Financial Service Providers (Pre-Implementation Adjustments) Bill — First Reading 
Financial Service Providers (Pre-Implementation Adjustments) Bill — First Reading 
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Financial Service Providers (Pre-Implementation Adjustments) Bill 
First Reading 
Hon SIMON POWER (Minister of Commerce) 
: 
 I move  
That the Financial Service Providers (Pre-Implementation Adjustments) Bill be now read a first time. 
 At the appropriate time I intend to move that the Financial Service Providers (Pre-Implementation Adjustments) Bill be referred to the Commerce Committee that the committee report finally to the House on or before 4 May 2010 and that the committee have authority to meet at any time while the House is sitting except during oral questions and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 187 and 190(1)(b) and (c). 
The objective of this bill is to make a number of necessary and desirable amendments to the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 before being fully implemented by the end of this year. I recognise that that is a short time frame and I appreciate that this will put pressure on the committee and on stakeholders seeking to make submissions. However the register of individual financial advisers and other financial service providers is due to go online in the middle of the year with the regime to be in place in early December. It is critical that the industry has clarity about its obligations so that these timetables can be met. 
The Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 together with the Reserve Bank of New Zealand Amendment Act 2008 were part of a suite of reforms introduced by the previous Government and agreed with by this Government that were aimed— 
Hon Lianne Dalziel 
: That’s the first time you’ve actually mentioned us. 
Hon SIMON POWER 
: —I am getting the hang of that actually—at promoting confidence in the financial sector. I want to emphasise to those who may have an interest in this bill and to the chair of the Commerce Committee who is in the House this evening that this bill is not an opportunity to relitigate the fundamental policies of the regime upon which there is broad agreement. Rather the changes proposed in this bill are aimed at balancing our two objectives of encouraging confidence and promoting efficiency as we implement the new regime. Any submissions from stakeholders should keep this limited scope in mind. 
A number of the amendments in the bill are technical in nature and are intended to resolve uncertainties and create clarity for both industry and regulators such as by clarifying some of the product classifications under the Financial Advisers Act and by removing uncertainty over the territorial scope of the Financial Service Providers (Registration and Dispute Resolution) Act. These are matters that have been raised with me since I became Minister and I know that my colleague opposite has also had these matters raised with her as the previous Minister I suspect but certainly since that time as well. 
There is one specific area of the bill I would like to focus on regarding the qualifying financial entity framework. The qualifying financial entity framework is intended to improve the efficiency of regulation for large institutions so they are able to take responsibility for both the products being advised on and for the advice itself. Many large institutions such as the registered banks and the larger insurance providers have argued that the framework for the qualifying financial entity model does not balance the two objectives of public confidence and efficiency in the most effective way. At present the Financial Advisers Act allows qualifying financial entities to cover only products that they issue. I propose to widen this to include other products for which the qualifying financial entity has clear responsibility. In this regard I note that the Securities Commission has stated that it will use the terms and conditions of qualifying financial entity licences to ensure regulatory neutrality—and this is quite an important point—between qualifying financial entity advisers and non-qualifying financial entity advisers. 
Furthermore the Act currently distinguishes between financial advisers who are employed by a qualifying financial entity and those who act as the qualifying financial entity’s agents. Only employees are permitted to advise on their qualifying financial entity’s complex products. Provided the Securities Commission as regulator is satisfied that a qualifying financial entity knows who all of its agents are and has adequate control over the advice they offer this distinction is not necessary. I therefore propose to remove it thus allowing employees and agents to advise on their qualifying financial entity’s complex products. However as I noted this equal treatment depends on clarity over exactly for whom the qualifying financial entity is responsible and on the qualifying financial entity having good systems in place to manage the advice offered by its advisers. Although the Securities Commission already has quite broad powers to ensure that this is the case the bill clarifies the situation of financial advisers who are working for qualifying financial entities but who are not their employees by replacing the slightly unclear concept of a qualifying financial entity’s agents with a transparent system of so-called nominated representatives. 
I have been discussing the broader qualifying financial entity framework with industry and I expect that a number of stakeholders will make submissions on it. By following the principles of responsibility for products and responsibility for advice—and it is critical to emphasise that—the qualifying financial entity model should accommodate a variety of business models provided always that adequate supervision and oversight remains in place. My view and the Government’s view is that as long as the oversight of the advisers within these entities is not compromised the framework should be enhanced to improve its flexibility where possible. 
I will also respond briefly to some of the other issues that have been raised by industry in recent months but that do not appear in the bill. There have been calls for the Financial Advisers Act to be amended to allow some entities to provide certain types of financial advice but the cornerstone of the legislation is that the professionalism of financial advice is best encouraged by ensuring that it is delivered by competent and ethical individuals. Although it may be appropriate that changes be made to improve business efficiencies such changes must be consistent with this fundamental principle. I have also received requests for wholesale advice to be excluded from the regime. My view is that all financial advisers should be broadly inside the framework but that may be achieved through other avenues. Those discussions are continuing. Both Acts already contain a number of mechanisms that can be used to ensure that the obligations imposed on wholesale advisers are not out of proportion to the benefits of regulation—obligations including the option of tailored disclosure obligations separate standards of client care through the code of professional conduct and the recognition of entities as qualifying financial entities. The committee may want to consider whether these obligations are sufficient. 
Finally I would like to address the regime’s coverage of what are termed investment transactions in the Financial Advisers Act. These provisions are important as they relate to the protection of client money and property when this is handled by financial intermediaries. The mishandling of client funds has the potential to seriously undermine confidence in the financial sector. However the current framework established by the Act leads to an impractical outcome whereby natural persons alone can make investment transactions but not companies and other entities. This will create significant compliance costs for businesses without creating much benefit for the public. I intend to write to the select committee with additional proposed amendments to the Acts to ensure that that situation is rectified at the time the committee is dealing with this bill. 
Although I am still in the process of preparing my proposal it is likely to reflect the following features: it will allow both entities and natural persons to make investment transactions it will be a registration-based regime that leverages off the existing framework set up by the Financial Service Providers (Registration and Dispute Resolution) Act and the Financial Advisers Act it will maintain the minimum money-handling standards set up by the Financial Advisers Act and of course the Securities Commission will be the enforcer of that regime. Most important in designing this framework I want to ensure that the level of oversight is proportionate to the risk posed by the relevant transactions. 
