Worth Richard: Financial Advisers Bill — First Reading 
Worth Richard: Financial Advisers Bill — First Reading 
[Volume:645;Page:14354] 
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.