Financial Advisers Bill — First Reading 
Financial Advisers Bill — First Reading 
[Volume:645;Page:14344] 
Financial Advisers Bill 
First Reading 
Hon LIANNE DALZIEL (Minister of Commerce) 
: 
 I move  
That the Financial Advisers Bill be now read a first time. 
 At the appropriate time I intend to move that the bill be considered by the Finance and Expenditure Committee and that the committee report finally to the House on or before 20 June 2008. 
The reason for the choice of select committee and the report-back date is to catch up with the Financial Service Providers (Registration and Dispute Resolution) Bill so that both bills can be dealt with at the same time. This is important as the review of financial products and providers and the review of financial intermediaries are very interlinked and to separate them at this point would I believe do a disservice to what has been a very good process to date. Without wanting to comment on the approach the select committee may choose to adopt I suspect that a number of submitters will want to be heard on both bills. It may be convenient that the hearings be scheduled together. 
When this bill did not get its first reading before Christmas I took the liberty of sending a letter to all stakeholders to advise of its delay and to draw attention to the fact that it had been introduced so that they could get on with drafting their submissions. Given the number of discussions I have had with some of the stakeholders since the bill was introduced there is no doubt that this bill has been widely read. It has focused the attention of a number of institutions and organisations on what they do that could be caught by this bill and on what ought to be caught by this bill. There is a distinction between the two approaches. 
This bill arises from the Task Force on the Regulation of Financial Intermediaries that was established in 2004. The task force was asked to consider options for reform that would ensure that quality financial information and advice is provided to the public and would assist New Zealanders to make the most of their savings. In its report back to the Government the task force made three core recommendations for reform. It recommended that the Government develop enhanced standards for financial advisers; enhance the redress sanctions and enforcement applicable to financial advisers; and improve disclosure made by advisers. In developing its recommendations the task force consulted widely including surveying the market for financial advice holding meetings with industry and consumer stakeholders and releasing a consultation document which attracted a wide range of submissions. The Government considered those recommendations developed them further and following another discussion document has now introduced this bill. 
So getting the bill to this point has been a long thorough and open consultation process but that does not mean that the bill is perfect. The intention of this bill is to foster consumer confidence in those who hold themselves out to be financial advisers and to ensure that those who claim to be professionals in this important area are held accountable for their performance integrity and competence. Recent events have shown the significance of the role of financial advisers not only in terms of people making investments in finance companies but also in terms of investments in property companies and other vehicles. 
That leads me to the definition of “financial adviser”. The bill was drafted with the intention of encouraging people to think about what is meant by the term “financial adviser” and about how the bill applies to them. This Government wants to ensure that people who provide financial advice in the course of their business are appropriately qualified and competent to provide that advice so that the public can have confidence in the quality of that advice. However it is not the intention of this bill to capture every person who discusses a financial matter with a client or offers a product or service that might have a financial implication; rather it aims to ensure that people providing financial advice in the course of their business or as their full-time occupation are competent to do so. It is they who are expected to be members of approved bodies. I am very happy for the select committee to listen to the submissions and report back to the House on a tightening of the definitions in order to achieve this objective. As I have said before a bank teller who just describes the interest rate on a product or range of products offered by the bank is not a financial adviser and is not intended to be caught by this legislation. In clause 6 of the bill we have made that crystal clear by stating: “For the avoidance of doubt the provision of information whether orally or in writing is not advice unless it is accompanied by a recommendation an opinion or guidance.” 
I guess the question I have asked myself is who the public should be entitled to rely upon for advice if they are investing their hard-earned money—recognising of course that we cannot legislate away all risk. At the end of the day people have to make their own decisions about what they invest in and given that the rate of return is directly related to the level of risk people are taking then they have to be alert to the detail of what they are being offered. 
From the consumer perspective this bill is about needing to have confidence in financial advisers and that those advisers are qualified to undertake their role. From the industry’s perspective competent advisers should not have their professional reputations tarnished by the bad apple who gives everyone a bad name. This bill aims to do that by ensuring adequate disclosure competence and accountability on the part of financial advisers. Any person who is bankrupt who has been convicted of certain crimes involving fraud dishonesty money laundering or terrorism financing or who is subject to orders under securities companies or consumer law will not be permitted to provide financial advice. The bill will also require advisers to disclose any conflicts of interests and fees and sets minimum competency standards to ensure that the financial adviser is equipped to recommend financial products that match a client’s investment needs and most important the client’s risk profile. These include requirements for the adviser to act with reasonable care diligence skill and integrity and not to act in a manner that may be misleading or deceptive. Conduct requirements also apply to handling money received by clients. 