I take this opportunity to thank the various stakeholder groups that have had input into this bill which will go a long way to improving confidence in New Zealand’s financial sector. I look forward to continuing to work alongside the select committee to ensure that the time frames originally set for the implementation of this legislation are not wavered from and we will make every endeavour to ensure that that is the case. I commend this bill to the House. 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 Labour will be supporting the first reading of the Financial Service Providers (Pre-Implementation Adjustments) Bill. I thank the Minister for advising me prior to this evening of the shortened report-back period. Unfortunately he did not mention the extension of the hours of business but we will see what we need in terms of the select committee and of meeting the report-back date that has been set. I am quite comfortable with the underlying reason behind asking for this report-back period and that is the stated commitment to implementing the underlying policy framework as introduced by the previous Government and as agreed in a relatively non-partisan way across the House. 
I say also to the Minister that I feel very strongly that that principle of collaboration is very important in this area. There are other areas where I think it is important as well but I think this is an area where we need certainty. This is about confidence in our capital markets and it is vital that we can work closely together on getting a good outcome. Certainly I think the objectives on both sides of the House are the same. 
I want to pick up on one of the last phrases that the Minister used in his comments and that was the question of proportionality in response to the risk that is faced. I have always been very determined in my approach to regulation in this area to look at that question of proportionality. There are several layers of proportionality that I think we need to take into account. One is that there is a risk that when something bad has happened there is a tendency to over-compensate for that situation and over-regulate thereby creating a disproportionate response to the actual level of risk. Therefore I think it is important to assess what that risk is right from the outset. A good regulatory impact approach to regulation is one that will always define the mischief that one is intending to remedy and then looking at the variety of options that are available to remedy that fault and looking at what the costs and opportunities the risks and benefits might be in any particular case. 
One of the concerns I have heard expressed is that passing quite complex legislation in quite a tight period in the lead up to a general election is not ideal in terms of getting the detail absolutely right. I am very comfortable with the idea that we will be looking at the detail rather than at some of the fundamental policy drivers that lay behind the framework we introduced. 
The qualifying financial entity framework was designed with the concept of proportionality in mind because it was not the same as an individual financial adviser who is essentially accountable to no one other than by voluntary membership of an organisation that ultimately ended up showing that it had no teeth if the individual withdrew from that organisation prior to the complaint being lodged by a disgruntled client. For the banks and other institutions that would be very tightly monitored it enabled the Government to look at a different framework for those large organisations that could take on the responsibility for ensuring that the right people were providing the right advice in an appropriate manner and that consequences would fall back on the whole of the institution if those standards were not met. 
Labour introduced legislation with the qualifying financial entity framework in it prior to the disclosure of the appalling example of ING and ANZ. That particular case made me think very carefully about the detail of the legislation that we passed. If anyone had asked me at the time we were introducing the legislation whether I thought that a registered bank in New Zealand would be responsible for allowing individual advisers working within that bank to provide recommendations—not just advice but also recommendations—to ordinary Kiwis that they should move their money out of their bank accounts and into this new diversified yield fund or the—I cannot remember the name of the other one— 
John Boscawen 
: Regular income fund. 
Hon LIANNE DALZIEL 
: —I thank the member; I know John Boscawen knows the names off by heart. I think they are etched on his forehead. 
The point I am making is that if anyone had asked me whether a bank adviser would make the recommendation to shift funds from one account to the other without having the knowledge the experience and the back-up of the independent analysis for those products I would have said that it could not happen in New Zealand; I really would have said that. That was coming off the back of finance company failure after failure. I would have stood by the banks and said that there is no way that a New Zealand - registered bank would have allowed that to happen; and it happened. The consequences have been far-reaching because they certainly have undermined confidence in what would otherwise be a very very strong sector. It has proven to be a very strong sector in New Zealand and Australia say compared with the international experience over the credit crunch and the complete loss of confidence in the banking system internationally. 
This position has made me relook at some of the stuff around qualifying financial entities. I heard the Minister say that the Securities Commission has already provided some advice that it will be looking for regulatory neutrality in terms of how it will be approaching the question of advisers—whether they are working for qualified financial entities. That possibly is giving me a positive steer that the Securities Commission will not allow a bank to get away with the sort of thing we saw that bank get away with on that particular occasion. I am sure there will be more opportunities to debate that particular matter. I have drafted a member’s bill that I will be introducing into the House when hopefully it is drawn from the ballot. [ 
Interruption 
] Yes I have good luck with ballots so maybe I will be in for some good luck here too. The bill is designed to add a provision within the Illegal Contracts Act to prevent people from being put into a position where essentially they kneecap the role of the regulator in determining whether there has been a breach of the regulatory framework which was the case for those who signed the settlement offer from ING. I am very hopeful that my bill will be drawn from the ballot and that there will be another opportunity to debate what has happened. Hopefully it will provide some comfort in the future to those investing in any sort of financial product that the Commerce Commission the Securities Commission and the dispute resolution services which will be established under the prior legislation will not have their jurisdiction ousted or limited in any way. 
I agree with the Minister’s comments on financial advisers that they must be competent and ethical individuals. I think there is still an issue with the distinction around the client base and whether the client base is more sophisticated on one level. I think there is a difference so we would like to work on that. I noted the recommendations of the Capital Market Development Taskforce on this which I think are very relevant to that particular issue. 
The final comment I want to make is that I hope the Minister will ensure that officials are able to continue to dialogue with stakeholders over the period that the bill is before the select committee. I am very comfortable for that to happen and I know that as Minister I liked that to happen. It means that we have up-to-the-minute advice as we consider very complex issues and that will assist the process. On that note I certainly commend the bill to the House. 
PESETA SAM LOTU-IIGA (National—Maungakiekie) 
: 
 I rise to support the Financial Service Providers (Pre-Implementation Adjustments) Bill. The thoughts of both the Minister of Commerce Simon Power and the chair of the Commerce Committee Lianne Dalziel have been expressed: it is about the efficiency of our financial markets. Like most countries around the world in the past year and a half we have suffered turmoil in goods and services markets but particularly in financial markets. This bill goes some way to addressing some of the concerns around public confidence in the financial industry. 
