What is the problem the FAA is trying to fix?

As the review of the Financial Advisers Act slowly rolls on we have had a few interesting reports come out. Here I take stock of what we’ve learnt so far.

Friday, July 3rd 2015, 11:39AM

The Financial Markets Authority survey on investor confidence is, in some ways, a report card on its own performance.

The survey released last month shows confidence in New Zealand’s financial markets remain “stable”.

From the release: “The survey shows that market confidence has stabilised, from 59% to 60% between 2014 and 2015. Overall confidence is up six percentage points since 2013.”

Considering the primary role of the FMA is to raise public confidence in financial markets its own survey is, arguably, a report card to the Government.

There are some interesting observations to come out of the report.

While our daily lives are intertwined with the FMA the public actually give the agency little thought or recognition.

“The number of New Zealanders who had heard of the FMA increased slightly this year from 35% to 39% which reflects the fact that the FMA is still a new regulator to most investors.”

If only a third of the population know about the FMA then what impact do they really have on investor confidence?

Then this comment becomes a little suspect as not many Kiwis would know what the FMCA is or how it impacts on them.

“Another factor is that New Zealand’s financial markets have recently gone through a period of significant regulatory change and improvement with the introduction of the Financial Markets Conduct Act in 2014, which we are now bedding in,” Everett said in statement.

There are a couple of good stats here that the authority could hold up to show it’s doing well, but on balance it’s a suspect metric.

Perhaps the bit which is most revealing is that FMA chief executive Rob Everett says that confidence is largely correlated to the performance of financial markets.

We all know the markets have gone gang-busters in recent years and investors, especially if they have taken on a little risk, should have been seeing double-digit returns.

When markets tank so too will investor confidence.

We failed to get an interview on the report, but did read this comment attributed to Everett.

"You've got to expect, historically, at some point it does go down. The challenge for us is to disentangle the returns with the confidence people have in getting treated fairly."

"We need to see what it will be like in a down-turn and then we will know more about how good a job we are doing."

The second report which caught my eye was a consumer survey done for the Ministry of Business, Innovation and Employment.

My interpretation of it goes a like this. Financial advice largely centres around the relationship between client and adviser. One of the best ways to think about this is the concept of the Trusted Financial Adviser. It's a concept which is really at the heart of what advice is all about.

Interestingly in the MBIE report consumers showed regulation and legislation wasn't at the heart of the relationship.

To me one of the most concerning comments in the report was this one: Advice clients "noticed a move away from personalised advice to more generalised/transactional advice from their financial adviser. These investment advice clients feel the impact of the FAA has been to restrict their access to personalised financial advice."

If that's the status now, then it is only likely to increase with the introduction of the DIMS regime.

It's also worth noting that consumers didn't know a heck of a lot about some of the protections put in place by the FAA. To get around this the survey had to tell people about them then ask questions. To my way of thinking it shows the government, and its agencies, have not done a good job educating the public about financial advice.

Secondly I wonder how much weight you can put on these answers when the people being surveyed are fed information like this. No doubt there is some answer about the statistical validity of such an approach, but I'll leave it as having a low face value.

I also discovered this Opinion piece New Zealand's biggest news website. It seemed pretty loaded to me, and then when you go through to the survey you really wonder about the quality of the information being plugged into the review.

But coming back to the MBIE report it is well worth a read, especially for the comments from consumers surveyed.

Tags: Financial Advisers Act MoBIE