SIMON POWER (National—Rangitikei) : I have to confess that I may have misled the House during the second reading of the Financial Advisers Bill. I made the statement that advisers had told the House that only three clauses of the original bill would remain in the event that matters were completely redrafted from start to finish. Now that I have had a closer look at the bill, it seems there are only two: clauses 1 and 2. In the bill as reported back to the House it now seems that pages 9 to 70 have been struck out, with a fresh start being made on page 70 with clause 3, relating to the purpose of the bill, which is, of course, what we are here to discuss in the Committee stage today.

If we work our way through Part 1, and I know we are anxious to take a few calls—not several calls, but a few calls—on each part as we work our way through the bill, we find that the stated purpose “to promote sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of public advisers” is a pretty good summary of where we are at today. As I said in the second reading, it is impossible for any legislature to attempt to pass legislation to eliminate risk, and nor should a legislature attempt to do such a thing, because risk goes hand in hand with return. But this legislation seeks to require disclosure by financial advisers, in order to ensure that decisions about whether to use a financial adviser are informed. It requires competency on the part of financial advisers to ensure that this advice is available to investors and consumers, requires that they have the necessary experience, expertise, and integrity—I am not quite sure how one legislates for integrity—to effectively match a person to a financial product, and requires that financial advisers are held accountable for financial advice that they give.

Those are three broad and meritorious statements. The point of the three of them is that where an investor approaches a financial adviser and seeks advice on a financial product, whether it be a simple or complex product, or where an investor seeks advice on a more complex financial transaction that is to do with, for example, reverse mortgages, different superannuation schemes, and property investment companies, the idea is that a certain level of disclosure and a certain level of competency should be available to the investor at the time that that advice is sought. The purpose clause attempts to capture the essence of the following: it is not the intention to legislate to prevent the loss of money in investments, because that would have the outcome of putting the Government into the position of being a guarantor, effectively, of investments, and that is not the way that markets work, nor is it appropriate for Governments to find themselves in that position. But investors are entitled to a degree of advice and competency from those from whom they seek advice, so that they are put in a position where they are best able to make decisions.

What we heard at the Finance and Expenditure Committee was quite interesting, on some days. On one particular day, I recall the committee receiving a submission that went something like this: there were some financial advisers who were not disclosing the commissions that they were receiving when a particular product was sold, but, worse than that, where they were conceding that a commission, or a benefit, was accruing to them if a particular product was sold, not all of the benefit from, or the discount on, that product selection was being passed on to the investor. In fact, on some occasions, we were told, a portion of that benefit was being retained by advisers themselves. We found, at that point, that the legislation needed to be broad enough to make sure that disclosure did cover off those sorts of situations.

I think the other important thing about the disclosure regime is that even investors who consider themselves to be quite skilled and thorough—investors who may have a legal background, or may have been in Parliament for some time—and who go along to their financial adviser out of a sense of nervousness, to make sure that their investments are all in the right place and have sufficient protection, would find themselves in an unenviable situation if they were confronted with a 5 or 6-page document to sign on the spot. What we need to avoid with this legislation is the situation where investors are put in that situation and told: “This covers that stuff. Just sign here, and everything will be fine.” Even the most careful and confident of investors would not want to be confronted with that type of paperwork at that time, prior to receiving the advice, and feel as though they must execute those documents.

This legislation has to avoid that situation occurring, and I am sure the Minister in the chair, the Hon Lianne Dalziel, will give us an assurance in that regard. The legislation has to avoid the situation where an investor is simply presented with a wad of documents, told to sign them on the spot before financial advice is given or received, and then that, in effect, releases the financial adviser from any of the obligations contained in this legislation. The short question to the Minister is, can a financial adviser contract out of the provisions of the legislation by presenting the investor with a disclosure document that the investor executes at the point the advice is received, and are we making sure that pushing on the investor, at the time that financial advice is offered, will not create any problems for the investor at that point? I think we are all keen to know exactly how, in practice, the Minister sees that particular set of circumstances working, because the last thing we want to do is to put in place a necessary and comprehensive piece of legislation to deal with financial advice, and then find from day one that the financial adviser can simply contract out of it, or assume that those obligations are discharged on the spot because a particular document has been executed. We will be interested to receive the Minister’s advice on that point.

Let us move then to clause 5, “Interpretation”. We see that “document” is well defined there, as is “Commissioner for Financial Advisers”. I say that is an exceptionally good idea and one that National is supportive of. Although “financial adviser” is defined in Part 1, the definition refers to “section 8”, or clause 8 of the bill, which is slightly further on. That definition warrants some attention at this point, but before I come to it I just point out that Part 2 deals with financial advisers and their disclosure and conduct obligations, but the definition of “financial adviser” is contained in Part 1, just in case members are concerned about that.

Clause 8 states: A financial adviser is an individual who performs a financial adviser service …”—yeah right! That does not really clear very much up. Clause 10 defines a “financial adviser service” as one performed by a person who gives financial advice, makes an investment transaction, or provides a financial planning service. So I have one more question for the Minister, and it relates to the definition of “financial adviser service”. When we were on the select committee, we heard about the distinction between financial advice and opinion. I note that the reference to opinion is not contained in the definition of “financial adviser service”, and I would be interested in hearing from the Minister on the issue of an opinion that is given by a financial adviser. Clause 11 defines when a person gives financial advice. I presume that financial advice is—oh, here we go. Clause 11 states that a person who gives financial advice “makes a recommendation or gives an opinion or guidance”—I take it all back Minister; it is crystal clear there—“in relation to acquiring or disposing of … a financial product.” So that issue is covered; I give my apology to the Minister.

But we look forward to hearing from the Minister about the signing of documents at the point of investment advice being sought, and what that means for any downstream effects or for the protection that the legislation may offer.

CRAIG FOSS (National—Tukituki) : It is with great anticipation that I rise to speak in the Committee stage of this bill. I would like to touch on clause 6, “Act binds the Crown”. Obviously, the Crown is exempt from the regulations around this bill. But, firstly, I shall turn to clause 3, the purpose clause.