This bill sets up a co-regulatory framework for financial advisers based on self-regulation by the industry through approved professional bodies as the front-line regulators with oversight by a central regulator—in this case the Securities Commission. The Securities Commission will ensure there is consistency across the approved professional bodies setting minimum standards with which the industry must comply while enabling industry to deal with the day-to-day regulatory issues itself. These minimum standards and the rules established by the approved professional bodies will ensure that all advisers are held accountable for the advice provided. The bill establishes a regime for the approval of the approved professional bodies by the Minister of Commerce and provides enforcement powers for the Securities Commission and the courts based on the existing provisions of the Securities Markets Act. 
Issues have been raised in the interim though about the potential cost associated with a multiplicity of approved professional bodies particularly in relation to disciplinary processes and consumer dispute-resolution systems. I hope the select committee takes careful note of the submissions it receives in this area as many of the professional organisations and statutory bodies will have insights into how this might be best managed. 
The proposed professional body is required to have rules that meet the criteria of rules set out in clause 51 of the bill. The criteria have been adapted from International Organisation of Securities Commissions principles which will ensure that all approved professional bodies will have the requisite governance systems and processes in place in order to appropriately monitor and supervise financial advisers. 
It is important to note that the application of the proposed bill is wide. As I said earlier this was intentional. We want everyone who works in the area of providing financial advice to think about this bill and its implications but at the same time we do not want to use a sledgehammer to crack a nut. I invite the select committee to ensure that the bill meets its objectives. I am open to—and indeed anticipate—there being changes through the select committee process to better reflect this intention. I encourage the stakeholders to remain actively involved in the development of the bill through the select committee process. This will ensure that we have legislation that is workable and effective in achieving its objectives. 
I record my appreciation of the participation of the industry through the consultation process and of the work that has gone into the drafting of this bill by officials to support parties and others for their backing of this important legislation which contributes to the building of a sound and effective regulatory environment. I believe that by creating such an environment we will encourage market participation facilitate investment growth increase confidence and put us further along the path to transforming our financial sector into one that is a world leader. I commend this bill to the House. 
SIMON POWER (National—Rangitikei) 
: 
 I thank the Minister for outlining her faith and confidence in the select committee process in looking at some of the issues the National Party views as remaining outstanding or at the very least requiring a further look and perhaps some drafting amendments and tightening on some particular definitions. But we will come to that shortly. 
I take this opportunity to thank the Minister for involving the National Party in initial discussions with officials present about the process she undertook on behalf of the Government in respect of the Financial Service Providers (Registration and Dispute Resolution) Bill and the ongoing discussions around wider reviews and subsequent legislation coming from those reviews. I think it is worth making the point that the Minister if I heard her correctly is talking about a report-back date of 20 June for the Financial Advisers Bill. The Financial Service Providers (Registration and Dispute Resolution) Bill has a report-back date of about 10 June the last time I looked at that particular set-up. 
In National’s view hearing a submission that could be relevant to both those bills at the same time is a significant advantage for the industry. I would encourage those who feel as though they have a stake in this legislation to have a say at the select committee. I encourage not just those in the industry but also consumers and those who are taking the opportunity to look very carefully at the type of investment decisions they are presently making with the unfortunate collapse in recent months of various organisations that could be described as second-tier lending institutions. This is an opportunity for those people also to have a say at the select committee and to put forward suggestions about what types of protections they believe should be available to investors. 
I know the Minister is fond of using in her speeches and releases the phrase “Governments cannot legislate for risk.” and I happen to share that view. Having said that I think there are more things that this Parliament can do to protect investors who are making decisions along these lines. The bill as proposed will need close scrutiny by the select committee. I am still of the view that the definition of “advice” contained in clause 6 provides a wide open door in some circumstances. I have looked carefully at clause 6(2) the “for the avoidance of doubt” clause and my initial reading of it is that it does not avoid that doubt. I think there is still room for improvement there because clause 6(2) states: “For the avoidance of doubt the provision of information whether orally or in writing is not advice unless it is accompanied by a recommendation an opinion or guidance.” That does not go anywhere near to clarifying the issues that I know the Minister has been looking at very carefully over the last couple of months. 
