Mr Speaker

The Labour-led Government, especially in its 2005-2008 term, was concerned to remedy the reputation that New Zealand had developed over many years for its under-regulated financial services market.  Financial company failures and a general lack of proper consumer protection were some of the symptoms that legislation promoted over that time targeted.  Much of that legislation went through the parliamentary process under the sponsorship of Lianne Dalziel as Minister of Commerce.  All of it came to the Finance and Expenditure Committee during my time as chair of that Committee. 

There are three laws of particular note, and all of them had major party bipartisan support.  The first is the Reserve Bank Amendment Act 2008, providing for Reserve Bank prudential supervision of non-bank deposit takers.  The second is the Financial Advisers Act 2008.  The third is the Financial Service Providers (Registration and Dispute Resolution) Act 2008.  It is the second and third of those Acts that would be amended by the legislation that is now being read a first time.

In 2008, the Labour Government passed the Financial Advisers Act to ensure that financial advisers were subject to tighter rules of professional conduct and competence.  The Act was one part of the effort to bolster investor confidence after the global credit crunch and a string of finance company failures in New Zealand.  The regulations contained in this Act focus on “financial products”, and not “financial decisions” as was initially proposed.  A tiered approach to advisers was taken.  Firstly, “Authorised Financial Advisers” will be allowed to provide advice on complex products (like securities or futures contracts).  There will be stringent requirements on those in this first category.  Advisers who fall under the second category only face a basic code of conduct and disclosure requirements, but can only provide advice on simple products (such as insurance or consumer credit contracts).  Even this second tier of advisers has to be registered and belong to a dispute resolution scheme.

The legislation enabled the adoption of a “Qualifying Financial Entity” (QFE) to reduce compliance costs for institutions with a large number of advisers; while ensuring there is appropriate regulatory coverage of advisers within these institutions.  The Securities Commission was empowered to oversee the new rules. The Act established a Commissioner of Financial Advisers (a member of the Securities Commission); and a Code Committee and a Disciplinary Committee.

The Financial Service Providers (Registration and Dispute Resolution) Act established an independent and free dispute resolution service for consumers who have problems with financial advisers or service providers.  A co-regulatory model was created, under which industry groups were to develop their own schemes which then have to be approved by the Minister of Consumer Affairs.  These schemes have to meet certain benchmarks, such as accessibility, independence, fairness, accountability, efficiency, and effectiveness. The Act also established a reserve scheme for providers who do not belong to an approved industry dispute resolution scheme.
The intention of this amendment bill, which was introduced on 8 December last year, is to make technical amendments to the Financial Advisers Act 2008 and to the Financial Service Providers (Registration and Dispute Resolution) Act 2008
The amendments largely involve changes to the qualifying financial entity (QFE) model:
1. A QFE will be required to name individual contractors whose advice it will take responsibility for, instead of automatically being responsible for advice from all its contractors.
2. The changes allow a QFE’s named contractors (as well as its employees) to provide financial adviser services on the QFE’s complex products, without being individually licensed. (This is currently permitted only for the QFE’s employees).
3. Employees and named contractors of a QFE will be able to provide financial adviser services for products for which the QFE is a promoter under the Securities Act. (Currently, the Financial Advisers Act allows this only if the QFE is the issuer of the product).

Part 1 of the Bill amends the Financial Advisers Act 2008.  Part 2 of the Bill amends the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

• Clause 6 relates to interpretation. The definition of a ‘nominated representative’ is the most notable change. A nominated representative is an individual who is formally nominated by a qualifying financial entity (QFE) in accordance with the new section 68A to perform financial adviser services in respect of that QFE.
• Clause 8 amends section 12 of the principal Act, which provides that activities performed by certain classes of person do not amount to financial adviser services. The amendment clarifies that exemptions that apply to activities undertaken by companies or organisations also apply if they are undertaken by employees of those companies or organisations.
• Clause 10 changes sections 17 to 19 of the principal Act. This clause makes those changes discussed under ‘Summary of the Bill’ (above). Section 17 places ‘nominated representatives’ (i.e. contractors) in the same position as employees in respect of financial advice and investment transactions, for instance, complex products. It also permits employees and nominated representatives to undertake investment transactions not only in respect of category 1 products (i.e. complex products, like securities) issued by the relevant QFE (as currently provided), but also in respect of category 1 products that the QFE promotes. The new section 18 requires a QFE to be registered while a nomination of a nominated representative is in effect. Section 19 exempts nominated representatives from having to belong to a dispute resolution scheme, as is currently the case for employees of QFEs.
• Clause 11 places nominated representatives in the same position as employees (‘agents’ are not in the same position, as the legislation currently stands) and also authorises both to provide financial adviser services in relation to category 1 products promoted by the QFE.
• Clause 12 extends the restriction on the term ‘sharebroker’ to cover a wider range of advertisements, but permits the use of that term by employees of a firm that is a member of a registered exchange.
• The rest of Part 1 is largely concerned with replacing certain terms, changing implementation dates, and simplifying wording.

As far as Part 2 is concerned -

• Clause 35 extends the list of people who are not held to be financial service providers. The two new categories are those who are nominated representatives under the Financial Advisers Act, and employers (insofar as they offer services to employees to enable them to join superannuation schemes, like KiwiSaver).
• The other amendments in this part are technical measures, aimed at smoothing out the implementation of the legislation.

There is no regulatory impact statement required for this Bill because “the proposals are minor and machinery in nature”.  Labour envisages supporting the Bill for that reason, and because it amends legislation promoted by it in a way that will presumably enhance its effect.