Clause 3 states: “The purpose of this Act is to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers, by”. I was thinking somewhat laterally, as I do, about a situation in which the Crown were to give financial advice, then to renege on that financial advice—and I know that the Crown is exempt from this legislation. I give the example of the “chewing gum tax cut”, where people were given advice in a Budget, they made financial decisions and plans based on that advice, then the Minister of Finance reneged and took the “chewing gum tax cut” off the table. I would be interested to hear the Minister in the chair, the Hon Lianne Dalziel, make any comment at all on that matter. I know that it is a lateral thought, but if the public are to have confidence in the financial services industry, as is outlined in the purpose clause, then surely they need first of all to have confidence that the regulator, the Government of the country, will be true and hold to its word.

I turn to the interpretation clause and the definition of “advertisement”. It is plainly obvious that it is some form of communication. We recently had an example in Wellington that is not addressed by this bill or the disputes bill, but may fall under the Commerce Act, I guess. An organisation had a billboard outside its retail outlet offering funds at 8 percent interest, and at the bottom of the advertisement was the statement “8 percent p.w.”—per week. Most people who went in there to borrow money had no idea what “p.w.” meant. In fact, 8 percent interest per week compounded amounts to thousands of percent per annum. Under the Commerce Act, that organisation was being quite open, because the billboard stated “p.w.”, but the people using that service did not have the financial literacy to know what it meant. Perhaps we need some more financial education in the public domain, in our schools—and probably in Parliament.

I go back to a point I made before. Someone was interjecting on one of our previous speakers, who was speaking about real estate. I note the definition of “category 1 product”. Whoever interjected said that real estate is excluded, but the definition states that “category 1 product” means “any estate or interest in land for which a separate certificate of title can be issued …”. There you go! That is a derivative, because someone can own the land, can use it as a guarantee, can use it as collateral, can use it as security, and, way down the chain, someone can borrow against it to buy a car—someone whom the landowner has never ever met. There may be three people in the chain. That is why real estate is a category 1 product. I would be interested to hear the Minister clarify that. I do not whether she was the interjector. I give her the benefit of the doubt—perhaps she was not.

Complex derivatives, etc., are also category 1 products. The definition refers to futures contracts, or any other contracts that may be specified along the way. The crisis we currently have in the financial markets is in and around those complex products. Events that occurred initially in New York and Cleveland are affecting people right down here in New Zealand. Unfortunately, or fortunately, that has been part of the global financial system we are in.

In looking at clause 5, “Interpretation”, I point out the obligations of financial advisers, and who they are. As earlier speakers have noted, they are not liable for the return on any investment, as long as everything is declared upfront and disclosed, be it a category 1 product or a category 2 product. That is all well and good, but we must distinguish what they are, because in these current times, when New Zealand is in a recession, many people are looking at the advice they were given. They need to determine whether they were given the full information, and if they were not given it, whether that impacted on the return on their investment. Someone may advise someone else to invest in, say, Australian equities, and that adviser may forget to give that person the relevant foreign exchange advice. As I said earlier, it is all about risk.

I would be interested to hear other members speak about trust accounts. I refer to the definition of “trust account records”. Under this bill, we interpret “trust account records” to mean “records relating to a trust account; and (b) includes any information that relates to a trust account and that is recorded or stored by means of any tape recorder, computer, … and any material subsequently derived from information so recorded …”. As we all know, and without going into the detail, interpretations of trust accounts and what goes through them—the interpretation of them—and the impact on not only the trustees but the beneficiaries of those trusts, declared or otherwise, is a very pertinent issue before this House and before the public right now. On issues like that, the public has to have full confidence that the legislators in this House abide by the same rules that we ask the public and the financial advisers for whom we are regulating to abide by. We should put ourselves under the same microscope and regulation that this bill will put the financial sector under. Thank you, Mr Chairman.

The CHAIRPERSON (Hon Clem Simich): The question was that Part 1 stand part, and we have—

Simon Power: I raise a point of order, Mr Chairman. I am sorry for interrupting when you are just about to take the vote, but there were a couple of questions, and one in particular, that I had asked the Minister in the chair, the Hon Lianne Dalziel, during my contribution on Part 1. They related to circumstances where financial advisers were asking clients to sign documentation relating to disclosure. I just wondered whether before you put the vote, in order to keep the Minister’s contribution in order, she would be prepared to offer me some advice on that matter.

Hon Lianne Dalziel: Part 2.

Simon Power: Part 2?

Hon Lianne Dalziel: All the disclosure is in Part 2.

Simon Power: OK, well I am happy to wait until Part 2.

• The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 1 be agreed to.

• Amendments agreed to.

• Part 1 as amended agreed to.

SIMON POWER (National—Rangitikei) : This is a slightly more complex area than Part 1, and one of the most interesting measures in this part is clause 12. Clause 12 relates to when a certain person is not performing a financial adviser service when giving advice or doing a transaction. Of course, my colleague Craig Foss would have noted that real estate agents are mentioned in clause 12(g). I am not sure whether that is a desirable policy outcome, but I would certainly be interested in what other members think on that issue. Likewise, although we are fully supportive of the legislation, as members know, I am not 100 percent sure that also excluding lawyers and chartered accountants is a particularly good policy initiative, in the sense that in much of the work that I recall doing as a lawyer, during the short time that I had in that job, there was certainly a financial component to the advice that was given on a reasonably regular basis. I am sure that is equally so, or more so, in the case of chartered accountants, although I have never been in that profession.

One thing that is particularly interesting about clause 12 is the very important inclusion of a person providing free budgetary advice as part of a budgetary advice service offered by a non-profit organisation. As is so often the case at select committees, some of the most powerful submissions that came before the Finance and Expenditure Committee were not from the big business organisations or the big unions, but from the individuals who come before the committee. One particular individual, whose name I am afraid escapes me, came before the committee to express her concern that budgetary advice offered by citizens advice bureaus, or similar sorts of budgetary services, would, on a reading of the bill, be caught by its provisions. I think that the inclusion of clause 12(k) is an extremely important one, given that we certainly do not want to put people who are giving voluntary budget advice into a difficult position when they are undertaking what is, essentially, an unpaid voluntary community service.

