Watchdog eyes delinquent advisers

Friday 3rd August 2001

By Chris Hutching

Securities Commission chief executive John Farrell wants the power to ban recalcitrant investment advisers in the same way the commission can already ban dodgy investment offers and directors.

A discussion document is being prepared for industry comment in coming weeks.

This is separate from the other initiatives being taken by industry associations.

The commission wants the power to enforce compliance with tougher laws while professional associations prefer a light-handed regime that lifts the professional profile and conduct of members.

The matter has become more significant because of growing awareness of the need to invest for retirement.

But the actions of a few delinquent mavericks threaten to bring the investment advisory into disrepute.

For example, one investment adviser was able to continue his investment advisory activities, returning to his naive client base to raise more money after the failure of several projects. According to a receiver of one of these projects, the investment adviser continued to act in a manner that was obstructive and cost investors more money.

The adviser's career only came to an end as a result of civil court action from a major creditor.

The commission would like to stop such people with a banning order that could only be lifted by a judicial review. The commission isn't advocating a full licensing regime that might penalise some professionals who provide a small measure of investment advice to clients.

According to industry publication FinancialAlert, the light-handed regime isn't working.

Investment advisers operate under the Investment Advisers (Disclosure) Act 1996 (see story above and on facing page), which requires a statement outlining their client money-handling procedures and whether they have been bankrupted or convicted for dishonesty within the past five years.

But other information is only required to be disclosed in writing on request.

Most members of the public have little idea of what disclosure issues they should seek from their advisers.

There is widespread concern some advisers are virtually ignoring the act.

The only way to stop advisers who break the law is to prosecute them but prosecutions are rare and the commission is constrained by time or money. It can already ban investment offerings and advertisements, but not those promoting them. Some of the same people continue to promote one scam after another.

Some general protection for investors is provided by professional associations but it is estimated 40% of investment advisers have no affiliations.

The professional associations have disciplinary procedures and education standards with which members must comply.

Enforcement rules also apply to disclosure of information but not the quality of investments or investment advice.

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