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Law Reform: Investment Advisers
A Discussion Paper

CHAPTER 8 OTHER MATTERS

8.1	There are also a number of other areas of possible change. We have not undertaken an analysis of the possible alternatives and are not requesting detailed comment. However we have, for the sake of completeness, briefly mentioned these matters below.

Licensing or Registration

8.2	Licensing or registration is the chief form of regulation in many overseas jurisdictions. Australia, the United Kingdom and the United States of America prohibit undertaking the business of giving investment advice unless the provider of that advice is licensed or authorised in some form.
8.3	Although New Zealand does have a system of authorisation for futures dealers, trustees and statutory supervisors (and licensing for stock brokers) instituting a licensing or registration regime to cover investment advisers would entail a major policy shift.

Compulsory Membership in a Professional Body

8.4	Lawyers in New Zealand must be members of the New Zealand Law Society ("the NZLS"). The NZLS has certain standards of conduct which it can enforce. The NZLS also has certain standards which persons wishing to become lawyers must meet. A similar system could be instituted for investment advisers.
8.5	The United Kingdom has a system whereby investment advisers must be registered. In the past, in most cases, they must be members of a self regulatory organisation (SRO) to be registered. The government regulator approves and supervises SROs. The Financial Services Act provides that members of SROs recognised by the government regulator are treated as registered (technically authorised to carry on investment business) by virtue of their membership of the SRO. There are a few firms that are registered directly with the government regulator. The SROs are in principle responsible for different sectors of the market to reflect the regime's approach of regulating on a functional rather than on an institutional basis. However we note that the United Kingdom is now moving away from this model.
8.6	Self-regulation does have some precedents in New Zealand. For example listed companies are party to the listing rules of the New Zealand Stock Exchange. These impose contractual obligations that can be enforced by the Exchange.

Statutorily Reserved Professional Designation

8.7	An alternative to licensing persons to undertake the business of investment advisers would be to restrict the use of generic terms such as "certified financial planner" to persons who were authorised for this purpose.
8.8	A statutorily reserved professional designation could take a similar form to that of Chartered Accountants. Designation could be attained by meeting certain criteria (for example educational qualifications) and could be administered by approved statutorily empowered industry bodies approved by the Commission. This could be a step towards a system of self-regulatory bodies.

Know Your Client Rules

8.9

Some jurisdictions have developed know your client rules. One such system would be where investment advisers and clients must come to an agreement. The investment adviser would be required to ask the client certain things so that he or she will be able to provide investment advice that fits the client's personal circumstances. This may include seeking information from its customers about their financial situation, investment experience and investment objectives relevant to the services to be provided. The adviser would be required to make reasonable inquiries about the appropriateness of the product and have regard to the client information in the recommendation. We note that the New Zealand Stock Exchange has developed know your client rules for its members.

Cold Calling and Telephone Solicitation Rules

8.10	Recently we have seen an increase in problems relating to people we would categorise as overseas investment advisers and investment brokers who are cold calling New Zealanders. We have not encountered problems with cold calling originating from within New Zealand. Often the overseas brokers appear to target small businesses and persons with limited investment experience. The general pattern appears to be that the overseas brokers will make an initial call. This will be followed by use of hard-sell techniques. If the New Zealander sends money overseas often all goes well until he or she decides to cash in the investment. At this point the overseas broker may stop making or receiving telephone calls and there can be no way of recovering the investment money.
8.11	It is difficult to effectively deal with this problem by direct means. The brokers are outside the jurisdiction. We can encourage better standards of decision making by investors. We consider that making an initial disclosure statement mandatory would help. If investors expect to and are in the habit of receiving a disclosure statement before investing funds they may be more cautious before remitting money on the basis of an unsolicited telephone call from people they know nothing of. They will understand that they should not receive or act on investment advice over the telephone until they have more information about the investment adviser.
8.12	Some jurisdictions, including Australia, the United Kingdom and Hong Kong, have rules pertaining to telephone solicitation. We may wish to consider a similar rule. This could either prohibit cold calling by investment advisers and investment brokers or make telephone contracts with investment advisers (or investment brokers) unenforceable by the investment adviser unless the telephone call was made at the invitation of that investor and the investment adviser provides the investor with a written disclosure statement.
8.13	It may be that provision for a mandatory initial disclosure statement would help to deal with this problem in New Zealand as investment advisers would not legally be able to give investment advice over the telephone until a written investment adviser disclosure statement had been provided to the potential investor.