Other people are included, of course, in the category of non-performance of financial advice services, such as teachers, lecturers, journalists, or State services employees who give advice in the course of working in those occupations, as are a Minister of the Crown and a member of Parliament—both in the course of performing their duties in those respective roles. As I have said, the list includes a lawyer, a chartered accountant, a tax agent, a real estate agent, a member of the board of a Crown entity, a Crown organisation, the Reserve Bank, a person providing free budgetary advice, and an employee giving advice to, or making an investment transaction on behalf of, his or her employer.

There are some references to KiwiSaver, investment transactions, and the offerer or target company in the course of a takeover. That is quite an interesting little inclusion there. In particular, the choice of words in clause 12(p) is, I think, quite odd, because we are saying that a person does not perform a financial adviser service if the person is “an independent adviser giving advice in the exercise of that person’s functions under the Takeovers Code”. The use of the language in the first part of that sub-definition would make one think, on first reading it, that that is exactly the type of person who is supposed to be captured by this legislation. The Minister is shaking her head, so no doubt we will hear from her on the issues relating to the Takeovers Code that need the provision of a special exemption.

Then there is the case of a person giving general commentary relating to a financial market. Again, that is quite an interesting little definition, because we could have regular columns from financial advisers, where one would write in and ask, say: “Dear Mr Foss, I have $10,000 sitting in a bank account. What is your recommendation? Should I put it into KiwiSaver or should I use it to pay my increased ACC levies?”. In that case, with regard to the response that Mr Foss gives in the media—hypothetically, of course—I would need to be convinced that the definition of general commentary is enough to exclude the appropriate general comments made about the nature of some of these investment schemes. But, of course, if one of these commentators makes the remark, in passing, that today the ASB is offering 9 percent over 30 days. as opposed to the BNZ offering 8.75 percent over the same period of time, and offers no specific advice in respect of those two current products on the market, I ask whether that steers an investor in a particular direction by its nature or inference, or whether it is general commentary, thereby excluding itself from that definition.

I suspect—and others in the National Party have said this during the second reading debate—that some areas of refinement will still be needed in this area after the election, regardless of who sits next to you, Mr Chairman, during the Committee stage of that refinement. I wonder whether we have made that provision certain enough. I see that the officials are busy chatting about these matters, and I would be interested to know exactly where we are heading with that particular point.

It is also interesting to note—

Mark Blumsky: That’s a good point.

SIMON POWER: I thank Mr Blumsky. We will miss that sort of input when the member leaves! The other thing I am interested in is clause 13, “Meaning of financial advice clarified”. Interestingly, in financial advice we do not include a prospectus, an investment statement, an authorised statement, a bank disclosure statement, a document or documents issued in lieu of a prospectus or investment statement, or a disclosure statement. One of the things I am interested in is the role of the corporate trustee when it comes to the process for having discussions about financial advice. The Minister knows, because we have shared the platform on one occasion recently at a financial advisers’ conference, that I am a bit keen to look at the front-line regulator, the corporate trustee, and make sure that its obligations and its role as a front-line regulator are being exercised in an appropriate way, to ensure that investors get the full picture. So we want to make sure that clause 13 does not let the front-line regulator off the hook, and I would be interested in receiving some guidance on that.

I will leave it there in terms of Part 2 of the bill, but I am keen to make a short contribution on the remaining parts.

Hon LIANNE DALZIEL (Minister of Commerce) : I thank the member. I think that this is an appropriate time for me to do the mea culpa. People have asked who is to blame for the quality of the original bill as introduced, and I accept full responsibility for that. But there is one thing that I will say in defence of the line I took in terms of the occupational approach.

Simon Power: I wasn’t blaming you.

Hon LIANNE DALZIEL: Other members made certain comments, so I thought I should accept responsibility. The point I want to make is simply this: if I had introduced a bill with a very narrow focus, nobody who ought to have been covered by this bill would have put their hands up and said: “Excuse me, you’ve left me out. Please include me.” By including everyone, by having a really broad definition, those who were not appropriately covered by this legislation were very quick to put their hands up and say: “Please take me out.” I still think that that was a good process in terms of getting everyone’s attention focused on who should be covered by the legislation. I do agree that shifting from the individual occupation to the type of advice they are giving, based on the product and the financial services planning, or the financial planning approach, is absolutely the right way to go.

I just draw the member’s attention to the Supplementary Order Paper, because there are some changes here that have picked up on some of the omissions. One is in respect of registered valuation, where, obviously, there could be potentially the giving of financial advice as a necessary incident of that work, so we have included that as well. We have picked up on the issuers and trustees.

Simon Power: Excluded that one, as a financial adviser.

Hon LIANNE DALZIEL: Excluded—excluded. We have also picked up on the question of issuers and trustees, although I think that the point the member raises about the trustees, the front-line supervisors, is a very real one, and it is part of the next stage of the Review of Financial Products and Providers, which we have already announced is being held back a little while we do some further work arising very specifically out of the finance company failures of the last 2 years. There is further work to be done with regard to the front-line supervisors. We have already announced some of the original decisions that were taken, but I have made the statement publicly that there is further work to be done in that area.

In respect of the budget advisers, I was very, very concerned to make sure that budget advisers, who help people who are struggling to cope on minimal levels of income, would not be caught by the Financial Advisers Bill, which is about protecting people from the risk of losing their life-savings when they have money left over to invest. I wanted that dividing line to be even clearer than as reported back from the select committee, so we have actually picked up some concerns that have been raised by the citizens advice bureaus. So now the clause will exclude people giving advice or making an investment transaction in relation to a category 2 product, or providing a financial planning service, taking that in the broader sense, if the advice is given, the transaction is made, or the planning service is provided without charge in the course of a service offered by a non-profit organisation. So that really should clear the decks for those people to feel comfortable that they can just get on with the job of providing that support.

The third area I should highlight is the question of an employer providing assistance to an employee with the implementation of a decision to acquire or dispose of a financial product made available through the employee’s workplace. Not all workplace superannuation schemes will be KiwiSaver, for example, so I think it was important to focus more broadly on employers giving supportive information in order to assist the implementation of decisions that their employees make.