The Minister’s view that the select committee should spend time looking closely at those clauses specifically indicates to me that she is open to the suggestion that that drafting can be tidied up. In fact with all the concerns that have been raised about the definition of “financial advice” and “financial advisers” over the course of the last 2 to 3 months I have to say I do not think that gets us to where we need to be in order to exclude the so-called bank teller example or for that matter a real estate advertisement that gives an indication that a particular rental property today is returning 6 percent on the investment. In my view the “avoidance of doubt” clause would not preclude either of those examples at first glance. However I am sure the select committee will test that further. 
Indeed the definition of “financial advice” in clause 6 does not help us either. Clause 6(4) states: “Whether advice is financial advice or not is not affected by—(a) how the advice is given or communicated;” whereas clause 6(2) states: “For the avoidance of doubt the provision of information whether orally or in writing is not advice unless it is accompanied by a recommendation an opinion or guidance.” I think there is still quite a lot of work to do in marrying up those particular clauses so that we get a better net capturing some of those more tricky examples we have talked about. In fact I think that in an effort to clarify those definitions tightly by inserting those catch-all clauses we may find that we might have added to the confusion rather than clarified the specific nature of the advice that the Minister was looking to capture. 
I think too that we still have some questions to answer—as the Minister herself pointed out—around the issue of approved professional bodies. There is a really interesting question as to whether a pyramid-shaped regulatory framework should exist for financial advisers—with the Securities Commission at the top of the pyramid followed by a few or several approved professional bodies and the consumer at the bottom—or whether we should have just a linear framework that has the Securities Commission one approved body and then a range of financial advisers being captured by a regulatory framework such as this legislation. If the select committee were to adopt that model of course we would want to avoid—and I am sure the Minister would agree with me on this—one approved professional body capturing a monopoly and driving up commissions and the like on those investors. That I think will be an important discussion that we will need to have. 
Central to this particular legislation is the issue of disclosures of fees and commissions—something that will need a pretty close look as we work our way through these particular pieces of legislation. I think we also need to think a bit—and I know the Minister has made many comments in speeches and in press releases about the kind of educative nature that some of these bodies need to take up—to ensure that we are not simply upgrading the size of the disclosure document that is dumped on the investor but rather are taking the opportunity to make sure that crucial advice is covered and that the information that is passed to the investor prior to the decision being made or at the point that the decision is being made is clear and concise and can be understood. That is I guess the vocational imbalance that might exist between the adviser who has access to the information and the investor who is making that decision to put in monies. 
I think we should look at other international models for this regulatory framework. Hong Kong is a good example. It operates a much more stringent licensing regime. I think it is worth the select committee asking whether that model is achieving a different outcome from the one proposed and whether there is anything we can learn from the way those models have worked that we might be able to import into some of this legislation—again without wanting to crack a nut with a sledgehammer as the Minister says. This is a bit of a once-in-a-lifetime opportunity to have a good look at these particular regimes. 
I understand the reasons for the Minister sending the legislation to the Finance and Expenditure Committee although I think it is a shame that it is not coming to the Commerce Committee where no doubt we would give it equal weight and due consideration. None the less National will be ably represented on that committee as this bill passes through and I will continue to keep a close eye on its progress. 
The National Party will be supporting the first reading of this bill and its referral to the select committee on the terms sought by the Minister. We remain concerned about those aspects I have raised today—that is definitions around “advice” and “financial advisers” the role or proliferation of approved professional bodies and issues of fees disclosures and disclosures of commissions. We also take the opportunity to encourage comparison with international models and most important we say to people who invest in finance companies that this is their opportunity to have a say as much as it is the industry’s opportunity to have a view on the legislation that will go before the committee. 
Sitting suspended from 6 p.m. to 7.30 p.m. 
Hon MARK GOSCHE (Labour—Maungakiekie) 
: 
 Talofa lava and my greetings. This Financial Advisers Bill whose first reading the Minister of Commerce Lianne Dalziel led off earlier in the afternoon is a further commitment by this Government to promoting confidence in the financial sector. There are many New Zealanders who at the moment are looking to Parliament and this Government to do that—given recent events in the non - bank financial sector in particular—as part of our ongoing reform of that sector which brings this bill before the House. It will promote greater accountability and transparency for financial advisers ensuring they are competent and act appropriately when managing conflicts of interest—again something that the public will be very keen to see enacted. 
