Adviser regulation taskforce to be set up

Since taking on the Commerce portfolio earlier this year I have met with many participants in this industry. No matter to whom I’m talking, three things about the regulation of financial advisers seem to come up:

• First, that the interests of the industry and those of the government are pretty much aligned. We are concerned about standards for the provision of financial services in New Zealand and are taking steps to make sure they are raised;
• Second, people seem to agree – and this is true whether they come from an industry, or a consumer, or a regulator’s point of view – that there is a question about how financial advisers are regulated in New Zealand and that there is, perhaps, a case that something more is required;
• But third, I am told routinely, `whatever it is you do, Minister, please do not give us the Australian regime`!

I am encouraged by the first observation – it is great we are all pulling in the same direction. I am intrigued by the second observation – everyone agrees there is something to be done but no one has yet put their finger on exactly what that should be.

And I see the third observation as a challenge. I think we share the same regulatory goals as Australia – we all want to provide consumers with the best advice and information. But if there are things we can do better than Australia; or if there are things about the New Zealand market we need to take particular account of, I am certainly willing to look at how we can achieve that.

Given the complex issues we need to address, I am pleased to announce I intend establishing a Task Force on the Regulation of Financial Intermediaries. This group will be tasked with providing options for the occupational regulation of financial advisers for Government’s consideration. We are developing Terms of Reference setting out expectations for the Task Force’s work. These will be made available on the Ministry of Economic Development’s website in the next few days.

I intend appointing six people to the Task Force. It will be led by a neutral Chair and include consumer representation. Other appointments will be people drawn from the industry and selected for their expertise across the financial advisory sector. I am also assigning a senior official from the Ministry of Economic Development to the Task Force whose role will be to advise on relevant government policies and priorities framing the group’s work. I expect the Task Force to report within six months of appointment.

What, in broad terms, will this Task Force do?

I am asking the Task Force to do essentially three things. First, it will conduct a review of the size, nature, and composition of the financial intermediary industry and industry participants, including investors. It will look at what the status quo is for regulation of financial intermediaries. We need to know the shape of the industry, who uses it, and what protections are already available to consumers.

Second, the Task Force will identify and describe any consumer protection problems arising out of its review of the status quo. This problem definition exercise will establish whether there are gaps in our current regulation and, if there are some gaps, what are the risks for consumers and how severe are they.

Finally, the Task Force will outline and evaluate options for reform of the way financial intermediaries are regulated in New Zealand. Options for reform should be designed to address the problems the group identifies and should be proportionate to the likelihood and magnitude of risks associated with those problems. The Task Force will need to consider how a regime would be enforced or administered, and by whom. And it will need to comment on any institutional structures, sanctions, dispute resolution features, or enforcement mechanisms necessary for the effective administration of any reform options.

The key criteria for evaluating options will be:

• A cost-benefit analysis;
• Measurement against best practice for occupational regulation;
• How the option fits with government policy on the creation of a single economic market with Australia; and
• How the option compares with international norms for the regulation of securities markets.

One thing I would like to stress is that I have an open mind on regulation of financial intermediaries. All options across the spectrum of regulation should be considered – from minimal or industry self-regulation; through a system of title protection or certification; right through to legislation providing for a full licensing regime. The Task Force is expected to identify consumer protection issues and design reform options that solve those issues. We cannot jump to a solution without diagnosing the problem.

Having this Task Force on the Regulation of Financial Intermediaries will help us get definitive responses to the three observations I outlined earlier. It means we will be working together to produce robust analysis of all issues relevant to how we should regulate advisers.

So why is the Government taking this step now?

I am aware there is already a lot of thinking being done about the regulatory environment for financial advisers in New Zealand. I trust you are all familiar with government plans to improve the disclosure regime under the Investment Advisers (Disclosure) Act through the Securities Trading Law Reform Bill. I hope to introduce that Bill to the House by the end of the year. And I know various parts of the industry have been working on proposals for self-regulation as part of the recommendations coming out of the Periodic Report Group’s 2003 paper on Retirement Income Policy.

While this latter work is valuable, what I am becoming increasingly aware of is the need for government to take a lead on this issue. That is why I am announcing the creation of this Task Force on the Regulation of Financial Intermediaries. As I have said, the Task Force is to include strong industry representation – we cannot consider this problem without a partnership with industry. But government must lead.

The first reason for this is that, while there is a real willingness in parts of the industry to consider some difficult regulatory questions, the reality is that reaching consensus on regulation across the whole financial services industry is hard to achieve.

Second, the issues at stake have implications for more than the industry. Consumers need your expertise to help them to save and invest wisely. How New Zealanders invest their hard-earned income is critical to their future living standards in retirement. Maximising the opportunities for New Zealanders to increase their wealth is an issue of particular concern to this government – again, we must lead.

Third, other public policy goals are also implicated in the question of how we might regulate financial intermediaries. This topic has long been mooted for consideration as part of the Government’s review of the Securities Act. I want to ensure recommendations for adviser regulation are consistent with my overall aim in that review, which is to enhance the integrity and effectiveness of, and the confidence of investors in, New Zealand’s capital markets. The recent IMF mission to New Zealand as part of its Financial Sector Assessment Programme scored us poorly in respect of our regulation of financial intermediaries. I also want to respond positively to that report.

Fourth, this government is committed to deepening New Zealand’s relationship with Australia as we move towards a Single Economic Market. Now, that does not mean I want a New Zealand version of Australia’s Financial Services Reform Act – FSRA. Many of you have already told me you do not want that.

But what it does mean is that a review of how we regulate financial advisers must take into account seriously the fact of the new Australian regime; it must look closely at what works about FSRA and what does not; it needs to consider whether it makes sense to adopt parts of the Australian regime here; and, in particular, if we want to take a different path to Australia, we have to examine what it is about the New Zealand market that makes us different. A government perspective on these issues is essential to placing any recommendations on adviser regulation in a public policy context.

It is with all these things in mind that I intend taking the lead by establishing this Task Force. Guided by tight terms of reference, and assisted by a neutral chair, an MED official, and a dedicated Secretariat to provide the necessary policy analysis, I anticipate the Task Force will provide recommendations that will mean we can take decisions on this matter in mid-2005.

The work of the Task Force will provide timely input to the final part of our four-stage securities law reform programme. Its work will complement other strands of that review such as the evaluation and appraisal of how securities are offered to the public. It will also assist us in responding to the Periodic Report Group’s 2003 Retirement Income Report.

Financial service providers play a key role in the decisions people make about investing their money. I am keen we regulate appropriately those that give investment advice. The creation of a Task Force as outlined to you today is an effective and timely response to demands that government take a lead on this issue. It also acknowledges we need, and value, industry input.

I look forward to working with you to create the regulatory conditions that deliver a higher standard of advice, that encourage investor participation in our financial markets, and ultimately lead to greater prosperity for all New Zealanders.

Ministry of Economic Development deputy secretary Mark Steel delivered this address on behalf of Margaret Wilson.

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