In respect of the comment made by the member in relation to the Takeovers Code, I should make the point that, yes, I know the language does sound difficult, and we do speak of financial advisers not including independent advisers giving advice, but the people who are appointed to enable people to make decisions as to whether to accept offers in a takeover situation are appointed under the Takeovers Act. Their independence is assured by that process, and the question around disclosure is covered by the independence that operates under the Takeovers Act. It is all monitored by the Takeovers Panel, and I think that is why it is excluded here. They do not have to go through having to disclose all of their situation, under this particular legislation.

Simon Power: So it’s not designed to exclude investment bankers.

Hon LIANNE DALZIEL: It is not designed to exclude investment bankers, but this is a particular function that they have under another Act.

The last thing I want to comment on is the question of disclosure. I draw the member’s attention to the provisions of the bill, which talk about disclosure having to be in the form required by regulation. I think that that is one area about which I want to give the member some comfort. I remember going to a meeting of financial advisers, which included some of the representatives from the Australian industry. They talked about the number of pages that had been increased by the particular regulatory framework they had adopted over there. I have asked my officials to make sure that when they do this work on these regulations—and subsequently on the changes they will be making in the Securities Act area, which will cover investment statements—they make them short and simple, in plain English, and make them very accessible to those who are seeking to rely on them. The last thing we need is to have complex difficult documents. We want people to be able to access the level of information they need.

I think it is very important in this environment, where we have advisers being paid by way of commission from the people who are selling the products, that people have not only the information about the nature of that commission but also a comparator with those other commissions that might be available. Unless people know that their adviser is being paid a lot more to offer them a particular product, over and above something else, and all the other issues that the member raises, then I think it does not address the fundamental flaw that exists in the current arrangement. This bill is designed to address that, and I know that members of professional organisations now—and this is why I always recommend that people use financial advisers who are covered by professional organisations—require their members to disclose this information up front already. At this stage, people do not have to wait for the legislation if they use people who are members of professional bodies.

CHRIS TREMAIN (National—Napier) : I want to pick up on what the Minister was speaking about during the commencement of her speech. She felt that the process she had undertaken had been a good one, in terms of spreading quite a large net in a catch-all situation, and then expecting people to put their hands up to say: “No, leave us out of this process.” I want to discuss it in terms of the danger of bureaucracy, which is something National bangs on about, in terms of bureaucracy creep and getting down to people who should not be involved in unnecessary regulation. I guess no more can it be said for the budget advisory community, which is referred to quite well in clause 12(k), whereby budget advisers are exempt under the auspices of this legislation. I think it is important to understand that initially budget advisers clearly came within the catch-all of the Act. As the Minister has quite rightly said, these are the people in our communities who deal with people who do not have a lot of money, such as beneficiaries who might have only a couple of hundred dollars, week in, week out, to work with. I am talking about citizens advice bureaus, and in my own electorate of Napier, the Napier budget advisory service that is run by two or three volunteers who sit up there in Community House. I am talking about the Napier Family Centre budgeting service, which has a number of volunteer budgetary advisory people.

They deal with members of our community who do not have a lot of money to rub together. We are not talking about the investment of life-savings of $200,00, $300,000, or $400,000 into different investment categories. We are talking about people who have had a pretty tough life and are struggling to make the best of $200 or $300. This bill initially looked to encapsulate the budget advisers within the legislation and to put regulation around them. Funnily enough, one of the first submissions that came to the table was from the budget advisory association. This association supported the legislation and said that its members should be a part of the additional regulation. I could not believe it, but that is what it said. But back in our electorate offices we were getting visits from budget adviser volunteers saying: “Crikey, we don’t need this sort of regulation. If we have to be accredited, it’s going to mean that we will need continuing professional development and there will be costs involved.” Quite frankly, a whole lot of volunteers will leave this service, and it will not be available to some of these hard-working Kiwis.

Then the Minister said she was keen to get rid of it. But, actually, I say to the Minister, one of the first amendments to the clause that came back from the officials, was that budget advisory services would be exempt, but only those funded by the Ministry of Social Development. I do not know whether the Minister remembers that particular clause, but that is what came back from the officials in the first instance. It was the National members of the committee, I have to say, who put up their hands and said: “Look, this will get rid of all the people who are involved in the voluntary sector.” As long as it is not for profit, that clause has to change. We felt it was important that the voluntary sector was exempted totally, and I am pleased to see that happen.

People often bang on about National going on about bureaucracy, but this is the type of bureaucratic creep that we get through this type of legislation, and that is just crazy. Certainly it is not necessary for volunteers in the voluntary sector.

I will give another good example. I was up in Māhia the other day, with the volunteer firefighters. Volunteer firefighters are now required to have New Zealand Qualifications Authority qualifications, for goodness’ sake! We are almost getting rid of the good Samaritan opportunities in our community, and that is just crazy. We have to make sure that we allow volunteers, whether they be budget advisers or firefighters, to continue to do their work, without massive bureaucratic creep and without additional costs. It is important that the officials consider those volunteers out there and the work they are doing, and that they do not unduly bring a whole lot of additional bureaucracy into it. I saw that happening firstly with the budget advisers. We are not axing them. We will take out only the budget advisers who are funded by the Ministry of Social Development, and then finally all budget advisers will be totally exempt. Thank you, Mr Chair.

• The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 2 be agreed to.

• Amendments agreed to.

• Part 2 as amended agreed to.

SIMON POWER (National—Rangitikei) : This is the part that attempts to deal with how to define authorised financial advisers and qualifying financial entities. I think that it is the most elegant part of the legislation but it is an extremely tricky thing to legislate for, and the officials are to be congratulated on coming up with such a neat way of categorising advice, in such a short period of time. This is essentially the part of the bill that creates the tiered approach, if you like, and National is supportive of that approach, as we modestly suggested throughout the process that such an approach would be appropriate.