The bill will set up a co-regulatory regime between the Securities Commission and industry-based approved professional bodies. The bill sets up that regime for financial advisers and its main provisions will require disclosure of financial advisers’ conflicts of interest their fees and their competency to ensure that members of the public can make informed decisions. It will require competency of financial advisers to ensure that they have the experience the expertise and the integrity to effectively match a member of the public to a financial product that best meets that person’s need and risk profile. It will ensure that financial advisers are held accountable for any financial advice they give and that there are incentives for them to manage appropriately conflicts of interest. 
In her speech the Minister indicated that she invited the Finance and Expenditure Committee to look at the various definitions in the bill and to ensure that members of the public as well as the industry make submissions on this bill. Obviously the bill has companion legislation which we are working on and it is important to have that set in place by the middle of this year. As a member of the select committee that will deal with this very important legislation I look forward to hearing from the public and from the financial advisers industry itself so that we can put together good legislation and report it back to the House so Parliament can pass it. I know there will be many people out there nursing some wounds from their own investments over the last year or so who will be welcoming this Government’s move. 
LINDSAY TISCH (National—Piako) 
: 
 Late last year under urgency this Parliament passed the Financial Service Providers (Registration and Dispute Resolution) Bill. The bill that we have before us tonight is the Financial Advisers Bill of 2007 and the commentary that has come via the Bills Digest suggests that these two bills the one I previously mentioned that went to select committee last year and this bill should form one new Act. I am not going to go into the pros and cons of that but there are certainly some similarities between the two. National supports this bill going to select committee and the need to establish a co-regulatory regime for financial advisers where the Securities Commission and industry-based approved professional bodies to be known as APBs will work together to create and monitor standards for financial advisers. The industry-based approved professional bodies will be front line day-to-day regulators while the Securities Commission will be responsible for the oversight and maintenance of standards of approved professional bodies and for ensuring the overall health of the sector. 
National agrees that there needs to be an update to the legislation governing the activities of financial advisers. However it is impossible to eliminate risk from financial decision-making so a balance must be struck between minimising risks for investors and minimising the costs to investors. Legislation is not the only response to minimising the risks of financial investment; improved financial education and literacy need to be a part of improving New Zealand’s investment culture. 
The range of financial advice in related services captured by this legislation is much broader than previously. However there needs to be caution to ensure that the providers of simple or uncontroversial services do not incur undue costs. In researching some background to this I note that in Singapore the Monetary Authority of Singapore sought amendments to its Financial Advisers Act back in October of 2007. The key features of that review for which submissions were sought were implementing a perpetual licensing regime for capital market services and financial advisers licence holders replacing the current licensing framework for licensed representatives and exempt representatives and replacing the Financial Advisers Act with a new representative notification framework. Even countries that are very versed in financial matters look to review their legislation from time to time. 
With the finance company collapses over recent months and the likelihood of more the question is whether this bill actually addresses the real issues. The extent of economic and social harm from deficient financial advice will not be fixed by this bill in its current form. Many large and small investors who have suffered financial loss as a consequence of bad advice. Many of these investors are elderly and have lost life-savings after being given advice by so-called financial planners. 
The move to approved professional bodies which will be a regulatory regime may sort out some of the rogues. However if we look at the genesis of this bill we see it goes back over 4 years when the issues I have just raised were not as paramount as they are today. If we were to look at a bill today and start from scratch I am sure we would see a different type of bill one that moves to protect the investor through a regulatory framework that would address the major deficiencies of financial adviser disclosure law and the compulsory disclosure of advisers’ fees and commission. 
This would enable the investor to identify any economic incentives that the financial adviser may incur and may gain from the advice he or she has been given. At the moment advisers have to disclose their position only if the client requests disclosure and many people do not know that they have that ability to do so and subsequently do not ask. The law requiring compulsory disclosure comes into effect on 29 February of this year. 
There is also a need for a banning orders regime against breaches by financial advisers. That would give investor protection and if we look at the Australian model the Australian Securities and Investments Commission has done exactly this for cases identical to cases that have recently occurred in New Zealand—yet we do not have that provision in this bill nor has it been envisaged. As part of the select committee process which we welcome because we are supporting this bill to the select committee there may be the opportunity to tighten up and to give that sort of protection that I mentioned before. 
