21st August 2008 Speech Notes
ACI NZ Finance Sector Forum
Opening Address by Commerce Minister Lianne Dalziel to the Australian Compliance Institute New Zealand Inaugural Finance
Sector Forum.
Ernst & Young
Auckland
9.00am
Martin Tolar, thank you for the opportunity to address your conference this morning. In the programme it is stated that
“in the current environment of regulatory reform, New Zealand's finance sector faces the challenge to be fully prepared
for change. Understanding regulatory impact is key for compliance professionals who have the added responsibility of
implementing necessary initiatives within their organisations and to manage the impact over the longer term.”
This is vitally important and with the major changes that have and are being introduced you could be excused for feeling
that the pace of change in terms of regulatory reform particularly over the past eight and a half years has been very
fast - but for each one of you sitting on the compliance side there are dozens of investors who believe that the rate of
change has not been fast enough; they feel that they have been sidelined by the broader focus the government has taken
in terms of strengthening the regulatory frameworks around our capital markets and left them exposed to the finance
company sector in particular.
I'd like to put that in context, because it is relevant to what you do.
I made a comment in a speech yesterday that a consumer group called Exposing Unacceptable Financial Activities has
accused me of being insensitive to the plight of those who made investment decisions and have lost some or all of their
life savings; or have some or all of their life savings in frozen funds; or who have taken out a mortgage on their
otherwise freehold home to invest in a speculative venture that they didn’t know was speculative.
They have accused me of describing such people as greedy, stupid and naïve. I have never described these investors as
greedy or stupid. Of course I have said they were naïve - how else would you describe someone who does not fully
appreciate that a return on investment is based on risk; that there is no such thing as a safe bet; that people
shouldn’t put all their eggs in one basket and that property values do not always increase, sometimes they drop.
In fact I have made the point that many people went out of their way to get advice they thought they could rely on.
People tend to trust that someone else has done the homework for them – a former life insurance agent, who has him or
herself invested in Blue Chip – well what could be the risk? One of the investors I spoke to told me how he had been
pursued by a Blue Chip agent, who he knew, until he finally gave in.
Can I say that Blue Chip is different from the finance companies; not only were they not covered by the same trustee
company supervisory arrangements, they also relied on people using their equity in their homes to invest in this
property venture. They were told nothing could go wrong. I have consistently told those who took legal advice or who
used a New Zealand registered bank for their mortgage that they must take advice from the Law Society and the Banking
Ombudsman – there may be remedies there for the advice they received. I have also told EUFA this, but they appear to
prefer to call on the government to "freeze everything", even though I have told them we cannot do that. So Blue Chip is
different. But unfortunately because of the timing they all get tied up together and people do not discern a difference.
This matters because when we are talking about people who are inexperienced in terms of investing, perception is
reality.
Returning to the finance companies, most people I have come across did think they were taking sensible steps to ensure
they got good advice, but even though they may have been told that their financial adviser was getting a commission,
what use was that if they had no point of reference and didn’t know that it was much more than other products would
provide.
People may not have appreciated how important it was that their adviser was a member of a professional body that could
hold them accountable for breaching codes of standards and ethics. People may have thought that the investment was ‘safe
as’ because the interest rate wasn’t much more than what the bank was offering. These people were not greedy and they
were not stupid.
But they were too trusting. They did not appreciate that with any rate of return there was an element of risk and they
did not understand what that risk was. Someone said recently that New Zealanders weren’t cynical enough and I think that
could be right.
But at the same time, I don't think we should expect the advisers to be accountable for someone else's fraud, unless
they have acted unprofessionally by turning a blind eye to a clearly under-priced product or accepted a high commission
without analysing the offering in sufficient detail. And there were those that did that – happy to take a commission
without doing the homework – and look where their clients are today.
Nor should we take our eye off the need to lift levels of financial literacy so that inexperienced investors understand
the nature of the risks they are taking with their hard-earned money. Financial literacy has to be lifted in New Zealand
or we are never going to have the depth to our capital markets that we need to achieve our ambitions.
