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22 May 2009

Speech

Hon Simon Power, Minister of Commerce

Speech to branches of the Institute of Financial Advisors

Good afternoon and thank you for inviting me to speak to you today. I'm sure you're all anxious to hear about the implementation of the Financial Advisers Act, but I would like to first briefly outline how this regime fits into the Government's priorities for the financial sector.

The global financial crisis forms the backdrop of our economic policy work at moment. The International Monetary Fund now considers that financial stabilisation will take longer than expected, and their forecasts for global growth over this year and next have been revised down.

The international situation inevitably affects New Zealand. Although our banks are sound and have endured the crisis well so far, most of our trading partners are in recession and this will affect demand for our exports. This has exacerbated problems such as the drop in our housing market and the collapse of some finance companies. Treasury estimates that our gross domestic product fell by 1 per cent over the March quarter.

But the crisis has provided us with an opportunity to reassess our financial sector regulation. The task at hand is to respond to the specific issues raised by the crisis while not losing sight of the long-term objective of achieving and maintaining productivity growth.

In particular, we need to think about what we want New Zealand capital markets to look like over the longer term. In this area, I am working closely with the Capital Markets Development Taskforce.

I am very enthusiastic about the single economic market with Australia and I recognise that New Zealand is too small to try to go it alone as we seek to develop our capital markets. For this reason, I am keeping in close touch with my Australian counterparts. There are many elements of financial market regulation that the two countries can usefully seek to progress in partnership.

Recently I spoke to NZX about how I saw successful capital markets taking shape in New Zealand. To me, successful capital markets are efficient, highly liquid, and have minimal transaction costs.

Successful markets ensure that all relevant financial risks are able to be adequately identified, priced, and allocated to those best able to manage them. Investors and consumers need to be appropriately informed about investments, and illegal and unethical behaviour should not be tolerated.

I want to see company owners better informed of the capital market options available to them, and confident in using the options that meet their needs. Correspondingly, I want to see confident investors who have a higher level of financial literacy and who know how to interpret risk and return. I want to see more households holding capital market assets.

These objectives are ambitious and they will not be achieved overnight. However, I consider them to be of great importance for the future prosperity of New Zealand, and we need to start acting now so these ambitions can be attained.

I have begun this process already through both long-term and short-term projects.

The immediate situation of companies is important. Capital-raising has become more difficult in the face of the international crisis. In order to help companies through the recession I have prioritised several pieces of work aimed at helping them access capital.

On the recommendation of the Capital Market Development Taskforce, I have approved several changes to the NZX listing rules and initiated the Securities Disclosure and Financial Advisers Amendment Bill.

The primary goal of this bill is to improve access by issuers to certain exemptions in the Securities Act and give listed companies the option of using a "simplified disclosure prospectus" when issuing certain securities.

I am also well on the way to producing revised securities regulations that will be more user-friendly and accessible to issuers.

Looking to the longer term, I have started work on the "super-charged debt market" proposal that emerged from the recent Jobs Summit.

I have also begun work on a comprehensive review of the Securities Act. This key piece of legislation is 30 years old and it's important we ensure it serves both investors and issuers adequately in the 21st century. I intend to address long-standing issues in areas such as disclosure documents while considering new insights from the current crisis.

On the other side of the equation, I am seeking to promote investor confidence in both the long- and the short-term. The Securities Act review is one of these but I'm particularly concerned about the role of trustees in light of the recent collapse of finance companies in New Zealand. I have prioritised work on the trustee supervisory model and I'm looking for substantial changes to ensure accountability and sufficient competence of trustees.

Of course, progressing the Financial Advisers and Financial Service Providers regimes will contribute significantly to improving the quality of our markets. I'm sure you're following this area closely, and I would like to discuss the implementation of this regime in more detail, as you have asked for.

The Financial Advisers Act and the Financial Service Providers Act seek to improve transparency and accountability through several means. These include dispute resolution schemes for consumers, registration for all financial service providers, and authorisation for advisers giving complex advice.

There is also the "qualifying financial entity" model, which allows organisations to take responsibility for their advisers under certain circumstances. I will talk more about this shortly.

The Financial Advisers Act and Financial Service Providers Act are on track for implementation at the end of next year. The Securities Commission, the Minister of Consumer Affairs, and I are working with the industry to ensure the details of the regimes are workable. I'd like to thank the IFA and the industry for their contributions so far.

There are many milestones still to be reached, and I would like to take this opportunity to outline these to you. As I have said, there are tasks for agencies, including the Code Committee, myself as Minister of Commerce, the Minister of Consumer Affairs, the Companies Office, and the Securities Commission.

I'd now like to discuss each of these in turn.