The purpose of this bill should be to protect the mum and dad investors who may not have the financial acumen to make the right financial decisions so they become very reliant on advice from the so-called advisers and there are many of those. Some of them I have to say have been quite unscrupulous and we are seeing the results of this today with so many businesses falling over and so many people who have been caught in that trap. 
Many people who lost money because of breaches of and by financial advisers were in fact prudent savers. They had saved for many years. And now in the latter years after they have invested possibly their superannuation or possibly the money put aside for a rainy day with people in whom they had trust and confidence those people have been found wanting. 
There are many cases where confidence has been breached and abused and there has been no desire to make reparations. In fact I do not know of any cases where there has been a requirement for a financial adviser to make reparation to someone who has lost money. National will support this bill to select committee but we will be looking to strengthen the safeguard for innocent investors. 
PETER BROWN (Deputy Leader—NZ First) 
: 
 Let me make it clear from the onset that New Zealand First will most definitely be supporting this bill to go to a select committee not because we think the bill is 100 percent correct and we have it right but because we believe there is a need for this type of legislation in this country. I can recall that quite some years back—1987 as a matter of fact and I will just give the House a little bit of my personal experience with financial advisers—I had coming to me two chunks of money both fairly significant with an interval of time in between. This was before the crash of 1987. I saw an advertisement in a newspaper or a financial magazine. I contacted the principals and in due course an agent came to see me gave me a prospectus and gave me an investment statement for want of a better term and I thought it was pretty good. I gave him the chunk of money and told him another chunk of money was coming in so many weeks’ time. In the intervening time the crash of 1987 started to occur and in due course this financial adviser—financial whizz kid; call him what you like—turned up at my home and I had a second chunk of money. He gave me the impression that investing with that particular organisation was safe—as safe as houses as we would say as safe as Bob Clarkson’s buildings—and of course I duly gave him the money. 
What happened? A few weeks later I found out that not only had my first chunk of money diminished somewhat but the second chunk of money had also diminished. If the truth be told somebody would have known that as soon as I gave him that cheque it would shrink by quite some amount. 
Bob Clarkson 
: You should have come and seen me! 
PETER BROWN 
: I tell Mr Clarkson that I missed his comment but I am sure he is— 
Ron Mark 
: He said “Buy a race track.” 
PETER BROWN 
: Yes—[ 
Interruption 
] 
Ron Mark 
: He said he rorted the council. 
PETER BROWN 
: That is very honest of him is it not? But to get back to this bill; I say that that was a serious situation and I was quite disappointed obviously as members can imagine. That money that I had invested had turned into a fraction of what it was when I invested it. I approached the finance house and I got little satisfaction. At the end of the day though with being a little more shrewd I did not lose too much. I managed to work the system and I mean that honestly; I did not short-change anybody. But we can think of the mums and dads and perhaps even more important the retired folk who have put their life savings into investment houses in recent times and come out in some cases with nothing and in other cases with very little and a good deal less than they invested. 
But I go back to my experience. I got a prospectus and I got an investment statement which is all I could call it. But this bill states in clause 6(3) that “Financial advice—“(c) does not include advice about the procedure for taking or implementing a financial decision; and (d) does not include any of the following: (i) a prospectus; or (ii) an investment statement;” But I have to tell the House that thousands of people invest on the strength of those two pieces of paper. They get a prospectus and then they ask the agent or adviser whether they can prepare an investment statement for them. That is what has happened and that is what does happen but this bill says that that is not giving financial advice. 
Now I turn to clause 8 which states: “Act does not apply to lawyer who performs financial adviser service in course of professional practice”. Well I have had some experience with those guys. 
John Hayes 
: You’ve got your boss. 
PETER BROWN 
: My boss is a bloody good lawyer and a very honest one; the member can have no doubt about it. I have to say that the lawyer I am about to talk about—and I am not going to name him because it was some years ago—attended to some legal matters for me and he proved to be an excellent lawyer when it came to the legal side of things. But I also invested some money with him and some of it went astray. Luckily I got my investment back; the law firm honoured it. But there were many who perhaps were not as persistent as me or as determined as me whatever who lost thousands. I have to ask with that experience why this legislation does not apply to a lawyer who performs financial adviser services in the course of professional practice. I think that that is something the select committee has to look it because I am aware that in this country over a period of quite some years several lawyers have taken money from members of the public and it has disappeared without trace. Indeed some of those lawyers have ended up in prison. I really cannot understand why the Minister has included that clause in this bill. There must be a reason but I would urge the select committee to look at the clause in some detail and with some scrutiny. 
