FINANCIAL SERVICE PROVIDERS (PRE-IMPLEMENTATION ADJUSTMENTS) BILL - First Reading Speech

17 February 2010 Speech I move, That the Financial Service Providers (Pre-Implementation Adjustments) Bill be now read a first time. At the appropriate time, I intend to move that the Financial Service Providers (Pre-Implementation Adjustments) Bill be referred to the Commerce Committee and that the committee report finally to the House on or before 4 May 2009 and that the committee have authority to meet at any time while the House is sitting, except during oral questions, and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House, despite Standing Orders 187 and 190(b) and (c). The objective of this Bill is to make a number of necessary and desirable amendments to the Financial Advisers and Financial Service Providers Acts 2008 before it is fully implemented by the end of this year. I recognise that this is a short timeframe, and I appreciate that this will put pressure on the Committee and on stakeholders seeking to make submissions. However, the Register of individual financial advisers and other financial service providers is due to go online in the middle of the year, with the regime in place in early December. It is critical that industry have clarity about their obligations so that these timetables can be met. The Financial Advisers Act and Financial Service Providers Act 2008, together with the Reserve Bank Amendment Act 2008 were part of suite of reforms introduced by the previous government that were aimed at promoting confidence in the financial sector. This Bill is not an opportunity to re-litigate the fundamental policies of the regime, upon which there is broad agreement. Rather, the changes I have proposed in this Bill are aimed at balancing our two objectives of encouraging confidence and promoting efficiency as we implement the new regime. Any submissions from stakeholders should keep this limited scope in mind. A number of the amendments in the Bill are technical in nature and are intended to resolve uncertainties and create clarity both for industry and for regulators, such as clarifying some of the product classifications under the Financial Advisers Act, and removing uncertainty over the territorial scope of the Financial Service Providers Act. There is one specific area of the Bill that I would like to focus on, regarding the Qualifying Financial Entity, or “QFE” framework. The QFE framework is intended to improve the efficiency of regulation for large institutions, so they are able to take responsibility for both the products being advised on, and for the advice itself. Many large institutions, such as the registered banks and the larger insurance providers, have argued that the framework for the QFE model does not balance the two objectives of public confidence and efficiency in the most effective way. At present, the Financial Advisers Act only allows QFEs to cover products that they issue. I propose to widen this to include other products for which the QFE has clear responsibility. In this regard, I note that the Securities Commission has stated that it will use the terms and conditions of QFE licences to ensure regulatory neutrality between QFE and non-QFE advisers. Furthermore, the Act currently distinguishes between financial advisers who are employed by a QFE and those who act as the QFE’s agents. Only employees are permitted to advise on their QFE’s complex products. Provided the Securities Commission, as regulator, is satisfied that a QFE knows who all of its agents are and has adequate control over the advice they offer, this distinction is not necessary. I therefore propose to remove it, allowing employees and agents to advise on their QFE’s complex products. However, as I noted, this equal treatment depends on clarity over exactly who the QFE is responsible for, and on the QFE having good systems in place to manage the advice offered by its advisers. Although the Securities Commission already has quite broad powers to ensure that this is the case, the Bill clarifies the situation of financial advisers working for QFEs – but who are not its employees –by replacing the slightly unclear concept of a QFE’s “agents” with a transparent system of “nominated representatives”. I have been discussing the broader QFE framework with industry and I expect that a number of stakeholders will make submissions on it. By following the principles of responsibility for products and responsibility for advice, the QFE model should accommodate a variety of business models, provided that adequate oversight remains in place. My view is that so long as the oversight of the advisers within these entities is not compromised, the framework should be enhanced to improve its flexibility, where possible. I would also like to respond briefly to some of the other issues that have been raised by industry in recent months, but which do not appear in the Bill. There have been calls for the Financial Advisers Act to be amended to allow some entities to provide certain types of financial advice. A cornerstone of the Act is that the professionalism of financial advice is best encouraged by ensuring it is delivered by competent and ethical individuals. While it may be appropriate that changes be made to improve business efficiency, such changes must be consistent with this fundamental principle. I have also received requests for wholesale advice to be excluded from the regime. My view is that all financial advisers should be broadly inside the framework, but this may be achieved through other avenues. Both Acts already contain a number of mechanisms that can be used to ensure that the obligations imposed on wholesale advisers are not out of proportion to the benefits of regulation, including: • the option of tailored disclosure obligations • separate standards of client care through the Code of Professional Conduct, and • the recognition of entities as QFEs. The committee may want to consider whether these obligations are sufficient Finally, I would like to address the regime’s coverage of what are termed “investment transactions” in the Financial Advisers Act. These provisions are important, as they relate to the protection of client money and property when this is handled by financial intermediaries. The mishandling of client funds has the potential to seriously undermine confidence in the financial sector. However, the current framework established by the Act leads to an impractical outcome, whereby only natural persons can make investment transactions, but not companies and other entities. This will create significant compliance costs for businesses without creating much benefit for the public, and I intend to write to the select committee with additional proposed amendments to the Acts to ensure that the situation is rectified. Although I am still in the process of preparing my proposal, it is likely to reflect the following features: • it will allow both entities and natural persons to make investment transactions. • it will be a registration-based regime that leverages off the existing frameworks set up by the Financial Service Providers Act and Financial Advisers Act. • it will maintain the minimum money-handling standards set up by the Financial Advisers Act; and • the Securities Commission will be the enforcer of the regime. Most importantly, in designing this framework I want to ensure that the level of oversight is proportionate to the risk posed by the relevant transactions. I would like to take this opportunity to thank the various stakeholder groups that have had input into this Bill, which will go a long way to improving confidence in New Zealand’s financial sector.