Lessons NZ can learn from Aust and the UK, as our laws around financial advisers are revamped

By Rebecca Sellers*

Dodging calls from financial advisers may be part of your adult life.  But what we do with our money matters to the economy: financial markets depend on confident investors and our love of property is a dangerous affair. This week, consultation began that could build a better model. The government released an issue paper on its review of the Financial Advisers Act 2008 and the Financial Service Providers Act 2008.

The financial advice regime seeks to protect investors by regulating financial advisers. It impacts not only the people visiting you to talk about retirement savings, but also those selling insurance for your home or car and most of the people you see when you go into your bank. We can look at other jurisdictions and decide how we want our future to be.

In the UK, financial institutions fund holidays and other impulse buys through compensation payments. Since 2011, UK institutions have paid £18.8 billion for the mis-selling of credit insurance. The final figure may be significantly higher.  

This week the UK regulator announced more people may be able to claim because of a recent Supreme Court decision: if an insurance salesperson failed to disclose a large commission to a customer, the sale was unfair. The sale of UK annuities is also being scrutinised. Sick retirees were sold annuities only suitable for people in good health, and so received too little money, as the product was structured for someone with a greater life expectancy.  

Closer to home, Australia has been grappling with the same issues. There have been multiple Senate inquiries: into the activities of financial planners, their employer’s response and then ASIC’s handling of the investigation. So far, AU$52 million compensation has been paid to affected customers.

Both the UK and New Zealand have had claims for compensation for swaps. Small businesses bought swaps to protect against increasing interest rates on their debts. When the GFC hit, businesses were required to pay the banks, even though interest rates had fallen to historic lows.

As is often the case when a deal turns bad, focus shifted to the information provided at the point of sale. Although the UK courts have dismissed claims of mis-selling against banks, action by the regulator has led to £1.8 billion in compensation being paid. Here in New Zealand $24.2 million compensation has been made available to rural customers and support trusts.

Products are mis-sold when the people who sell them are not incentivised to ensure the best customer outcome. Some products are not sold to the right customers (for example, how well do small business owners understand swaps?). Other products may just be toxic in nature (ask anyone who was exposed to sub-prime mortgages). Financial institutions succeed when they develop a risk culture that rewards good customer outcomes.  

The Financial Markets Conduct Act 2013 aims to ensure that product providers build good products. But how will those be sold?

Do customers understand the difference between the types of financial adviser? Do you? Anecdotally, the public recognises a registered financial adviser (RFA) as being more qualified than an authorised financial adviser (AFA). But this is wrong. Only AFAs can provide financial advice on a full range of investments issued by different financial service providers.

Most New Zealanders hold their wealth in their homes and have a life policy but do not own substantial investment portfolios. This means that, for most New Zealanders, most of their wealth consists of, or is protected by, life or general insurance products. Advice on these products can be given by an RFA. No competence or expertise is required to become an RFA. Is this sufficient to protect the wealth of most New Zealanders?

Competency is not the only area needing change. Money is also an issue – and the issue is one of transparency. Currently, there is no requirement for RFAs to disclose the commission they receive. New Zealanders expect to receive advice for ‘free’ – but it is not free. The RFA receives commission. How can customers understand the value of the service if they are not aware of the size of the commission payment – or even that commission is being paid?   

The financial advice regime increased costs for anyone providing advice on investments, such as KiwiSaver. Has this led to a corresponding increase in the accessibility and quality of advice? An outcome that restricts access to quality advice would be entirely contrary to the purpose of the regime: to promote the sound and efficient delivery of financial adviser services.

Competent advisers who are clear about their value proposition will increase confidence and capital. The more people invest, the more financially literate they are. How much better would this be for us than becoming a nation dependant on compensation pay-outs?

-------------------------------------

*Rebecca Sellers is the EY Law Financial Services Leader.