path in 2002 of adopting the Securities Commission’s recommendations and developing more effective self-regulation it can remove many of the arguments for prescriptive adviser regulation.

Attempting to defend the status quo is an option that in my view will fail. I stress that the issue is not about the quality of advice or criticism of advisers, the issue is about meeting what is perceived as best practice standards from overseas and countering the perception that the current controls do not sufficiently protect consumer interests.

Other issues the industry will need to manage in 2002 include:

• The Human Rights Commission and media activity that will follow the publication of the Australian Law Reform Commission’s report on "Protection of Human Genetic Information". ISI is already in contact with the Commission, but handling the emotive media comments will create a challenge for life insurers.
• The Ministry of Economic Development work programme for 2002 includes a review of the "Life Insurance Act 1908", given this has been "bumped off" the 2000 and 2001 MED agendas we will wait with interest.
• We will continue the progress with IRD on resolving a number of tax issues many of which are back-office administration problems and whilst important, do not attract wide public interest.

In summary, utilising the strong ISI position to gain maximum input and influence in the pre-election/political process on sensible long-term savings policy and favourable taxation reform will be the main 2002 focus.

It is always the surprises that make life interesting and in the run up to an election this industry needs to be prepared to respond to the unexpected.

Vance Arkinstall is the chief executive of the Investment Savings & Insurance Association.

Vance Arkinstall is the CEO, Investment Savings & Insurance Association

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