One thing about institutional accreditation still sits in the back of my mind. I am pretty sure, although I stand to be corrected by Charles Chauvel or any other member of the committee who was there at the time—in fact, the officials might be able to correct me, directly through the Minister—but I think it was Sam Stubbs from Tower who came before the committee and made a comment that went something like this. When it comes to dealing with a professional after something has gone wrong, and what I think he termed the eye-to-eye conversation across the kitchen table has been had with that individual about the particular advice or product—in fact, I think he drew a parallel with a dentist, if I recall correctly—the responsibility should lie with that individual, in the event that the financial advice has proved to be inadequate or inappropriate. That issue has sat for the last 2 or 3 months at the back of my mind—a reasonably crowded and cluttered place for it to sit, over the last 7 or 8 weeks—

Hon Mark Burton: It’s such a small receptacle.

SIMON POWER: I say thank you to Mr Burton. I will miss those sorts of comments after the election, although I am sure it was meant in good humour, as all of the member’s comments have been over the last 9 years.

In the situation where that individual who sat across the kitchen table gave financial advice to the person concerned—after a level of trust was built between them, and discussions occurred; it was that personal connection that saw the investment decision triggered—we do not want to create a regulatory framework that sees that individual escape responsibility or escape accountability because he or she happens to belong to a large organisation that is institutionally accredited for the range of advisers who come under its umbrella. I think the submitter who raised that issue raises a fair issue. We cannot afford to have a group of financial advisers structure themselves in a way that sees that grouping being given an accreditation at an institutional level, and thereby inoculating its individual salespeople, financial advisers, representatives, and financial planners, from any direct accountability or responsibility for the very nature of the trusting relationship that that one-on-one discussion built.

That is the only question, the only comment, and the only thing on which I seek feedback from the Minister in Part 3. Thank you.

Hon LIANNE DALZIEL (Minister of Commerce) : I am happy to respond to Simon Power’s comment on accountability and say that that is the reason why the qualifying financial entity approach that has been adopted in the Financial Advisers Bill is, as the member himself described, such an elegant solution. It says that the qualifying financial entity, which is required to meet a standard in order to have that status acquired through the Securities Commission, takes responsibility for defining who falls on either side of the line. On one side of the line we have the ones who are to be individually authorised and therefore individually accountable, like any other authorised financial adviser. On the other side of the line we have the category 2 advisers, who are dealing with the lower-level products based on that risk assessment. I think that is a neat way of allowing the institutions to take responsibility for employees and agents who are operating to sell, essentially, products that are in that lower-level risk category; the higher-level advisers will be required to be authorised financial advisers.

To go back to a comment another member made about the sequence of events around budget advisers, I say that is a very good example to use to explain how we have got to this particular position. When we started off by defining people by their particular occupations, we ended up in a situation where budget advisers necessarily were included in the definition because it was so broad. We are trying to bring that back but at the same time we are very mindful of the fact that if we exclude an occupation, then all of a sudden people will redefine themselves as budget advisers instead of financial advisers in order to avoid coverage, which is why we tried to link it to the funding from the Ministry of Social Development. That was not the best mechanism. The select committee came up with a better one, and I am grateful to it for that. Then the officials and I have come up with an even better one, which is the one in the Supplementary Order Paper.

But that is the exact point I am making: that the qualifying financial entity actually taking responsibility for dividing the two groups—one requiring the individual authorisation of the Securities Commission and the other coming within the responsibility of the qualifying financial entity—is, I believe, the best of both worlds. We get really good coverage and we get that eye-to-eye contact for those who have made bad professional judgment.

CRAIG FOSS (National—Tukituki) : I thank the Minister of Commerce and acknowledge those points. I agree with the qualified financial entity part of this bill—Part 3. It is another part that was totally rewritten, and for the better, as we have all acknowledged. I have some questions, though—and perhaps I need to read somewhere else—about the qualified financial entities.

Many of the submitters, particularly the larger players, are already doing something along those lines anyway, so the burden is not huge. They operate across many jurisdictions, and therefore need to keep control and account of who is doing what everywhere. In this mobile world, where one can call a local bank and end up talking to someone overseas, keeping control does become tricky, and the bill acknowledges that we can go only so far here in New Zealand.

Among the three obligations and responsibilities of qualified financial entities that are mentioned in the bill—and I agree that the Securities Commission having that call is exactly right; it is the gateway of all things regulatory around financial markets, along with the Reserve Bank; I think it is a good fit—is to ensure that staff are authorised. Most of them took that on board, particularly the larger ones. They do not really have a problem with it, because all their staff are authorised in some way, shape, or form in order to get into the building, to use their websites, or to do whatever it might be.

They are also obliged to provide a list of names to the Securities Commission, and to keep that list up to date. I would be interested to know what “up to date” means. I had a quick look at the definitions and I did not see it there. Common sense would say it meant quarterly reports, or something like that, but it could cross a financial year, or it could be an entire cycle. What is up to date for one qualified financial entity operating here in New Zealand on its own may be different from what is up to date for a qualified financial entity that is incorporated here but is essentially overseas owned. Is there consistency of timeliness? I am sure the Securities Commission would give encouragement and guidance, but perhaps it is one of those areas that the select committee could have defined a bit further. I am open to be advised that the definition is somewhere in the bill.

My colleague Simon Power pointed out earlier that all of us here agree that the single regulator model of the Securities Commission—leaving the expertise in that place—is very good. The bill acknowledges that a Commissioner for Financial Advisers will be appointed. The commissioner will be a member of the Securities Commission, and that is all very well and good. I presume that more funding will be required to enhance whatever operations it does.

Also in this part—and I acknowledge the foresight of this provision—is alignment of the fines outlined in the Securities Act, those in this bill, and those in the Financial Service Providers (Registration and Dispute Resolution) Bill, which I assume we will be talking about this week. There will be consistency across the sector, and that takes away the ability for someone to do regulatory arbitrage, to exploit one piece of legislation over another—to do fine arbitrage, if one likes. In this bill as it was first drafted, there was the possibility of five industry bodies, and one person could have moved around the other bodies.

National members are voting for this bill and this part. We endorse where it has got to now. We endorse the consistency of it, and the recognition of where the expertise lies in this particular sector. I think it is very good. I acknowledge the qualified financial entity model and the authorisation of two tiers, category 1 products and category 2 products—complex and run-of-the-mill, if you like. I think it is a very good fit. Yes, there may be further work to do.