Some of the key changes as pointed out by the two prior speakers relate to the qualifying financial entity model. Those entities are regulated by the Securities Commission first and foremost to take responsibility for advice provided by employees and contractors on an extended range of products but not for advice provided by people who require individual licences to give such advice. The key change is the naming of individual contractors who provide such advice for which the entities take responsibility instead of their automatically being responsible for advice from all contractors. I think that is particularly important. It allows a degree of disclosure by those entities that provide advice. It allows investors and consumers alike to understand who is providing the advice and their responsibilities. 
This bill allows the entities’ employees and named contractors to provide advice on category 1 products which are complex products such as shares and various other instruments and financial products without being individually licensed. Under the current legislation this is permitted only for the employees of qualifying financial entities. 
This bill is part of a suite of reforms aimed at promoting confidence in the financial sector. The suite includes the Financial Advisers Act the Financial Service Providers (Registration and Dispute Resolution) Act as well as the Reserve Bank of New Zealand Amendment Act 2008. Some of that legislation was passed by the previous Government and the chair of our committee was the Minister of Commerce at the time. We are continuing much of the bipartisan attitude towards this part of our law. It is encouraging to hear from the chairperson tonight that she will be working constructively across party lines with our ACT and Maori Party members on the committee to ensure that this legislation is reported back on time and facilitates the purpose for which we are putting it forward. 
It is really critical that we go online in the middle of the year in terms of the register of financial service providers. Compliance is compulsory by early December—that goes without saying. We will welcome submissions by all stakeholders across the industry not just providers of financial advice but also consumers and investors who have been hurt by some of the finance company failures that have occurred in the last 2 to 3 years. 
If people are wondering whether there is a problem in the industry they have only to look at the  
Consumer 
 magazine article last year that outlined a mystery shopping expedition by the magazine that found that a number of key areas in the financial service advisers industry were particularly lacking. Those areas included lack of advice poor analysis by certain advisers inappropriate advice and questions around some of the costings provided by those advisers. 
This legislation aims to improve standards of disclosure which would ensure that consumers are better placed to assess the extent of an adviser’s independence. I think that is a critical point. It certainly has come through in the Commerce Committee’s finance company failures inquiry. 
The regime will ensure that advisers meet minimum standards of competency to ensure that they are able to provide the high-quality advice that investors expect. We all know that we cannot necessarily legislate for ethics and a certain competence and standard of behaviour. But we will certainly look at a regime that is regulated by the Securities Commission. I obviously support this bill going to the select committee. Thank you. 
CHARLES CHAUVEL (Labour) 
: 
 The previous Labour-led Government especially in its 2005-08 term was concerned to remedy the reputation that New Zealand had developed over many years for its severely under-regulated financial services market. That determination arose before some of the finance company failures and the other less than desirable conduct that we have seen in this country from that sector over the last few years. It was largely motivated by a concern about the stability of our financial company sector and a general lack of proper consumer protection. Those were some of the symptoms that the legislation promoted by the last Labour-led Government targeted. Much of that legislation went through the parliamentary process under the sponsorship of Lianne Dalziel as Minister of Commerce so it was good to hear her contribution on the Financial Service Providers (Pre-Implementation Adjustments) Bill tonight. 
There were three laws of particular note. All of them had major-party bipartisan support. The first was the Reserve Bank of New Zealand Amendment Act 2008 which provided for Reserve Bank prudential supervision of non-bank deposit takers rather than simply relying on the trustees of those non-bank deposit takers to exercise the necessary oversight. That is a major clean-up in the sector and it seems to be functioning extremely well. The second reform was the Financial Advisers Act 2008. The third was the Financial Service Providers (Registration and Dispute Resolution) Act 2008. It is the second and third of these three Acts that would be amended by the bill that we are now reading a first time. 
In 2008 Labour sponsored the Financial Advisers Act to ensure that financial advisers were subject to tighter rules of professional conduct and competence. The Act was just one part as I have said of the effort to bolster investor confidence in anticipation of the global credit crunch and as I said because of concern about finance company liquidity in New Zealand. The regulations that were authorised to be made under the Act were required to focus on financial products not financial decisions as was the original proposition in the first draft of the bill circulated for comment. 
A tiered approach to the regulation of advisers was taken. First authorised financial advisers were to be allowed to provide advice on complex products for example securities or futures contracts—the really tricky stuff. There were to be stringent requirements in that first category as is appropriate. Advisers falling into the second category faced only a basic code of conduct and reasonably minimalist disclosure requirements but in return for those pretty light-handed regulatory requirements on them they were permitted to provide advice on only simple products like insurance or consumer credit contracts. But even the second tier of advisers was required to be registered and to belong to a dispute resolution scheme. Those two requirements had never existed before and this absence contributed to the Wild West nature of our financial services regime. The legislation enabled a qualifying financial entity or QFE to reduce compliance costs for institutions with large numbers of advisers. There had been concern that those institutions would be subjected to enormous administrative costs if each of their advisers had to register and be subject to the provisions of the Act so the qualifying financial entity mechanism was established to effectively provide for group registration. 
The Securities Commission was the regulatory body empowered to oversee the new rules. The Act established a Commissioner for Financial Advisers to be a specialist member of the Securities Commission the code committee and a disciplinary committee. The Financial Service Providers (Registration and Dispute Resolution) Act in turn established an independent and free dispute resolution service for consumers with problems with financial advisers or service providers. That Act basically set up a co-regulatory model under which industry groups would develop their own schemes which would then be subject to approval by the Ministry of Consumer Affairs. The schemes would have to meet certain minimum requirements such as accessibility independence fairness accountability efficiency and effectiveness. The Act also established a reserve scheme for providers that did not belong to any of these particular industry dispute-resolution schemes. They would default into the reserve scheme so that no customer of a financial service provider would go without the protection of an 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 model that I have just described and that other speakers have mentioned. Basically the bill would make three significant changes. First a qualifying financial entity will be required to name individual contractors whose advice it will take responsibility for instead of automatically being responsible for advice from all of its contractors. Secondly the changes will allow a qualifying financial entity’s named contractors as well as its employees to provide financial adviser services on the qualifying financial entity’s complex products without their having to be individually licensed. At the moment under the legislation in its current form that is permitted only for the qualifying financial entity’s employees as opposed to the contractors that it might retain as well. Thirdly employees and named contractors of a qualifying financial entity will be able to provide financial adviser services for products for which the qualifying financial entity is a promoter under the Securities Act. At the moment that is permitted under the Financial Advisers Act only if the qualifying financial entity is actually the issuer of the product as opposed to also being its promoter. Effectively line calls were made about many of these matters in the select committee process. I was the chair of the Finance and Expenditure Committee when we considered those issues. Those calls could have gone either way. Frankly it is probably useful to try out the changes that are suggested in this bill particularly in light of the prevailing economic climate to see whether they will be improvements on the current legislation. As I said in the select committee the evidence could have gone either way. 
