The Financial Advisers Bill is expected to be passed into law before the election. The bill aims to improve the quality of the financial advice industry, by imposing a licensing regime on professional financial advisers. This legislation is part of a raft of new laws recently passed or in the pipeline designed to better regulate industries that have been seen by some to have been letting consumers down, including real estate agents, financial advisers, insurance providers and finance companies.
For professional financial advisers (“Authorised Advisers”) a new “industry code” is to be introduced – this will include minimum standards of competence, knowledge and skills and ethical behaviour, and Continuing Professional Education requirements. The types of investment that are regulated are extended beyond shares and debt securities to land transactions (Real Estate Agents are not caught as they are covered by the similar obligations in the new Real Estate Agents law). The new law would catch selling agents and advisers in a “Blue Chip” scenario – this has to be a good thing.
Authorised advisers will be required to disclose details of “professional or business experience” relevant to the performance of a financial adviser service and “disciplinary proceedings” – this is intended to require greater disclosure than is currently required, and empower consumers to choose a quality adviser.
To become licensed, the competence and character of an adviser will be assessed, and the adviser will be liable to have that licence revoked if they do not fulfil their obligations. Advisers will be required to exercise care, diligence and skill in giving advice, and to not engage in misleading or deceptive conduct. These obligations are intended to be more onerous than the existing obligations under the Fair Trading Act. If an adviser breaches his or her obligations, they can be subject to extensive penalties.
The consequence of disciplinary proceedings will include an element of “naming and shaming”, which may create employment law issues for employers who no longer wish to be associated with an employee who has been censured. Consumers can complain to a new watch dog and should be able to have disputes resolved more cheaply and easily through a new approved dispute resolution scheme.
So far so good? Improving the quality of advice received from professional advisers may help protect investors against the sorts of losses that are being incurred in the current market, but many of these losses are the result of systemic failures, rather than poor advice (other legislative changes such as greater regulation of finance companies is designed to help here). It is also well documented that New Zealanders have an alarmingly low level of understanding of financial products and investing, and this is something we should all take responsibility for. Financial literacy can only benefit from our professional advisers being held to higher standards. Aside from protecting the individuals who have invested on the basis of advice, this new law should help generate confidence in the financial system and help build New Zealand’s savings culture over the long term. Given the loss of confidence suffered in recent times this could take some while.
The new laws do involve greater “compliance” and associated cost but in my view this is money well spent. Additional compliance burdens could be expected to create a barrier to entry of new participants to the market, which acts to filter the types of person going into the industry. And if an adviser stands to lose their licence (and hence their livelihood) and be prohibited from carrying on business, they could be expected to take more care. Sure this may reduce competition and increase the cost of the services provided, but this is probably a downside many finance company investors would, in hindsight, have been be willing to pay.
However, the reach and impact of these new laws goes further than we might expect.
The bill, for example creates a second category of adviser, being persons who advise on less sophisticated investment products and extends its reach to persons advising on consumer credit contracts and insurance products. The sales clerk who advises on a Hire Purchase contract for a new TV, and the car dealer selling a car on credit, would be an investment adviser under the new law.
Will the new laws result in a more robust financial system and better quality advice being received from the finance industry? Probably. Will they encourage investors to improve their own financial literacy, and to understand and question the advice they receive? Hopefully. Will they insulate investors from loss? Definitely not. Are they too late for many? Yes.
