Financial advisers need further regulation - Capital Markets Taskforce

Tuesday 4th August 2009

The Capital Markets Development Taskforce fears the new Financial Advisers Act will fail unless it is accompanied by additional stringent measures to govern the ethical conduct and description of financial advisers.

"If incorrectly implemented, it could produce an occupational licensing regime which ultimately benefits service providers rather than retail investors," says the taskforce, headed by Wellington-based merchant banker Rob Cameron, in its second report, issued today.

The new report makes a slew of new recommendations aimed at numerous big capital markets issues besides the perceived integrity of the New Zealand managed funds and financial advisory industry, but dwells on the D-minus showing in the Morningstar report published in May that ranked 16 countries' fund management industries.

"In at least some parts of our market, we have a long way to go to come into line with international best practice and thus cultivate preferable outcomes for investors," the report says, recommending "more principle-based regulation focussed on ethical standards for issuers and advisers".

Among major recommendations in the report:

Impose a fiduciary duty on financial advisers which requires avoidance of conflict of interest, independence from outside influences such as commissions, and competence to advise;
Regulate the words "independent adviser" to protect the meaning of independence;
Develop standardised, short form documents that clearly explain risks to relatively unsophisticated investors;
More standardised fee disclosure;
Make regulators able to be proactive, biased to the investor's perspective, and to penalise;
Overhaul New Zealand's settlements and payments system, in part to make capital-raising less intimidating and expensive for New Zealand small businesses, many of whom struggle to get beyond capitalisation by family and friends;
In upgrading the settlements system, explore also whether New Zealand has new global financial services opportunities in a post-credit crunch world
Develop a New Zealand-based derivatives market;
Establish performance measures for the health of both public and private capital markets;
Make more local agricultural, utilities, ports and banking investment opportunities available to New Zealand investors;
A number of technical amendments to the Takeovers Code and Securities Act to remove unintended bugbears and costly impediments to action by competent and wealthy investors.

Perhaps most radically, the report recommends five principles be applied to investment advisers:

The fair treatment of customers is central to the corporte culture of firms;
Consumers are given effective, clear and accurate information about products and advisers;
If customers receive advice, it takes account of their circumstances;
Products perform as firms have led customers to expect, and service of an acceptable standard;
Consumers do not face unreasonable barriers if they want to change product, switch provider, submit a claim or make a complaint.

The report says better functioning capital markets are especially important for New Zealand since banks are deleveraging, pushing traditionally bank-dependent local businesses to private equity markets for capital, the report says.

As well as the usual litany of weaknesses and thinness in the New Zealand capital markets, the report identifies the lack of a New Zealand-based derivatives market as a serious hole in the national offering for investors, although the NZX's planned milk powder futures derivative is a big step towards fixing that.

"Derivatives play an important role ... by providing mechanisms to buy and sell risk," notwithstanding the bad name given to the whole concept by the link between the global credit crisis and the growth of excessively complex derivative products that did not hedge risk effectively.

The report identifies "agriculture, utilities and banking" as three key areas under-represented in the suite of investment opportunities for New Zealanders, in an observation clearly favouring partial privatisations and "Mum and Dad" opportunities to take a stake in cooperatives, such as Fonterra.

The taskforce will also recommend in its final report in December that both public and private equity markets have simple, transparent performance indicators.

Public markets would be measured on indicators such as number of capital raisings, total capitalisation, liquidity and transaction costs.

For private markets, key measures would include "capital commitments, investments, and exits, ... particularly for the institutional part of private markets".

The Cameron group also has overlapping membership of the tax reform group led by Victoria University tax professor Bob Buckle and ensuring both groups' agendas are aligned.

Download full report here

Businesswire.co.nz

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