I'm sure you're very interested in the Code of Professional Conduct, and you'll have seen my appointment of Annabel Cotton to the position of Commissioner for Financial Advisers for a period of up to 12 months. Ms Cotton is an investor relations consultant to New Zealand listed companies, is on the board of directors of several companies and is a member of the Securities Commission. She brings considerable experience to the position and I look forward to working with her.

Her short-term appointment will allow implementation of the code to get under way immediately while the Ministry of Economic Development searches for a long-term candidate.

Her first key task will be to appoint the Code Committee, which will have the responsibility of drafting the code of professional conduct that will set the competency standards for authorisation.

In preparing the draft Code, the committee will undertake public consultation.

I understand we are aiming for this process to begin around the middle of this year and that it will last several months. In the meantime, the Securities Commission has produced a staff paper with thoughts and questions on the issue of competence standards that could inform the work of the Code Committee. The commission has posted the paper on its website and is looking for industry feedback. The final date for comments is next Friday.

Working alongside the Code will be a set of requirements for disclosure by all financial advisers. I will set these by regulation and the Ministry of Economic Development is working on its advice to me in this area. They have already sought input from an industry working group and I anticipate they will issue a discussion document in June this year.

A number of mechanisms also need to be in place for the Financial Service Providers Act to be implemented.

These primarily consist of approved dispute-resolution schemes and a reserve scheme for those financial service providers who do not have an approved scheme to join. The Minister of Consumer Affairs is working hard to get the dispute resolution framework up and running right across the financial services industry, and I understand she expects to have the reserve scheme operating in May 2010.

We encourage industry-led dispute resolution schemes where appropriate so businesses will have access to options that address their specific needs. However, we recognise that not all financial service providers can establish a scheme for themselves and the reserve scheme is there for this reason.

Again, industry consultation will be sought to provide a practical perspective on how this system should operate. I understand that the Ministry of Consumer Affairs will seek feedback on two key areas through consultation documents in the next few weeks. One covers guidelines for those considering applying to become an approved dispute resolution scheme. The other will cover the proposed operation and governance arrangements of the reserve scheme.

In December, Consumer Affairs will also issue a consultation paper on levies for the reserve scheme.

The other component of the financial service providers' regime is the register for financial service providers, which is being developed by the Companies Office. This will be an online ‘one stop shop' for registration by all financial service providers and authorisation for financial advisers.

As I have said, I plan to have both regimes up and running by December 2010. We aim to have the dispute resolution system and the Companies Office register operating by the middle of next year to allow industry time to come to terms with the new system and achieve compliance.

I'm very conscious that there will be a lot of interest from industry on the process for setting fees. Again, the Companies Office, the Minister of Consumer Affairs and the Securities Commission will be setting the fees for registration, the reserve dispute resolution scheme, and QFEs and authorisation, respectively.

The Government wants to ensure it has a good understanding of the level of fees across the new regime as a whole. Regulators are working together to ensure consultation is undertaken in a coordinated way to encourage input from those who will be affected.

Finally, the Securities Commission is directly responsible for coordinating work on two main areas.

The first of these are the terms and conditions that will apply to authorised financial advisers. The commission is working on these and I understand they intend to consult industry in the second half of this year.

The second is the qualifying financial entity, or ‘QFE', system. This branch of the regime was developed in order to reduce compliance costs for organisations with large numbers of advisers offering less complex advice.

As I have said, it is my belief that cooperation between industry and the Government will provide the best and most innovative progress towards our objective of enhancing the professionalism of the financial sector. The discussion between businesses and the Securities Commission on the issue of QFEs is a great example of this.

Under this model, those entities approved by the Securities Commission to become qualifying financial entities take responsibility for the obligations of their employees and agents under the Act. These people can then provide advice on certain financial products without being individually registered.

The Securities Commission is considering the processes for QFE approval. Although many decisions are yet to be made, I understand that the commission is considering such possibilities as allowing streamlined authorisation for financial advisers employed by QFEs. This is part of the commission's effort to find pragmatic ways to accommodate different industry business structures while ensuring high standards across the sector.

I also understand the commission intends to issue a discussion document on QFEs in the near future.

In closing, I would like to say again that my vision of efficient, liquid, and fair capital markets is ambitious and will take time. This mission contains many separate projects but the financial advisers and financial service providers' regime is a central one.

I would also like to emphasise again that I consider input from industry to be of great importance to the effective implementation of the financial adviser regime.

I would again like to thank the IFA for its contributions so far.

I also invite you to continue contributing to the discussion over the next 18 months in order to help us construct a regime that will support and maintain high professional standards and investor confidence at reasonable cost.

All Simon Power's media statements and speeches are at www.beehive.govt.nz/power

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