I do not want to give the impression that New Zealand First does not understand that when people invest money there is some risk and one cannot legislate totally against risk. But we are talking about legislation that is meant to be giving the public the best security it possibly can when they invest their money. As I said earlier on with some of the events of the last 18 months and with organisations keeling over almost every month for the last 18 months or so one has to wonder where the ethics are why the industry works the way it is and why it has not made a more positive attempt to tidy its own backyard up. This bill is needed but as I said earlier I have read the bill only very briefly and I have found some flaws in it. 
Another flaw that I found—and I can accept that I am not fully au fait with the whole thing—is in clause 35 “Protection of client’s money held on trust” which states “The money of a client that is received or held by a financial adviser on trust—(a) must not be used to pay the debts of any other creditor of the financial adviser;” and there is another paragraph paragraph (b). Well that is self-evident I would have thought: one does not take money that belongs to a client and pay one’s own debts. But there is no penalty clause for anybody who does that—at least if there is I cannot find it. There are penalty clauses in preceding clauses—clauses 30 32 33 and 34—but when we get to clause 35 and see that it states that the adviser must not use money to pay debts there is no penalty for the person who does that. Maybe the provision has to be read in conjunction with one of the earlier clauses but it does surprise me that there is no penalty attached to a financial adviser who takes money that legitimately belongs to a client or has been given to the adviser by the client and who uses it to pay the debts of any other creditor of the adviser. 
New Zealand First will support this bill. We urge the select committee to give it a thorough examination because we think and suspect there are some flaws in it. If we are going to produce legislation like this it is in the public’s interest that we examine it and we want the best legislation there possibly can be. 
Hon PAUL SWAIN (Labour—Rimutaka) 
: 
 I rise to speak in favour of the Financial Advisers Bill. I will take up an issue that the previous speaker Peter Brown raised about lawyers which I will attempt to answer as I work through my contribution. 
I think it is fair to say—and I think the member touched on it—that there has been a lot of uncertainty as far as the public is concerned about issues relating to financial advice over the last 18 months at least and this has been highlighted by some of the performances by some of the financial advisers particularly over the last 12 months or less. There is no doubt about it that this is a bill whose time has come. 
I have to say I suppose without a great deal of enthusiasm that when I was the Minister of Commerce this issue was raised. I actually recall it being raised by the leader of New Zealand First who was looking into this matter. There was no question that this issue needed to be addressed; the problem was what its level of priority was. The first level of priority when we came into Government in 1999 was protecting small investors which is important. That was done through the Takeovers Code to ensure that all investors or shareholders received rights similar to those of the big investors which had not happened in New Zealand. That was something that was really important. We then had to try to deal with things such as insider trading and toughening up the powers of the Securities Commission and giving it more funds. I know that the Minister of Commerce has been beavering away on a number of other matters relating to this whole financial services area. Now we are in a position to be able to do something about financial advisers and I think it is critical. It is about having confidence in this important area of the financial sector. 
The previous speaker spoke about people who have a small nest egg and who want to invest it to try to protect their future only often to be let down by advice. There do not seem to be any particular penalties that can be brought against advisers apart from taking them to court—a protracted series of events. The idea here is to try to build the fence at the top of the cliff and that is a good thing. The bill is looking to try to promote accountability and transparency for financial advisers and I would hope that the financial advice sector welcomes this with open arms. I have not yet heard anybody opposing it and I would be interested to see whether anyone is prepared to put his or her head over the parapet given what has happened in New Zealand over the last little while. 
Some people will be asking whether this bill is the appropriate model. It sets up a co-regulatory regime and it is a regime that provides for established codes of practice within the industry to be overseen by the Securities Commission. There is a balance between on the one hand having the Government totally regulate which is always a difficult thing to do because often the Government cannot keep up with every modern piece of information that is happening within the finance sector and on the other hand self-regulation which has proved to be absolutely hopeless—the kind of thing that is now being addressed in the real estate area. I think that balance is really really critical. 