Part 1 of the bill amends the Financial Advisers Act and Part 2 amends the Financial Service Providers (Registration and Dispute Resolution) Act. Basically clause 6 deals with matters of interpretation. The most notable change there is the amendment to the definition of a “nominated representative”. A nominated representative will be an individual who is formally nominated by a qualifying financial entity in accordance with the new section 68A to perform financial adviser services in respect of the qualifying financial entity. Clause 8 amends section 12 of the Act to provide that activities performed by certain classes of person do not amount to financial adviser services. Clause 10 amends sections 17 to 19 to make the changes relating to nominated representatives—that is contractors—that I have already referred to. Clause 11 places nominated representatives in the same position as employees. Clause 12 extends the restriction on the term “sharebroker” and the rest of Part 1 is largely concerned with replacing terms changing implementation dates and simplifying wording. There is really only one significant change in Part 2 which is in clause 35. It extends the list of people who are not held to be financial services providers. The two new categories are those who are nominated representatives under the Financial Advisers Act and employers that offer services to employees to enable them to join schemes like KiwiSaver and there are some other technical amendments. 
No regulatory impact statement is required for this bill because according to the bill’s explanatory note “the proposals are minor and machinery in nature.” Labour envisages supporting the bill for that reason and because it amends legislation promoted by the previous Labour-led Government in a way that will hopefully enhance its effect. 
JOHN BOSCAWEN (ACT) 
: 
 The ACT Party will be supporting the Financial Service Providers (Pre-Implementation Adjustments) Bill. I will comment on the speech given earlier this evening by the Minister of Commerce Simon Power and also on the comments made in response by Lianne Dalziel. The Minister made the point that the bill is aimed at promoting confidence in the financial sector; that is absolutely fundamental to a growing and developing economy. Lianne Dalziel in her speech in response made the comment that the consequences of financial failure have been far-reaching. Well that has to be the understatement of the year. At last count some $4 billion or $5 billion either has been lost or is tied up in moratoriums on money invested in finance companies. Lives have been ruined people have committed suicide and couples—grandparents who have worked their whole lives believing that they were setting aside sufficient funds to live off in their retirement—have been left destitute. People have been left homeless and have had to move in with their children or with their parents. Huge amounts of money have been lost. 
Yes it is very important that we have confidence in the financial sector and it is very important as the Minister said to create clarity for regulators and the industry but I would like to comment on the importance of enforcing that regulation—actually enforcing that law. Some 3 weeks ago prior to Parliament resuming I was surprised to read on the front page of the  
New Zealand Herald  
that the new head of the Serious Fraud Office was committing the resources of his office exclusively to the investigation and possible prosecution of losses in the finance industry. I say that when one looks at passing legislation like this it is important to have the law in place but it is more important that the law be enforced. Yes it is great that the Serious Fraud Office is putting in the effort but I ask why it took a change of chief executive and why it took until November of last year when this Government had been in place for the previous 12 months to create that focus and create that priority. I think of the thousands of families mainly elderly people who have lost money in the many finance company collapses reading that some 15 months after a change of Government the priority of the Serious Fraud Office has shifted and it is making this matter its first priority and is putting resources into it. If we are to set up a framework such as this it is very important that the regulators be well resourced that the resources be there to investigate breaches of the law and to prosecute and uphold the law. 
Lianne Dalziel referred earlier this evening to the situation of ING and ANZ. Let me remind members of the House who are not fully aware of the circumstances what they were. The ANZ bank owned 49 percent of ING and it actively promoted and sold products on behalf of ING. The client advisers of the ANZ—qualified bank tellers financial advisers—actively sought out clients of the ANZ and encouraged them to shift their money from safe deposits into the two ING funds that are at fault the regular income fund and the diversified yield fund. What is interesting is that for the most part I do not believe there was malice on the part of those ANZ staff. I do not believe that those staff knew what they were actually selling. So when I heard the Minister say this evening that this law will require the qualifying financial entity to assume responsibility for the advisers and for that advice I thought that that had to be a good thing. It is important. Those people hold themselves up as experts. People and in particular the elderly look up to banks and respect them. They believe that they can rely on their advice. 
There were many disgraceful things about the ING-ANZ situation not least of which was that when it first came to light the people who invested in that fund were offered a derisory 10c in the dollar. I acknowledge the protest group that set out to try to get a better deal for investors. The tragedy is that most of the people who invested in that product were offered 62c or 64c in the dollar; that offer was made to all ING investors and as Lianne Dalziel pointed out to get their 62c back they had to sign a piece of paper and sign away their rights. 
That brings me to my next point. While the Serious Fraud Office seems to have taken far far too long to put effort into investigating the collapses that have occurred the Commerce Commission has been beavering away for more than 12 months looking at whether ING and ANZ misrepresented the situation and breached the Fair Trading Act. I ask again whether sufficient resources are being put into that investigation. What is the point of bringing a bill like the Financial Service Providers (Pre-Implementation Adjustments) Bill to Parliament to pass it into law if the Government bodies are not prepared to enforce it and the Government is not prepared to make the resources available? It is a fact that those people who invested in those two ING products on the advice of ANZ bank advisers had the option of applying to the Banking Ombudsman for additional compensation but the many clients who invested in them on the advice of ING advisers did not; they did not have the benefit of that extra advice. If the qualifying financial entity is required to take responsibility not just for its employees but for its agents—for the independent financial contractors who hold themselves up as experts and sell these products—that has to be a good thing. 
