Regulation 'not successful'
Financial sector reforms and regulation have not improved the public’s faith in advisers, one commentator says.
Thursday, August 1st 2013, 6:00AM 
21 Comments
by Susan Edmunds
Claire Matthews, of Massey University, said the Financial Advisers Act and the introduction of the Financial Markets Authority had not been as successful as they could have been, in improving public faith in financial markets or increasing their stability.
“I don’t think it has worked as well as it desired. I’m not necessarily convinced it’s made the public more confident in using advisers but it has made it more difficult for them to find an adviser because they have disappeared from the market.”
She said it was a situation that would probably improve over time.
“I think to a certain extent the FMA has gone too far, which was a possible reaction to certain events. There was a feeling that they needed to clamp down on certain people in the market. But many people who were doing a good job have now left because of all the regulations they have to comply with now. The collapse of finance companies and a minority of advisers who took advantage of their clients have resulted in the new regulations,” Matthews said.
She said regulations had probably not done much to avoid investors being caught out by more failed investments in future.
Other factors drove collapses such as those that hit finance companies during the global financial crisis, she said. “It comes down to the basic problem of greed. You can’t regulate greed away.”
Greed on both sides had driven the way finance companies were operated and the investors who saw there was money to be made and wanted a slice of it, she said. "People thought 'I want to get some of it myself', without thinking about the risk they were taking."
No amount of education or regulation would be able to contend with that. “Whatever the rules, people find ways around them.”
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Comments from our readers
On 1 August 2013 at 9:45 am Brent Sheather said:
Claire has hit the nail on the head here when she says “many people who were doing a good job have now left because of all the regulations”. Personally I am not taking any new clients because it is such a nuisance, not to mention a risk, and any new clients I do take get really angry when they have to fill in the stupid forms. Not assigning blame to anyone in particular and think the FMA is doing a good job but there has got to be a better way and if there isn’t I am off to the south end of the Gold Coast before you can say “its 3 foot and offshore”. Regards Brent On 1 August 2013 at 10:02 am btw said:
Bear in mind, the recent laws and regulations introduced statutory standards that are actually lower than the fiduciary standards in place previously under the common law. If we're going to lower standards then of course the public are going to continue to lose confidence. On 1 August 2013 at 11:21 am Fred said:
Good for Claire Matthews. Spot on!
Why did regulation avoid appointing such sensible and wise persons.
Like dodgy advisers & products, the FMA has over-promised and under-delivered.
On 1 August 2013 at 11:29 am graemetee said:
From the client's perspective I think they see less advisers / more paperwork for them so why bother and leave money in the bank. The AML/CFT laws and regulations are particularly effective at discouraging business for advisers. The FMA are now trying to clarify the absolute mess created by politicians and bureaucrats with 3 or 4 consultation papers. Nothing has changed the behaviour of advisers so why should the public think anything has really changed except they have whole new level of hassle to deal with before they even start with any investing? On 1 August 2013 at 1:55 pm broker said:
I think one good outcome is that it has stopped the part-time investment adviser - the insurance or mortgage guy who decided to do some 'investment advice' on the side. Apart from that the whole thing is a mess... On 1 August 2013 at 2:01 pm Jeff Goldsworthy said:
Totally agree with Claire and great to see comments like that from someone other than an adviser. The cost of regulation moving forward has forced Advisers to charge fees and has in fact stifled advice to those who need it most, but cannot / will not pay for it. @graemetee, I don't see the AML/CFT discouraging business for advisers, but just making the process harder to complete and forcing them to redefine who they deal with. Regulation is definitely a "work in progress" which will be refined over time - hopefully not a "long time". In the interim, back to the paperwork I go.........
On 1 August 2013 at 4:47 pm Alison said:
The FMA is behaving like any bureaucracy. Having been caught out by the Ross affair, their automatic response is more regulation to show they are "doing something"; even though they had the tools to apprehend Ross: they just didn't apply them. On 1 August 2013 at 5:18 pm w k said:
Why I wasn't surprised it failed? The people up there:
1. Have not ran a business of their own before.
2. Do not understand the business.
3. Do not listen.
4. Top priority is to keep their jobs.
5. Are suppose to be self funded.
6. Do not advise you the act when you ask them. They can't advise you but know when you go wrong, not sure how that works?
Agreed with some of you, I am even more selective of clients now. A bit doubtful, I trust my instinct and ditch them before trouble troubles me.
And lastly, my son wanted to give this business a try, and I strongly discouraged him and will not even let him take over my business.
I doubt FMA is at all bothered with our responses or reaction anyway.
On 1 August 2013 at 8:40 pm Independent Observer said:
I have often claimed that the FMA (new sherriff in town) should have adopted more of a collaborative approach, as opposed to the direction taken.
The strong arm and inconsistent approach of the FMA has scared away good industry folks from delivering their trade, acted as a low deterant for the villians, and done nothing to really stimulate industry confidence amongst consumers.
With KiwiSaver balances becoming meaningful, the time is right for the FMA to adopt a fresh perspective and work alongside the industry - many of whom are genuinely in business for the right reasons.
On 2 August 2013 at 9:23 am Anon said:
Several thoughts really ...
It is suggested that advisers who were doing a good job left as a result of regulation. I would suggest they were probably going to leave anyway. Good capable people don't leave something because things change.