I shall talk a little about the types of institutional accreditation. There are those registered under this bill as category 1 products and category 2 products, and authorised by the Securities Commission. That is nice and clean. There are bound to be some organisations that fall outside or very close to it, but I am sure we will find them on the way through. Having category 2 will totally do away with all the fears of the various insurers, agents, and people who operate call centres for banks. Basically, they are transacting run-of-the-mill business. I acknowledge the Minister in regard to where we have got to on that. On a cost and compliance issue, it was a great leap forward, because everyone had looked on it in horror.

• The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 3 be agreed to.

• Amendments agreed to.

• Part 3 as amended agreed to.

CHRIS TREMAIN (National—Napier) : I rise to speak to Part 4 of the Financial Advisers Bill, which deals largely with how financial advisers are to be regulated. Essentially, as the legislation is now to be enacted, it will be under the guide of the Securities Commission, which was established in Part 1 of the Securities Act. It was going to be product regulation based under the Securities Act and the Securities Markets Act on the one side, and then, as we have discussed in previous parts of the bill, financial adviser regulation with supervision of both qualified financial entities, as Mr Foss just spoke about, and of the accredited financial advisers, as Simon Power spoke about earlier. Clearly, under the Securities Commission there will be enforcement of the statutory obligations of each of those organisations.

But what is now being proposed in Part 4 is how we are going to regulate financial advisers through the establishment of a Commissioner for Financial Advisers. That is dealt with in subpart 1 of Part 4. The commissioner will be a member of the Securities Commission. If we look back to the legislation as originally proposed, if I recall correctly, we see that the idea was that we would set up a number of bodies under each industry organisation that would then be responsible for the accreditation of the financial advisers within their own industry.

Hon Lianne Dalziel: They would apply to be—

CHRIS TREMAIN: Yes, that is correct. Then there would be a default provider if there was nowhere to go. It all got a bit complicated at the end of the day, and everyone in the House agreed that going to one body, with the default provider being the Securities Commission and therefore the Commissioner of Financial Advisers, was by far the best alternative in terms of stopping duplication. Everyone knew where to go, and we have come up with the best solution.

Essentially, the functions of the commissioner are dealt with in clause 77, and they are as follows: “(a) to appoint members of the code committee:”. As I understand it, the code committee will be responsible for establishing the code, writing it, and updating it as time goes by. The other functions of the commissioner are “(b) to review the code and propose changes to the code as required: (c) to act as a chairperson of the disciplinary committee:”—because a disciplinary committee will be established under the commissioner for dealing with complaints and disciplinary actions—“(d) to oversee and expedite the work of the Commission in relation to financial advisers:”. Lastly, it is the function of the commissioner to exercise and perform such other functions, powers, and duties as are required of the commissioner.

Clause 82 deals with the content of the code that the commissioner will be required to put in place. What we have done in the legislation is outline some of the key criteria that must be part of the code. It must provide for minimum standards of professional conduct. As one would expect, this includes things like the standard of competence that must be required from financial advisers or from qualifying financial entities, the level of knowledge and skills that these individuals or qualifying organisations must have, and the level of ethical behaviour and client care that one would expect from a quality financial adviser.

The code must also provide for continuing professional training for authorised financial advisers, which is something we have seen come across a number of professions, whether for plumbers, electricians, or financial advisers. We have seen that ongoing requirement for continuing professional development, and more recently we have seen this come into the Real Estate Agents Act, where both licensees and real estate salespeople who remain independent contractors will be required to undertake ongoing continuing professional development. Lastly, in terms of establishing the code under clause 82, subclause (3) states: “The code must specify different standards for different classes of authorised financial adviser.” That deals largely with the fact that there will be a two-tiered system where financial advisers will need to attain a higher level of qualification to advise on category 1 products versus category 2 products. I think that is good.

Subpart 2 of Part 4 deals with complaints about financial advisers and how that will be dealt with. It is pretty straightforward. Any person now may complain to this one body, and it will be far clearer than it was under the original legislation that was proposed. Thank you.

• The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 4 be agreed to.

• Amendments agreed to.

• Part 4 as amended agreed to.

SIMON POWER (National—Rangitikei) : If I had not received such a pleading look from the Minister Lianne Dalziel not to stand, I would have sat down. I just make the point that Part 5 relates to general provisions and appeal of decisions, the right of appeal of the commission—interestingly, on the issue of authorisation—and the potential decline of qualifying financial entity status. The District Court, apparently, will make those decisions. I suppose on an issue like that there does need to be a procedure for appeal, and I guess, on balance, that the District Court is the appropriate place for that.

• The question was put that the amendments set out on Supplementary Order Paper 253 in the name of the Hon Lianne Dalziel to Part 5 be agreed to.

• Amendments agreed to.

• Part 5 as amended agreed to.

SIMON POWER (National—Rangitikei) : We come to the only two surviving original clauses of the Financial Advisers Bill, which, as we said earlier in the debate, has been completely rewritten, with 61 pages being deleted from the bill.

Hon Lianne Dalziel: A hard-working committee.

SIMON POWER: It is pretty hard-working, all right! Sixty-one pages have been deleted, but what stays? Since this bill was referred to the Finance and Expenditure Committee in February of this year, or thereabouts, what has remained from the years of work and reviews, stakeholder meetings, workshops, and the like that occurred? What is left is the title—the Financial Advisers Act 2007—and the Government is to be commended for retaining that during this process.

Secondly, what has also remained during the last 8 or 9 months is the commencement date. That is clause 2(1), and it will come into force on a date to be appointed by the Governor-General by Order in Council. Secondly, clause 2(2) states: “One or more Orders in Council may be made appointing different dates for the commencement of different provisions.” That is it. They are the only two clauses that survived the original bill.

Hon Dr Michael Cullen: We listened!

SIMON POWER: That is right—it is a listening Government. So we wiped out 69 pages of ineffective legislation and replaced it. But, as we said earlier, that was the right thing to do, and we now have what we view to be a crucial first step in workable regulation around this industry. I think it is worth noting that the Minister has always been careful in her public statements, and particularly in her press releases and speeches—which we have followed pretty carefully—to make the following two statements in either this form or in a form similar to it. The first statement is that she is not inclined, she tells us, to regulate for regulation’s sake, which is something that we support. We believe that regulation in this case is necessary. Secondly, the Minister has made the statement many times that we cannot legislate to prevent risk, and that is also a position that the National Party endorses.

