Financial intermediaries: consultation on options for change

The Task Force on the Regulation of Financial Intermediaries, which is considering the regulation of financial intermediaries such as brokers and other financial advisers in New Zealand, has consulted on various options to improve quality standards in the industry.

Background

The Task Force was appointed by the Government in November 2004 to consider and report on the regulation of financial intermediaries. Its task is to suggest options for reform that will enhance the quality of financial information and advice being provided to the public and assist New Zealanders to make the most of their savings.

In May, the Task Force published a consultation paper setting out the issues that it identified from its first round of consultation and looking at options to address them. The period for submissions on the consultation paper closed in June and the Task Force will now report back to the Government on its conclusions. The Task Force has published a summary of the responses it received to its consultation paper.

Areas of proposed reform

The Task Force made proposals for reform in three key areas.

1. Enhanced consumer information

   The Task Force's consultation paper proposed to improve consumer education initiatives and enhance the disclosure obligations for financial intermediaries. The aim of the reform is to enable consumers to make better decisions about an intermediary or financial product and to make comparisons. The Task Force also believes that it would encourage greater competition. The Task Force's summary of responses says that respondents generally agreed that the education proposal would be effective to address at least some issues, and that many agreed that accurate, clear and concise disclosure is required.

2. Enhanced redress, enforcement and sanctions

   In its consultation paper, the Task Force proposed that consumer confidence in the industry would be promoted by effective and comprehensive dispute resolution procedures plus effective enforcement mechanisms and sanctions, including the ability to remove negligent or unethical participants from the industry. Respondents to the paper have agreed with the need for enhanced redress, and many support building on the existing Ombudsman schemes.

3. Enhanced standards

   The Task Force identified an issue with a lack of mandatory minimum industry-wide standards, meaning that the industry suffers from a variance in the quality of services and difficulty for consumers in understanding and distinguishing between quality standards. Most respondents to the consultation paper supported the idea of enhanced baseline standards, especially in relation to ethics and competency. Many also supported business conduct standards, although there was less support for standards of remuneration or restrictions on ownership structures.

Mechanisms to implement the proposed reforms

The Task Force also identified various implementation options.

1. General legal standards

   The proposal of industry-specific legislation with mandatory disclosure, redress, ethical and conduct standards has received considerable support from respondents to the consultation paper, possibly in combination with other options.

2. Registration (in addition to general legal standards)

   A registration regime would require intermediaries to register their details with a governing body. Respondents showed a mixed level of support for this, with some considering that it would do little to achieve the desired objectives, while others considered that it would assist with recognition of and enforcement against intermediaries.

3. Restriction of occupational designations (in addition to general legal standards and possibly registration)

   The Task Force proposed as an option a restriction on the ability to use certain titles, for example "financial adviser", subject to adherence with certain requirements. This received little public support, particularly when restrictions were tied to remuneration.

4. Licensing

   Under this proposal, only licensed people or organisations would be able to offer financial intermediary services. The person or organisation would have to meet minimum standards for entry and there would be ongoing competency and conduct requirements. This idea also received considerable support, although some respondents considered that it would be too costly when balanced against the benefits.

Other proposals put forward by respondents to the Task Force's consultation paper included co-regulation between the Government and industry self-regulation, and enhanced trans-Tasman regulation (including application of the Trans-Tasman Mutual Recognition Agreement).

For more information, see www.med.govt.nz.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.