Has regulation gone too far? I would say not really. I think perhaps what is lacking is a balanced view around financial losses. Individuals made losses for a variety of reasons. You have touched on one factor that drives investor behaviour and that is greed. This can be a problem as can a lack of accountability from the investing public. Regulation allows an adviser to put the investor in a position where they must take responsibility. This is good for all concerned.
I think a key issue with investor confidence is the far reaching effects of the past losses and freezes on funds. Finance companies are always talked about but you would be hard pressed to find anyone who didn't know someone who has lost money somewhere. There used to be a "deep-freeze" list on the web (and it was long) and it included finance companies, fund manager funds, and property funds (all having problems). Small problems with funds, such as the inability to make withdrawals when you want them generate a lack of confidence. Losses don't have to be large, or indeed even made for people to start losing confidence.
I think investor confidence will start to improve not through any further change with advisers, but rather through the improvement of products on offer and a genuine customer focus by issuers to put the interests of investors at least on the same footing as their own.
On 2 August 2013 at 9:23 am David Whyte said:
Claire/Brent et al
All points made are relevant and to the point. However, you can complain all you like but the regulatory environment is here to stay. There isn't an OECD territory without some form of financial services regulation, and having worked in a couple of those territories, I can confirm NZ has a relatively light-handed regime.
That's not to say we shouldn't seek improvement in what we have.
a)DIMS requires a test of financial bona fides - solvency and liquidity - to protect the investor if the DIMS company runs into financial difficulty.
b) Adviser status should not be delineated by improperly perceived product complexity. Poor advice in risk products can be as catastrophic, if not more, so than in the investment space.
c) All financial advisers should be individually licensed to practice - license to be obtained by examination, with focus on electives, investment, risk, F&G insurance etc.
Just my humble opinion.
On 5 August 2013 at 10:08 am darryl said:
An academic says, "I think" and its a fact? Despite this the assumptions have merit. On 5 August 2013 at 5:47 pm w k said:
@david w: refer (c), this was suggested, and did they listen? refer to my comment (3). I further suggested that license be renewable, say, every 2yrs and recommended by two practicing advisers. If this had been in place, do you think Ross would have his license renewed? On 6 August 2013 at 8:35 am Analyst said:
David, you hit the nail on the head. On 6 August 2013 at 10:58 am David Whyte said:
@wk - did they listen to anything other than their own pre-conceived notions? License renewal point agreed absolutely. A testimony of ongoing fitness to practice is essential. Ross would surely have failed in the face of your recommendations.
On 6 August 2013 at 2:05 pm w k said:
@dw. My suspicion for not enforcing individual licensing is because of QFEs. After all, they are their biggest paymaster. Advisers not under QFEs are in fact subsidizing QFEs advisers. On 7 August 2013 at 1:38 pm John said:
Spot on wk. The Code has as its foundation putting clients interests first (as though this is a startling new revelation). Most QFEs with their vertical integration, clipping the ticket and fee gouging can never be said to be doing this....but are to a large extent self regulated. Who said lobby groups were only alive and well in the USA. Bit of a joke really. On 8 August 2013 at 9:17 am CJM said:
"I further suggested that license be renewable, say, every 2yrs and recommended by two practicing advisers. If this had been in place, do you think Ross would have his license renewed?"
How would this work? For the sign off to be meaningful the advisers would need to be entirely independent and have something at risk if their recommendation turned out wrong.
Otherwise you just get mates recommending mates.
I would have thought Ross may have found two advisers to sign off - especially if was signing off on them as advisers too.
But if you require independence then what adviser would want to take the risk of signing off on a competitor's business? There is no upside for them, but a lot of downside. And do you really want to open your entire business to another adviser?
Relicensing would require some sort of independent assessment process with powers to get full access to a business - but how many people here who have been through the AFA process and had FMA visits think that would uncover rogues?
On 8 August 2013 at 3:42 pm w k said:
@cjm: Think.
I've joined several clubs and associations which needed recommendations, and they only need to vouch for my good character. I don't recall at anytime suggesting assessing or auditing anybody's business, I only said recommend.
Does it work? If I know that I need someone to put me up for any recommendation, I better behave myself which I always do. Would you recommend someone whom you know who would churn business, a foul mouth, unprofessional or practices unethically, in other words a "cowboy"?
On 9 August 2013 at 10:12 am CJM said:
Take Ross. Who knew he may have been dodgy? Why do you think he could not have found 2 advisors who thought he was OK - especially if he would vouch for them in return?
If an advisor is stealing money or incompetent, why would they worry about the impact of being discovered on the advisor who vouched for them?
The assumption everyone makes is that the industry "knows" its rouges before they are unmasked. But I have seen no evidence we do.
Someone you think is a cowboy may have 10 mates in the industry who think he is a good guy and a delight to have beer with. And they probably would not have a clue if he was a good advisor, a bad advisor, or an outright crook.
On 13 August 2013 at 10:51 am An said:
All very valid comments, and great to see a united vote for once. I feel regulation is very important, but the FAA has missed the target completely.
The public confidence of advisers has not changed (in fact I doubt many people are even aware of the existence of the FMA).
Bad investment decisions are still being made by individuals. I still get people coming to me for investment advice; when I refer them to a suitably qualified AFA they often can't be bothered, ignore my advice and blindly invest).
Like many other investors who lose money (before and after regulation) it doesn't matter what the rules are - some people are just their own worst enemy. Regulation is simply a revenue creating venture.
Rather than prescribing cumbersome, expensive and failing regulations, we should be sharing good, sound and successful business models.
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