In conclusion I am trying to say to the House that it is all very well to have laws and regulations in place but it is important that the regulatory bodies are resourced and that they are prepared to enforce the law. I believe that that is the very minimum that the people of New Zealand can expect from this Parliament and this Government. Thank you. 
HONE HARAWIRA (Maori Party—Te Tai Tokerau) 
: 
 A kia ora mai ano ra tatou katoa e te Whare. It is good to hear that the new head of the Serious Fraud Office has made checking out these finance companies one of his main priorities although that is likely to bring no joy to the 14500 investors who lost more than $460 million after the collapse of Bridgecorp a couple of years ago or to people like Jack and Ngaire Williams a couple of senior citizens who lost more than $200000 in the collapse of Blue Chip. Last year they were told that their house would be sold off to pay their debt which led to the heart attack of Mr Jack Williams. 
Exactly how underhand some of these arrangements were came to light in the Auckland District Court as recently as yesterday when a former staff member told the hearing against the Bridgecorp directors that staff were advised to lie to angry investors who rang the finance company asking why they had not been paid and to say that the lack of payment was because of a banking glitch. It was a fairly significant glitch—$460 million. But there was even more gloomy news from KPMG which reported that fraud in this country last year rose to record levels. Its forensics expert said that committing fraud was likely to reach even greater levels in the future. 
It is in this context that the Financial Service Providers (Pre-Implementation Adjustments) Bill before the House is a welcome respite because it aims to change the Financial Advisers Act to better monitor financial service providers in order to tidy up the sector and make it more accountable to investors. We all know stories of people who have lost precious savings to dodgy finance companies believing there were standards in place and proper monitoring procedures when in fact the brutal reality was that they just were not there. Thankfully most Maori businesses did not get too caught up in the fast finance fiasco to backstop their growth because the security that was often required was their land whereas banks are now securing loans over cash flow stock equipment and machinery rather than the land itself. 
I also take this opportunity to thank Iria Whiu of Ngati Ranginui the first Maori national president of the New Zealand Educational Institute back in 1995 who helped set up the group that Mr Boscawen was talking about formed after the Blue Chip collapse. Exposing Unacceptable Financial Activities was formed to help victims of the collapse with slim hope of ever retrieving their funds. In following on from the ACT speaker I guess I have to raise the whole issue of the “three strikes” bill and the fact that a person can go to jail for the rest of his life for bashing people yet those guys can steal $460 million which no doubt has directly resulted in the heart attacks deaths and suicides of a number of people. They are in court now and the chances are that the maximum sentence they will get is maybe 2 years probably down at Ohura which is the country club prison that most of these guys go to. 
It is kind of a sad society when people can get away with this kind of thing and I do not know that this bill will do enough to teach them a lesson. This is just the first reading so there will be the opportunity to raise it again. Of course at the select committee we might write into the legislation that when these companies fall over the directors will also be held accountable for the health and lives of any of the investors they have diddled. Quite frankly it is not just about a loss of product it is about ripping people off. I think we have to be honest enough in this House to say that this is not about just investment—a lot of it clearly is not. The directors did not backstop themselves with alternative funding arrangements. They set out specifically to rip people off. They got their staff to lie to investors to try to cover their backsides until such time as some of them could skip out of the country. 
Mr Boscawen also quite rightly mentioned that of all those companies that have gone to the wall it looks like only about two or three directors will end up going to court on it. In fact a whole heap of these people should be going to jail. The problem of course is that all of the jails are full and even if they were double-bunked there are not that many cells in Ohura. Certainly none of these guys would be put up in Paremoremo the Mount or Ngawha because they are likely to get their just desserts. 
We need to start saying that this kind of crime given its spread right across society is far more dangerous to the health and welfare of our society than those who are charged with just assault. Yes assault is brutal but no more brutal than $460 million worth of straight-out theft from investors most of whom are probably Pakeha older kind of the age group of some people around here and wealthy kind of like the people on this side of the House over here. But be that as it may I sincerely hope that during our select committee hearings we can investigate ways and means of making it even tougher for these guys to even contemplate pulling scams that will rip people off. Kia ora Mr Assistant Speaker. Tena tatou te Whare. 
KATRINA SHANKS (National) 
: 
 It is my pleasure to stand here today to support the Financial Services Providers (Pre-Implementation Adjustment) Bill because this Government is about solutions and this bill is one more example of another solution that this Government has put forward to fix a gap. The bill fixes a technical error in previous legislation and provides a solution for it; that is why it is called a pre-implementation adjustment bill. 
It is my pleasure to stand here tonight to support this bill and to support our hard-working Minister of Commerce Simon Power. He is one of the most hard-working Ministers of Commerce that we have seen in this Parliament in a long time. But at the same time I need to acknowledge Lianne Dalziel the previous Minister as she is the chair of the select committee that I sit on. I acknowledge the work that she did in the previous term towards financial services and the solutions that we are looking at right now. 
What does this bill do? It simplifies the Financial Advisers Act reduces costs and encourages public confidence. But really it is just a technical amendment bill. It focuses on a very narrow area; that is the changes to qualifying financial entities. For those of us in the sector who are chartered accountants by trade and know a bit of the jargon that is a QFE. So what is a qualifying financial entity? It is a company that is approved by the Securities Commission to take responsibility for advice that employers and contractors provide to mums and dads out there—to anybody looking to invest in a product. There had been a technical glitch in that in the bill put forward in 2008 qualifying financial entities protected only employees but we know that many industries and many companies out there employ contractors whom the bill did not cover at all. An example of a company that would be a qualifying financial entity—not that there are any at the moment because that Act has not been implemented yet—is a bank or an insurance company that has many financial advisers on site and has its own training in place. It would mean that not every adviser would have to be licensed; they would be under the umbrella of the qualifying financial entity and the qualifying financial entity would be monitored by the Securities Commission and a regulatory board as well. 
We have these changes in place to name individual contractors so that they will be covered by this umbrella to ensure that these contractors and employees under a qualifying financial entity can give advice on complex products such as shares whereas in the previous legislation they were not allowed to do that and can also provide financial services for products that they are not an issuer for. Before they could promote a product only if they were the issuer; under this legislation they are now allowed to promote any product even if they are not the issuer. 