The bill basically requires financial advisers to address things like conflicts of interest fees and competency. It requires financial advisers to be competent to ensure that they have the experience expertise and integrity to give the public confidence and it ensures that financial advisers are held accountable for any financial advice that they give. There are some definitions that are probably worthy of repeating. In clause 6(5) a “financial decision” is considered to be anything to do with “(a) saving money: (b) investing holding or realising money or property: (c) borrowing money: (d) incurring a debt: (e) giving a security including a guarantee or indemnity: (f) taking out insurance: (g) making financial provision for the future.” A “financial adviser” is defined in clause 7(a) as a person who “(i) is a member of an approved professional body and is registered:”—under the financial services providers legislation—“and (ii) performs a financial adviser service in the course of the business of that person or of another person;”. 
The member made quite a good point actually which is that the bill excludes lawyers and that is right—it does. We faced this issue in respect of the Immigration Bill when we were looking at trying to regulate immigration advisers. The question really was that if lawyers provide immigration advice—yes they do—should they be bound by a sort of regulatory regime similar to that for other people who are providing immigration advice? Yes they should. But actually when one looks at lawyers one sees that that profession does have its own accountability screens within its own legislation. There is the ability to penalise wayward lawyers and there is the ability to address the concerns that the public have. In the immigration advisory area it was my view that to try to create a dual system where lawyers are accountable not only to their own system but also to a new immigration advisers bill was a bit of overkill. The lawyers of course supported that position as one would expect and it was always my view that we should keep an eye on it and see whether the regime that we had introduced was working effectively. It has been a while since I have had anything to do with it so it has been difficult to see how it has worked through but I imagine that a similar kind of logic or thinking has applied in this particular case. That is an area that the select committee will need to look at. 
If I had anything to do with the select committee my advice to the people on that committee would be to look at the immigration advisers legislation which excludes lawyers because they have legislation covering them to see whether it was working to see whether there had been any complaints in the immigration advice area that had not been able to be resolved and to see whether that kind of regime needed to be duplicated here or whether there was something here that was over and above just ordinary—for example immigration advice that meant the bill should apply to lawyers. Probably one would have to say that the need to regulate financial advice was more important than the need to regulate immigration advice but that is something the committee would want to look at. 
Peter Brown 
: So you’re agreeing with me? 
Hon PAUL SWAIN 
: No I am not agreeing with the member; I am saying he raises a good issue an important issue. I do not think it is as the member indicates. I do not think it is worth voting against the bill from that point of view—and the member has indicated he will not do so—but I think the important thing is that this is one of the issues that the select committee would need to address. I can see some logic as to why the Minister of Commerce has excluded lawyers but I think it needs to be tested out at the select committee. If the committee felt that it was an area that needed to be addressed then it could come back with alternative recommendations. 
I think it is a bill whose time has come. People will argue that it should have been done sooner—the old “too little too late” kind of thing—but a huge amount of work has gone on in the whole securities market and financial market area since this Labour-led Government came in in 1999. A huge number of reforms have been built to try to make sure there is more security and more stability within the sector and this bill is another important piece in the armoury to make sure that people can invest with confidence. 
Dr RICHARD WORTH (National) 
: 
 This legislation before the House tonight the Financial Advisers Bill is truly important legislation. In the last 18 months 14 finance companies have collapsed and I am certain there will be many more collapses given the structure of those organisations and also what is going on in the context of New Zealand investment. 
I want to deal with a number of issues in the time that is available and to start by saying that National supports this bill going to a select committee. It is particularly unfortunate that we are dealing with two bills—the Financial Advisers Bill which is the subject of this debate tonight and the Financial Service Providers (Registration and Dispute Resolution) Bill. The reason is that although both bills will go to the same select committee and although the time frames are broadly comparable there are similarities and substantial differences between the structures of those bills which are really intended to form a coherent whole. 
In looking at the market in general terms and asking why this bill is necessary it is right to say that if all of these finance company collapses had been known at the time a process of consultation was occurring then this bill would not have been in the form that it is. Just by way of a starting point in that regard members may know that finance companies that are non-bank deposit taking institutions—and I am excluding savings institutions—account for about 44 percent of total non-bank lending institutions’ assets. The impact of these finance company collapses on individual households is in excess of $1 billion. 
