Financial advisers under scrutiny
As the banking sector goes under the blowtorch over the Tasman, their Kiwi counterparts await this country’s reforms. Susan Edmunds reports.
Even without a banking royal commission, New Zealand will force banks to give ‘‘priority’’ to the interests of customers, experts believe.
Australia’s Royal Commission, looking into misconduct in the banking, superannuation and financial services sector has found numerous instances of bad advice being provided by the big banks and trans-tasman financial services provider AMP.
Clients were charged for advice they did not receive, people who had died continued to be charged, documents were falsified and bribes were paid.
That’s led to calls for a royal commission in New Zealand, but new rules set to be introduced for the financial advice sector here may go a long way to ensuring similar misbehaviour is made harder in this country.
A review of the Financial Advisers Act has led to the Financial Services Legislation Amendment Bill, which pulls the financial advice industry – including bank advisers – into the Financial Markets Conduct Act, and introduces a new code of conduct for the whole industry.
At the moment, authorised financial advisers – predominantly those offering investment services – must meet higher standards of disclosure, competence and record-keeping, and work to a professional conduct code.
Advisers who are operating as registered financial advisers – usually insurance or mortgage brokers – and those working for a ‘‘qualifying financial entity’’ such as a bank, operate to a lesser standard.
Under the new rules, all advisers will be required to give ‘‘priority’’ to client interests and banks and other providers will have to pay their staff in a way that does not jeopardise that.
Claire Matthews, a banking expert from Massey University, said the existing laws should already tackle any poor behaviour.
But she said the coming changes strengthen the argument that those practices were not seen in New Zealand.
Financial Markets Authority chief executive Rob Everett opposed a royal commission, saying New Zealand was already working on reforms that would regulate the behaviour of banks.
‘‘The Government is looking at insurance law, the Government’s looking at consumer credit, there’s a financial advice bill going through select committee right now, we’ve got a very transparent work programme as to where in the industry we’re looking for issues,’’ Everett said.
‘‘I would rather let that work progress before anyone leaps to any conclusions about whether or not to have an inquiry.
‘‘I’d also add the Australian inquiry has only been going a few weeks.
‘‘The initial report isn’t out until September, the final report isn’t out until February. I think rather than rushing to conclusions, I’d like to let the work that’s currently under way make more progress before conclusions are reached.’’
Conflicts of interest will have to be much more clearly disclosed and payments under the new advice rules and kickbacks will have to be more transparent.
Bank staff will have to make it obvious to customers if they are only considering their own provider’s products when they make a recommendation.
The Ministry of Business, Innovation and Employment has suggested that clients should be able to see upfront all details of an adviser’s fees and commissions. They should also be told how much they had paid as the service continued.
At the moment, only investment advisers give this sort of information.
Rod Severn, chief executive of the Professional Advisers Association, said that even without law changes, any moves the Australian banks made to tackle the culture at their Australian businesses should flow through to New Zealand.
But he said New Zealand’s big product providers would be ‘‘tarred with the same brush’’ as the Australians.
‘‘Most organisations are owned by the Australians and the model is very similar so you would have to assume that if it’s happening in Australia, some of that will happen here.’’
Rule changes would help the industry, he said.
At the moment, most of the sanctions available were only there for authorised financial advisers. There was little that was done to regulate the activities of registered financial advisers offering mortgage and insurance services, and the advisers working under the umbrella of the banks.
Sue Chetwin, chief executive of Consumer NZ, said the changes planned did not go far enough. Her organisation had previously called for an outright ban on commissions because of the way they affected the service given to clients.
Consumer NZ wanted all financial advisers and representatives working for product providers to have direct civil liability for breaches for their obligations.
‘‘We consider direct civil liability would provide a strong incentive for advisers to meet their obligations to consumers and is essential to improve industry standards.’’
Fred Dodds, chief executive of the Institute of Financial Advisers, said the Government had made it clear it wanted to create consistency across the industry.
But he said it would be ‘‘hugely difficult’’ to ensure that the 30,000-odd registered financial advisers and product provider advisers were brought up to the level of the 1800 authorised financial advisers in the market.
Independent advisers have raised concerns that the new rules do not do enough to tackle the problem of the distinction between sales and true advice.
‘‘Consumers need to understand the difference,’’ Dodds said.
‘‘Are they dealing with someone who is looking at their issues and concerns and finding the best solution or someone who is looking to ensure they only get their company’s product?’’
It is expected that the new financial advice rules will become law over the second half of this year, and start taking effect from mid next year.