This bill is addressing an issue of a very technical nature so I will take a very short call on this. At the end of the day this is about getting back the confidence in the market and allowing people to be able to invest with confidence and believe that the advice they are receiving from financial advisers is good advice. We know there has been a track record for a number of years now as financial advisers have not been regulated of the advice they have given not always being spot on; in fact in many cases it has practically been negligent. This bill aims to give confidence in financial service providers because there is a whole generation of investors in New Zealand the mum and dad investors who are not sophisticated investors and do not understand financial products but want a return from their money. A lot of these people are now in their late 50s 60s and 70s. They got burnt in the share market they got burnt in managed funds they got burnt with finance companies and there is not a lot now for them to invest in that they feel safe about. It is important that over a period of time we get these regulations in place so that investors are sure that the advice they are getting is good solid advice so they can have confidence to go and invest out in the market just a little more as opposed to just leaving their money in the bank and getting a smaller return because a lot less risk is attached to it. 
There is no silver bullet for getting confidence back in these markets and there is no one answer. This is one step in a number of steps one tool out of a number of tools in the tool box to ensure that confidence returns to our markets in New Zealand. Thank you. It was a pleasure to endorse this bill tonight. 
RAYMOND HUO (Labour) 
: 
 The Financial Service Providers (Pre-Implementation Adjustment) Bill amends two Acts of Parliament passed by the previous Labour Government in 2008. Both Acts passed with support from National and Labour supports this bill too. In contrast to Ms Shanks who has just resumed her seat I can see and appreciate why a bipartisan approach has been taken. The previous Labour Government passed the Financial Advisers Act 2008 to ensure that financial advisers were subject to tighter rules of professional conduct and competence. The Financial Services Providers (Registration and Dispute Resolution) Act 2008 established an independent and free dispute resolution service for consumers who have problems with financial advisers or service providers. This bill as the Hon Simon Power stated this evening is aimed at simplifying the implementation of the Financial Advisers Act and reducing costs while encouraging public confidence in the industry. 
A media statement released by Workplace Savings NZ in December 2009 is very helpful in understanding the difference between what it called a real provider of financial services such as a bank and an employer who merely promotes for instance a superannuation scheme for its workers. Its executive director Bruce Kerr said the concern of his organisation was about employers who make retirement savings arrangements available to their employees through the workplace being caught by the definition of a financial service provider. He said the organisation had worked hard with officials to develop appropriate relief mechanisms without which such an employer would need to register as a financial service provider and join a dispute resolution scheme. For employers who want to help their employees save through a registered superannuation scheme or KiwiSaver scheme the proposed changes will help to exempt them from the need to register as financial service providers. 
The Hon Lianne Dalziel in her third reading speeches on the two bills in 2008 explained the purposes of the two pieces of legislation. The Financial Advisers Act 2008 was one part of the Labour Government’s effort to bolster investor confidence after the global credit crunch and a string of finance company failures in New Zealand. The regulations contained in that Act focus on financial products instead of financial decisions as was initially proposed. A tiered approach to advisers was taken and the legislation enabled the adoption of a qualifying financial entity or QFE model in order to reduce compliance costs for institutions with a large number of advisers while ensuring there was an appropriate regulatory coverage of advisers within those institutions. The Financial Services Providers (Registration and Dispute Resolution) Act 2008 as its name suggests established an independent and free dispute resolution service for consumers. A co-regulatory model was also created in which industry groups were to develop their own schemes which then had to be approved by the Ministry of Consumer Affairs. 
Why does the legislation need to be amended? The Minister responsible for this bill the Hon Simon Power has stated that the new legislation will reduce costs and encourage public confidence in the industry. The bill proposes a number of technical amendments. The main amendments to the Financial Advisers Act relate to the regulation of qualifying financial entities. The proposed changes include first that a qualifying financial entity will be able to name representatives namely individual contractors and agents whose advice it will take responsibility for instead of the entity being automatically responsible for advice from all its contractors; and second that the ability to provide financial advice or conduct investment transactions in relation to a qualifying financial entity’s category 1 products without being an authorised financial adviser will be extended to the qualifying financial entity’s named representatives. That is currently permitted only in respect of the qualifying financial entity’s employees. The third change is to permit the employees and named contractors to provide financial adviser services for products for which the qualifying financial entity is a promoter under the Securities Act. Currently the Financial Advisers Act allows that only if the qualifying financial entity is the issuer of the product. 
Those changes are generally welcomed in the industry for the flexibility that they are supposed to provide. Potentially those changes will help to make the qualifying financial entity model more appealing for many of those involved in the industry. 
However some concerns are worth noting at the bill’s first reading. The law firm Kensington Swan in its financial law updates listed two reservations with regard to the extension to the qualifying financial entity model. Firstly it is unclear whether it is intended that an individual can be nominated by more than one qualifying financial entity. The firm foresees some major complications ahead with the roll-out of such a model. Secondly at a policy level these changes risk undermining the Securities Commission’s stated desire for there to be regulatory neutrality or at least they create that perception. Expanding the relief from liability under the Financial Advisers Act for nominated representatives runs counter to the objective of individual adviser responsibility. 
With the help and active involvement of the financial service providers the wider sector and the public in the development of the bill I am confident that the bill will meet its objectives and—if members will let me borrow what the Hon Lianne Dalziel said in 2008 in the third reading of the Financial Advisers Bill—I hope this bill “brings financial advice regulation into the 21st century aligns us with international best practice and provides for an appropriate level of investor protection in New Zealand.” Thank you. 
MELISSA LEE (National) 
: 
 It is a pleasure to rise in support of this Financial Service Providers (Pre-Implementation Adjustments) Bill—what a mouthful! I take this opportunity to wish everybody in the House and also people listening at home and watching television through Parliament TV a wonderful New Year—the Year of the Tiger. In my language it is “Se hae bok mani baduseyo.” which means: “May you receive lots and lots of blessing in the New Year.” And to the previous speaker who has just taken his seat Mr Raymond Huo I say xin nian kuai le which means happy New Year in Chinese I believe.  