I have to say that I think this is the only time in my short time here that I have seen legislation so thoroughly amended by the select committee process. It was not comprehensively amended, of course, because we still have clauses 1 and 2, but it was thoroughly amended during that process. That tells the Committee that the select committee process adds value to the final product, and it also tells the Committee that where a Minister is prepared to allow the legislation to form up following further input and advice, from officials, other political parties, and the select committee, the Parliament can find itself with workable legislation. I will make some comments on the future of this legislation in the third reading debate, but I will leave my comments on what are now really known as the enduring clauses of this legislation.

CHRIS TREMAIN (National—Napier) : I would like to speak to the enduring clauses of the Financial Advisers Bill, and to beg to differ just slightly with my colleague Simon Power, who claimed there are only two enduring clauses. When we look at the amended legislation in the mark-up version, we see that in fact only one clause remains in the legislation. If we look at page 9 of the new bill, we see that only the title has remained the same from day one. Clause 1 states: “This Act is the Financial Advisers Act 2007.”, and everything apart from that clause has changed. The commencement clause has quite clearly been changed. In the first draft there was an original provision there, but that has actually been changed.

• Sitting suspended from 1 p.m. to 2 p.m.

• Clause 1 agreed to.

• Clause 2 agreed to.

• Bill reported with amendment.

• Report adopted.

Hon LIANNE DALZIEL (Minister of Commerce) : I move, That the Financial Advisers Bill be now read a third time. The progress of the Financial Advisers Bill has not been as easy as I first thought it would be. The failure of a string of finance companies last year brought me to the conclusion just before Christmas last year that the bill as introduced was not the best way forward. After advice from industry, I concluded that the co-regulatory model would struggle with the disciplinary workload that could arise and would not survive the loss of confidence in the sector, which is the inevitable fall-out of finance company failures. It was necessary to make significant changes during the select committee process. At this point I again express my thanks to members of the Finance and Expenditure Committee and officials, who have engaged with the industry, the wider sector, and the public. I also acknowledge the Opposition’s commitment to working with the Government on finding a solution to these issues. In particular I acknowledge Simon Power, who has been open about concerns, and we have worked together to resolve them. I commend the whole committee’s engagement with the industry, and its willingness to listen and make such changes at a late stage. I am confident that the committee has produced a bill that is far more practical and suitable for its purpose.

Specifically, I support the bill’s new focus on financial products in contrast to financial decisions, and the development of the two-tier approach to authorised financial advisers, and other financial advisers, advising on category 1 and category 2 products. The bill enables the adoption of a qualifying financial entity model to reduce compliance costs for institutions with a large number of advisers, as well. Finally, the bill provides clear and appropriate exemptions from the definition of a financial adviser, so that people offering budget advice, for example, are not captured by this legislation.

I will just place on record here that in the legislation itself the definition of financial advice uses the words “recommendation”, “opinion”, or “guidance”. These are words that need to be read together; one follows from the other. “Guidance” does not simply mean setting out options for people then to take advice on or make a decision on. I want to make it absolutely clear that citizens advice bureau advisers will not be captured by the definitions in the legislation.

I will not go over the details of the legislation again. Suffice it to say that the bill’s passage today will ensure that the election period can be put to good use by officials from the Ministry of Economic Development and the Securities Commission, and by the industry as a whole, to inject the detail into a regulatory framework that should reinvigorate a much-needed sector. I say that it is a much-needed sector because we all need to be able to rely on advice in order to be guided to make good investment decisions, where we do not have that expertise ourselves.

I will make two more statements that again cover issues that have not necessarily been raised in this debate. If people are taking advice from an adviser now, I urge them to use one who is a member of a professional organisation that can hold that adviser to account. But I warn them not to use that advice as a proxy for their right to know the details of the investments being made, and the level of risk they are exposed to. The Securities Commission has a good range of information available, and I do ask people to use it. It provides good advice, including the advice not to be afraid to say no if the level of risk is outside people’s risk appetite.

The second issue is the question of financial literacy. We can build a strong regulatory framework, as we have done with this bill, but inexperienced investors must still understand basic financial principles, such as risk and return. That is why the Government has committed to the National Strategy for Financial Literacy, led by the Retirement Commissioner, engaging as it does with the private sector and the non-governmental organisation sector, as well. At the same time, the companies that have taken the hard-earned money of people who have saved over a lifetime owe a duty of care not to abuse the trust that has been placed in them. New Zealanders who have lost money, or whose funds are frozen, are disgusted by the flaunting of wealth by those who have left behind them a trail of devastation. Corporation law was designed to protect entrepreneurs from personal liability, so that they could take risks without facing financial ruin every time an idea did not pay off. But to see people driving around in Porsches and living in luxurious mansions, when others are seeing their life-savings go up in smoke, creates challenges for those of us who defend the underlying principle. It is a disgrace, and they should be ashamed.

Financial advisers stand in between those companies and clients, and it is their duty to identify the risk profile of their clients and to do the homework their clients cannot be expected to do—work up a balanced portfolio, read any prospectuses, identify where the risks are, ask whether the risk is appropriately priced, and be alert to the potential motive behind higher than usual commissions. It is very easy in this climate to blame all financial advisers, but I warn against imposing too high a standard on those who were faced with misleading prospectuses or who could not have foreseen the domino effect of the flight to quality that followed the initial failures.

In conclusion, I believe that the Financial Advisers Bill now meets the objectives I set for it when it was first introduced. It brings financial adviser regulation into the 21st century, aligns us with international best practice, and provides for an appropriate level of investor protection in New Zealand. I commend the bill to the House.

SIMON POWER (National—Rangitikei) : The Financial Advisers Bill has enjoyed support from the entire House from its first reading, and through the select committee process in the Finance and Expenditure Committee, its second reading, and the Committee of the whole House, and I suggest that that support will continue for its third reading. That tells us, as a Parliament, that the House regards this issue as being, in many respects, above the usual day-to-day political discourse that occurs on most of the legislation before it. Many, many New Zealanders have lost money through finance company and mortgage trust collapses. Many billions of dollars have been lost because of those failures. It is critical to rebuild trust and confidence in our capital markets. The issue of the disclosure of fees and remuneration contained in this legislation is a key part of reforming the sector.

