Pragmatism rules over idealism in financial advice industry

Friday 3rd August 2001

PHILLIP MATTHEWS: More failures in Australia than in New Zealand

VANCE ARKINSTALL: Not so keen on compulsory membership

Hands-off regulation remains preferred over registration for investment consultants, writes PETER V O'BRIEN

The underlying question of compulsory formal qualifications, registration with a statutory body and membership of a recognised professional organisation remain outstanding issues in the financial planning and investment advisory sector.

The effect of the Investment Advisers (Disclosure) Act, which had been in operation for a year, was the main issue when NBR Personal Investor last considered the burgeoning service industry in October, 1998.

The current situation is that anyone can hold themselves out as financial advisers and engage in financial planning without any formal qualifications, registration or membership of an industry body.

Accountants, lawyers and members of the Stock Exchange are required, either by statute or under regulations authorised by statute, to comply with all three elements.

It is worth noting the US has required independent (non-bank) investment counseling firms to be registered with the Securities & Exchange Commission since 1940 and Australia has a very prescriptive (laying down rules) regime.

Financial Planners and Insurance Advisers (FPIA) chief executive Phillip Matthews told NBR Personal Investor the Australian regime did not work. He said there were more failures in Australia than in New Zealand where there were no regulations, apart from disclosure requirements (see accompanying article) but there seemed a catch in that view.

A registration system would automatically show who had failed.

The New Zealand non-registration, non-membership of a professional body regime would not show who had failed.

It was put to Mr Matthews (and to Investment Savings and Insurance Association (ISI) chief executive Vance Arkinstall) that a planner/adviser could fail through giving bad advice and/or inability to close down the business and walk away.

That happens every day in every sector of the economy and there are no statistics about it, unless a company was put into receivership/liquidation or a sole proprietor filed for, or was declared in, bankruptcy.

After some discussion they seemed to accept the point (no letters, chaps, if our discussions have been misinterpreted) so we were back to the issue of compulsory registration and controls.

Mr Matthews questioned the US registration process, saying registration was one thing - which could result only in sending a document and paying the postage - without any regular overseeing of the advisers.

That was valid, but no different from anything the SEC does. It is a powerful body with access to sanctions that might make people in the New Zealand securities industry angry if they were implemented here.

Despite a widespread view the US is an uncontrolled economy, it is tightly controlled in many areas of the securities industry.

Mr Matthews said his organisation, in its short history, had taken no stance on the regulatory environment.

It asked him to look at the issue, discuss it with other market participants and report.

Mr Arkinstall said there was more work to be done in the area, although there was no indication registration/regulation would be the answer to any problems. He said ISI was not so keen on compulsory membership but saw merit in the regulatory processes of the Institute of Chartered Accountants.

Both executives dismissed reports there was a joint working party to prepare a document on the issue, a view that apparently arose as a result of an exploratory meeting held between FPIA and ISI and other interested organisations.

The professional bodies were approaching the question with caution. There was nothing unusual in that. It can be assumed they would "smell the wind" before taking a stance.

Logic may suggest there should be a registration/regulation regime, but that depends on politicians' reaction to public opinion and the industry organisations' response to that and their own assessment of public opinion.

It is a pragmatic business, where idealism is always downgraded in favour of reality.

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