The purpose of this bill is to simplify the implementation of the Financial Advisers Act to reduce costs and to encourage public confidence in the industry. Both of those things I am sure everyone in this Chamber would agree are good and need to be done to promote confidence in the financial sector. It is wonderful to see everybody across the whole Chamber in support of this bill. We all know someone who has suffered through the collapse of finance companies. I know more than one who has lost all of their retirement savings in their twilight years. The large numbers of finance company failures affected me personally. I panicked and cashed in even my son’s education fund thinking that I was going to lose all of that money. I put it under my bed like a not-so-very-sophisticated investor would do— 
Dr Paul Hutchison 
: Is it still there? 
MELISSA LEE 
: No it is not actually. It is not still there; it stayed there for a couple of days and I decided that perhaps the best thing I could do was put it in the bank in a high-interest-earning savings account. 
The bill makes technical amendments to the Financial Service Providers (Registration and Dispute Resolution) Act and the Financial Advisers Act. It was introduced into Parliament by the Minister of Commerce the Hon Simon Power. Let me take this opportunity to say what a great Minister he is. The number of bills he put through this Parliament last year was nothing but phenomenal. 
Hone Harawira 
: Phenomenal! 
MELISSA LEE 
: Sorry? 
Hone Harawira 
: Phenomenal! 
MELISSA LEE 
: Fantastic phenomenal; that is right. The Minister expects the changes to take effect in the middle of this year giving financial advisers about 6 months to implement them before legislation is made compulsory at the end of the year. The amendments to the bill focus mainly on changes to qualifying financial entities; as Katrina Shanks said people in the industry call it the “QFE” model. Although I am not from the financial sector I am starting to get the hang of that—“QFE”. A qualifying financial entity is a company given the thumbs up by the Securities Commission to take responsibility for the advice provided by its employees and contractors on a limited range of products instead of having all those people each requiring their own licences. This means that a qualifying financial entity has to name individual contractors whose advice it will take responsibility for. That means both qualifying financial entities’ employees and named contractors can provide financial services on category 1 products like shares without individually having to be licensed. At the moment only employees of qualifying financial entities can do that. 
The bill brings transparency and clarity into the sector as qualifying financial entities are not automatically responsible for advice from all of their contractors but are for those they name as contractors employees and the products they advise on. The changes also permit those employees and named contractors to provide financial advice or services for products for which the qualifying financial entity is a promoter under the Securities Act—not just the issuer of the product. At the moment that is allowed only if the qualifying financial entity is the issuer of the product and not the promoter. We need competent and ethical individuals to deliver professional financial advice as the Minister said and as other members in the House agreed. I look forward to the submissions through the select committee stage from both financial advisers and consumers to make sure we have a robust process in progressing this bill. 
I take the opportunity to give you an example of the climate of the industry. I will share a story if I may. There was a  
Consumer 
 magazine mystery shopper investigation into the industry last year. It was interesting to note that among other things out of seven pre-retirement plans investigated six provided little practical help and were found to have lacked meaningful advice. That is appalling. That is an 85 percent failure rate in my view. Only one Trustees Executors had a detailed plan and gave good reasons for the advice given. That was the only plan rated as “good” by the mystery shopper panel. The magazine article identified disclosure competency and independence as three areas where there were shortcomings in the industry. This bill and the new financial regime this Government is implementing will go a long way towards addressing those shortcomings. This bill simplifies the implementation of the Financial Advisers Act and reduces the cost while encouraging public confidence in the industry. It will provide transparency clarity and certainty and for me that is fantastic. I commend this bill to the House. 
STUART NASH (Labour) 
: 
 I must admit that it is humbling for me a poor boy from Hawke’s Bay to follow the second most sexy woman in Parliament but I will do my best. I rise in support of the Financial Services— 
Melissa Lee 
: You could be No. 3. 
STUART NASH 
: Well I have to ask myself if Bill English is No. 3 what the validity of that poll is I must admit! We cannot believe every poll we read. Jacinda Ardern must be No. 1 and there is no doubt about that but let us get on to the substance of this bill. 
Hone Harawira 
: You’ve got to be No. 3—the sexiest woman. 
STUART NASH 
: It is worth noting I tell my friend that this bill is designed to further tighten the rules and regulations around financial advisers. I congratulate the Hon Lianne Dalziel on her excellent work as Minister of Commerce in the previous Government and now as chair of the Commerce Committee. It is her work that has got us here today; let us not beat around the bush and let us be clear about that point. 
But why are this bill and the overall tightening of regulations governing financial advisers important? Quite simply they are right for the people of New Zealand. There are many many sad sad stories of ordinary New Zealanders who have worked incredibly hard all their lives only to have someone masquerading as a financial adviser provide them with advice that has cost them their savings. There is a fundamental difference amongst the groups of people who have lost their money in the spate of very public finance company collapses. There are savers and there are investors. Investors are those who have or should have knowledge of risk and who seek advice from different sources to make decisions after weighing up the odds. But what they have not assessed as a risk is the negligent behaviour of people who had no financial knowledge except for the knowledge that the more they sold the better off they were. Advisers have been conflicted in the extreme. Savers however are people who have put their hard-earned dollars which they had built up over 20 30 40 and 50 years of working hard and paying their taxes into the hands of unscrupulous operators only to see their life-savings vanish. And with their savings have gone their dreams of a retirement with dignity a retirement spent enjoying the fruits of their labour. They have seen what should have been that reality cruelly taken away. 
Savers do not necessarily price risk as investors do; they pay others to assess risk and expect competency diligence and honesty. Is that too much to expect? No it is not. Investors understand that risk equals return whereas savers—mums and dads grandmothers and grandfathers—who have lost all their money in the financial sector were not pricing risk. They have been putting their money away ready for their retirement and for their grandchildren’s education. This travesty has resulted in an increase in ill health and a decrease in the well-being of a huge cohort of New Zealanders. 
Last year I spoke in this House of at least two people who had committed suicide because they had lost their life-savings. I spoke of the tremendous hardship and mental anguish of those New Zealanders. I spoke of the tremendous loss of wealth from the nation’s bottom line of over $5 billion. I cannot imagine being 65 and losing my life-savings. I cannot imagine the feeling of utter devastation. It is no wonder that ill health has plagued these unfortunate Kiwis. So Labour did something about it and passed the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act. 