I echo the Minister’s views when I say that many investors have received poor-quality financial advice. We in the National Party agree that there is a need to update the legislation that governs the activities of financial advisers, and since the time when the Leader of the Opposition, John Key, wrote to the Prime Minister, offering the assistance of the National Opposition with that process, the issue largely became a depoliticised process. I was dispatched on behalf of the National Party to be briefed by the Minister’s advisers, to discuss and negotiate with the Minister, and to cajole her into accepting the differing views on the initial version of the bill. I will return to that matter shortly.

One of the things that the Minister of Commerce and I, and, in fact, that Labour and National, agreed on very early was that it is impossible to eliminate risk from financial decision-making, and, indeed, that it is impossible to legislate against such risk. So a balance had to be struck between minimising the risks for investors and minimising the costs of a new regulatory regime for investors. Of course, legislation is not the only response to minimising the risks of financial investment. Improved financial education and literacy need to be part of improving New Zealand’s investment culture. Fundamentally, the proposals in this legislation to require greater disclosure of financial advisers’ remuneration, commissions, royalties, and other such payments, greater disclosure of qualifications and conflicts of interest, and a higher level of competency on the part of financial advisers are necessary. So too is the need to hold financial advisers accountable for the advice they give.

This bill, very appropriately in our view, establishes the Securities Commission as the sole regulator of financial advisers, and abandons the original co-regulatory model. It allows institutions to be accredited and responsible for their employees, rather than, in many instances, requiring all individual employees to register. The two-tier regime, which provides heavier obligations for more complex advice and lesser obligations for more simplistic products, makes sense and is practical.

On the issue of the financial adviser, the definition of that term has been covered extensively during the Committee stage. There was no doubt that the attempt in the original bill to define advice given by referring to the occupation of the individual or the organisation giving that advice was based on a faulty premise, not because that was not a good place to start the discussion about what a regime should look like, but because it provided too many loopholes for people to avoid the regulatory framework. Indeed, on the other hand, it would have captured, in our view—and, in fairness to the Government, in its view as well—a group of advisers who were never intended to be caught by a more complex regulatory regime, rather than a more simplistic regime relating to more straightforward financial products.

During the select committee hearings we saw the emergence of a model that virtually developed itself as submitters gave their views to the Finance and Expenditure Committee. It was actually quite a remarkable discussion, with members of the committee putting alternative models to submitters as the submitters appeared, and asking for their comment on the workability and practicability of those models. As those discussions went on, it became clear that they were forming up in the minds of the committee, and of the chair, Charles Chauvel, a useful model to explore beyond the model first offered at the bill’s introduction and first reading. To the credit of the officials who were advising the committee, they swallowed hard and started, effectively from scratch, to draft the legislation that is now before the House in its third reading.

During the second reading debate, I said that parliamentary counsel made a remark in the drafting stages, when I asked how much of the original bill would stay intact—my recollection was that the answer was three clauses. We later found out that it was two clauses, and there was a suggestion during the Committee stage that it was only one clause. That meant there was a buy-in by the committee and by the Minister, who corresponded with the committee on at least one occasion that I can recall, offering to buy into that model and offering some suggestions about how it could work in a more practical way. I have to say the bulk of the work and, if I can reuse the word I used in the Committee stage, the elegance of the legislation that was put before us was largely a burden that had to be shouldered by the officials who advised the committee on that matter. They are to be commended for and congratulated on those efforts.

I conclude by thanking the Minister of Commerce for making the officials available, and for discussing this legislation in a positive and constructive way. I think, in the end, the House has delivered legislation that will begin this process in a comprehensive and thorough way.

I will finish by saying one thing—and the Minister will be relieved to know that I am the only National Party member who is taking a call in the third reading—which is that this legislation, in itself, will not prevent people from losing money when they make investments. That is a very trite thing to say, but it is an important statement to make, because whatever happens after the election on 8 November, and whoever occupies the Government benches, will not change the situation that some people will lose money on various investment vehicles. All that the Government, or for that matter, Parliament, can do is to provide a regulatory and legislative framework that is designed to put the best possible information before investors, and to ensure that those people who are in the investment advisory business are competent and are required to disclose matters material to the investment decisions that are being made. The legislation cannot prevent loss and it cannot prevent risk, but it does go some way towards requiring those who are giving financial advice to meet a far higher standard than that they have had to meet up until now.

R DOUG WOOLERTON (NZ First) : New Zealand First supports the Financial Advisers Bill, as we do the suite of bills that surround it. We look forward to bringing to this House in the next Parliament other measures to help investors in this country. We need to encourage people to invest in our businesses, and the sort of behaviour we have seen recently does exactly the opposite. Successive Governments have tried to steer people in this country away from property, which New Zealanders have a preference for, and one cannot do that if people see their money disappearing down the tubes. This bill goes some way towards making sure that the people who advise investors are at least registered, which means they can have some faith in the advice that they get.

I think it is great that the people who advise at the budgetary advice level, like those from citizens advice bureaus, have been left out of this bill, thus ensuring that people who give advice to others, like my friend Clayton Cosgrove, are not caught up by this sort of thing. Where Mr John Key gets his advice from for his share trading we do not yet know—that has yet to be seen—but we suggest he would probably come into a category 1 or 2 situation whereby the level at which he operates is somewhat more sophisticated. We were pleased to see that those who advise people in good faith and without receiving any recompense need not feel that they could suffer a fine because of their good works. We think that is absolutely appropriate.

As I said at the beginning, and I will finish on this note, New Zealanders need to have faith that the investments they make, usually at the latter end of their working life, do have some sort of surety around them and, in particular, that the people giving them advice are qualified to do so, that they understand the situation people are in, and that they give advice appropriate to people’s age, their risk profile, and those sorts of things. This bill goes some way towards ensuring that without taking away any of the entrepreneurial activity that we seek to encourage in this country.