I think it is interesting that these failures reflect the relatively high risks that finance companies have taken in their business operations. There is a significant heterogeneity across the deposit-taking finance companies. The lending institutions with higher credit risks are typically involved in property-development finance mezzanine lending and consumer lending. It is also right to say that the failures that have occurred to date have been caused fundamentally by underlying solvency problems to do with asset quality connected lending and credit management and that liquidity pressures would have been the trigger for closure in some cases. Many companies are under continued liquidity pressure particularly given the risk of reduced rates of reinvestment in the sector and there is good data about that particular topic. 
We have also seen since the failures of 2006—and I am thinking of companies like National Finance Provincial Finance Western Bay Finance and more recently Bridgecorp and others—that reinvestment has substantially declined reflecting the squeeze in liquidity in the sector and an increased reliance on other forms of funding. That is in marked contrast to what has been going on in the savings bank area. 
An important element of this episode has been that many investors have not received appropriate returns for their risk. For example although finance companies engage in riskier lending than banks this is only partly reflected in the returns on short-term deposits. The average difference between the interest rates on 1-year term deposits at banks and 1-year finance company debentures has been consistently around 1 percent. So one can ask why an investor would put money into a finance company and not go off to a bank like Westpac or Rabobank and earn a monthly rate of interest on a reasonable deposit sum of around 8.2 or 8.4 percent. Deposit-taking finance companies on average have a margin between debentures and loans—and I am talking about the interest spread—around twice that of banks and it is significantly more for companies lending for consumer purposes. That is all very odd. 
So far as this particular legislation is concerned one would have to say that the scope of the bill is commendable. Its purpose is to require disclosure of financial advisers’ conflicts of interest fees and competency. Requiring competency of financial advisers and ensuring that financial advisers are held accountable for any financial advice are clearly worthwhile laudable objectives. But I share the reservation of earlier National speakers that it may be that although we support sending this legislation to a select committee there are some fundamental mishits in it. Clearly one of the complexities of the legislation will be all around the requirement that financial advisers are required to be members of an approved professional body and registered on the register of financial service providers. There is the opportunity in the context of the bill for there to be multiple providers with multiple complications associated with that. There are also disclosure obligations for financial advisers and provisions that basically track the existing law on conduct obligations for financial advisers. 
One of the big problems will be the meaning of “financial advice” and “financial decision”. I believe that errors have been made by the Government in drafting those policy provisions—in particular in clause 6(2). How might that work? A customer may go into a trading bank and say “I have $20000 to invest. What do you suggest I do?” and the teller says whatever he or she thinks. Clearly there is reliance in that setting whereby the person who has the money is unsure of what the possibilities might be. That seems to me to be clearly within the provisions of clause 6(2). It is in oral form—it is unlikely to be in written form; it does not need to be in written form—and it is in effect a recommendation an opinion or guidance. Although the Minister says that it was not intended that bank tellers would be picked up by this legislation with the way in which it is drafted sadly they will be. But other classes of occupation will be similarly caught. I would instance for example the person giving advice on rental investment and rental returns. 
It is also relevant to note in this regard that although there are some exceptions in this legislation the parallel legislation words the exceptions in a slightly different way and that is calculated to cause confusion. I think it is also possible to argue—and it is why I made the preliminary comment that if these finance company collapses had been known there would have been a different financial model—that this legislation is substantially about self-regulation. We are one of the very few countries that have not moved to regulate this type of financial activity. I know there is criticism of the Australian model—and maybe that criticism is justified—but there is a case to say that given the extent of the calamity we are looking at in terms of finance company collapses a self-regulation model may in fact not be the best plan. 
The final thing I would like to say is just on an aspect that relates to the enforcement provisions in this legislation. We have the collapse of Bridgecorp we have talk of representative and class actions being mounted by disgruntled investors and it is right to say the law in New Zealand as it relates to class action—and I am talking about the procedural rules around the law—is not wholly satisfactory. They are in marked contrast to what goes on in Australia. So I would express the hope that the select committee that looks at this bill will contemplate substantial changes that will enable class actions to be advanced and will protect investors as an investment group. 
Bill read a first time. 
Hon MITA RIRINUI (Minister of State) 
 on behalf of the  
Minister of Commerce 
: I move  
That the Finance and Expenditure Committee consider the bill 
 and that the committee report finally to the House on or before 20 June 2008. 
Motion agreed to.