This current bill under debate makes minor proposals that are machinery in nature but that does not make it any less important in protecting the most vulnerable in our society. This bill is important for other reasons too. One of the problems in this country is the do-it-yourself or DIY attitude or mentality to investment and savings that many of us have. We think we know how to earn our own optimal return on our savings without seeking advice from those who are expected to know the markets and the different investment options. The level of investment in the housing market is evidence of this trend because we all know how to buy a house do we not? Now we are told that as a nation we have to invest in the productive economy—buy into stocks invest in capital markets and put our savings into areas that will lift New Zealand’s economic growth. I agree with this advice but the problem which has been recognised by this bill and by the other two bills I mentioned beforehand is that the level and quality of advice from financial advisers has been of such poor quality—and I think we know that we are talking here about the finance company sector—that many New Zealanders have now had their worst fears realised: no one can be trusted with their money. 
The stereotypes and generalisations that people had about financial advisers have been realised. I feel sorry for those in the sector who acted with competence and who always advised their clients in their best interests because they have been tainted with the same brush as those who advised that a balanced portfolio meant investment in five different finance companies. However not all who acted in an unscrupulous manner were those who operated out of the back of a tin shed; there were those in glass towers who also gave advice that was as devious and self-serving as that found anywhere. This bill will be I am hopeful another step in the process of rebuilding the confidence of ordinary New Zealanders in the investment advice sector because it is exactly what is needed. 
If we are to grow our country it will not be because this current Government is giving tax cuts to the top 9 percent who earn the top marginal rate and is giving very little of anything to the other 91 percent who are not. It is interesting that the  
New Zealand Herald  
poll on Saturday said that only 22 percent believed that the proposed increases to GST—so that the Government can give tax cuts to those most privileged in our society—will be good for economic growth. Do members know that in the Napier electorate over 75 percent of people earn under $40000 a year and that only 5 percent earn over $70000? So three out of every four people in the Napier electorate got no tax cut last year but this year they will get an increase in GST to pay for tax cuts for the top 5 percent of income earners. That is not fair in any language. 
These proposed tax cuts will not do anything for economic growth;  
New Zealand Herald  
readers know this. As mentioned more actually said that the proposed cuts were unfair than said they were fair. Do members know why the cuts will not do anything for economic growth? Well the Government obviously does not. It is because they are based on outdated and disproved economic theory. Friedman and his supply-side free-market approach to macroeconomic theory died with the downfall of the Thatcher and Reagan Governments. It is rather interesting that other countries that we are very very fond of comparing ourselves with like Australia have adopted a Keynesian approach— 
Hon Simon Power 
: Don’t go picking on Ronald Reagan; it’s an outrage! 
STUART NASH 
: —I tell Mr Power—where they provide tax relief to the most vulnerable not the most affluent. 
This bill is absolutely necessary because it starts the process of rebuilding the confidence of ordinary Kiwis in the financial advisory market. Kiwis need to know that when they take their hard-earned money to a financial adviser they will get independent competent advice from a person who will walk them through all the risks and benefits in a transparent and meaningful way. The past was the Wild West; a city full of cowboys is not a good place for the vast majority of Kiwis to be. As a collective we need to ensure that people are encouraged to diversify through their portfolios into the productive economy and that they are encouraged to save and invest in a prudent manner. Anything that helps to ensure that process we are duty-bound to support. There is a long way to go I tell Mr Power before the industry will have the full confidence of the investing and saving public again but this bill along with Lianne Dalziel’s two Acts is at least a start. Thank you. 
JONATHAN YOUNG (National—New Plymouth) 
: 
 The Financial Service Providers (Pre-Implementation Adjustments) Bill seeks to bring public confidence and industry efficiency into this particular area. The bill is based on the backdrop of a global credit crisis. This Government is rightfully encouraging New Zealanders to move from consumption to investment and from spending to saving which will bring great strength into our economy. It will enable us to build a stronger export base which needs investment and through savings to create a great pool of capital from which credit can be accessed and interest earnings retained within the New Zealand economy. We believe that that will be good for New Zealand. 
To make those changes we need to have strength within our financial markets and strength within the mechanisms that protect investors. We have had a real hit here in New Zealand as many countries have. Members have mentioned time and again tonight the mum and dad investors and the many ordinary Kiwis who have had a little set aside or a little available at the end of every week. Under this Government they will have more available at the end of every week to invest for their future. Much of this has happened through the advice of financial advisers. It was reported in the Commerce Committee last year that approximately $6 billion disappeared from our economy when investors lost money in a number of instances through the failure of financial companies. That $6 billion is not in the portfolios of New Zealand investors and is not working for New Zealand in credible companies. This bill will build efficiency and confidence within our financial market. 
It has been noted tonight that the  
Consumer 
 magazine has done some investigation and review of what we have on offer from financial advisers. It came to the clear understanding that there is a mixed report out there. Some are good some are bad some are helpful and some are useless. Who knows what to believe about financial advisers? We want this country to have confidence in those who undertake that profession. It is very important that we have appropriate levels of regulation and legislation. 
A cornerstone of the Financial Advisers Act is that the professionalism of financial advice is best encouraged by ensuring that it is delivered by competent and ethical individuals. This is common sense is it not? Financial advisers ought to be competent and they ought to be ethical. These are the people who advise us what to do with the money that we are investing for our future. Of course we would like the adviser to be competent and ethical. It is critical that we have this regulatory framework right so that it fosters confidence in the sector and enables the sector to get on with the job. A lack of confidence means that good financial advisers in our country are viewed with a degree of scepticism. We want to remove that scepticism and to ensure that the advisers who comply and do a great job in terms of all of the regulations are indeed approved of. 
It is my delight to commend this bill to the House. Thank you. 
Bill read a first time. 
Hon SIMON POWER (Minister of Commerce) 
: 
 I move  
That the Commerce Committee consider the Financial Service Providers (Pre-Implementation Adjustments) Bill 
 that the committee report finally to the House on or before 4 May 2010 and that the committee have authority to meet at any time while the House is sitting (except during questions for oral answer) and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 187 and 190(1)(b) and (c) 
. 
Motion agreed to.