You will recall the 1987 crash and the inexperienced investors who pulled their money out at the time – I feel as if
history is repeating itself, where reinvestment rates have plummeted, placing at risk what would otherwise be sound
businesses. Until we have confidence restored to this market we have lost an important element of our financial markets
and although it isn’t large enough to trigger the attention of the Reserve Bank, it does mean that some developments may
not be able to proceed because the finance isn’t there.
It’s been like a set of dominoes – one failure leads to the other – and it is only confidence that will see the rebuild
occur.
As many of you will know the government has launched a financial literacy campaign led by the Retirement Commissioner,
who has finalised a National Strategy for Financial Literacy. There are many public and private sector players in this
important space from schools delivering on the curriculum - to the NZ Enterprise Trust taking business and financial
literacy into our schools - to the Securities Commission teaching the basics of risk and return. This is vital work and
must continue to receive top priority.
As I have said on many occasions, the regulatory frameworks that support business generally and the financial sector in
particular, are part of the country’s essential infrastructure.
As you are aware the government is not simply reacting to the current pressures in the sector. The regulatory reforms
that are currently before the House, and indeed the reforms that are still in the policy development stages are a result
of work that was initiated back in 2005.
And this itself was the final stage in the broader reform of securities law that had to be undertaken when we became the
government in 1999. The Takeovers Panel needed a Code to enforce. The regulation of our stock exchange had to meet IOSCO
standards. The rules around insider trading, market manipulation and investment adviser disclosure requirements all had
to be strengthened.
The Review of Financial Products and Providers encompassed a broad range of work, including work relating to financial
advisers, non-bank deposit takers, compliance with the Financial Action Task Force (FATF) recommendations, and insurance
and securities law more generally.
We took a holistic approach to reviewing the sector so we could look at the various interdependencies that exist in the
industry and develop proposals that accounted for these interconnections.
I believe that this has fundamentally improved our understanding of the sector and has enabled us to develop rules that
are more suited to the realities of what is a complex financial environment.
Late last year, Dr Cullen and I introduced three pieces of legislation into the House; the Financial Advisers Bill, the
Financial Service Providers (Registration and Dispute Resolution) Bill and the Reserve Bank Amendment Bill (No 3).
The Financial Advisers Bill has been the most difficult Bill for the Finance & Expenditure Select Committee to deal with, largely because it has become obvious that the co-regulatory model involving
industry-based Approved Professional Bodies cannot work in the current environment. As I said in a speech to the IFA
recently, the level of mistrust simply could not sustain the co-regulatory model if we wanted to rebuild confidence.
Earlier this year, the Select Committee made an interim report to Parliament in order to release a discussion document,
which proposed another model and on the 7th of August the Select Committee released a second interim report confirming
that they will recommend that the Securities Commission undertake the regulatory role.
As I have said recently, I was concerned not to lose the strength of the co-regulatory model and that was the industry
expertise that exists in the professional bodies. With government backing, the Select Committee has proposed the
establishment of a Commissioner of Financial Advisers, who will have a statutory responsibility to engage with industry
to develop a code of conduct and to establish an appropriate disciplinary body.
I am confident that this approach will ensure that we have the strength of central supervision, without losing the
experience and knowledge of industry participants. The proposal suggests a two-tiered approach to imposing appropriate
obligations on financial advisers, and allows for institutional certification to ensure that the regulation is
effectively tailored to the risks associated with the level of financial advice given.
The first tier financial advisers will need to be individually authorised by the Securities Commission whether or not
they are employed by a Certified Financial Institution, thereby creating a level playing field, allowing the public to
know that if they are getting advice on complex securities or superannuation or investment planning they will be able to
rely on the Securities Commission’s oversight. Regulation of financial advisers will help to assure the public about the
services being offered to them.
The Select Committee has also been considering the Financial Service Providers (Registration and Dispute Resolution)
Bill. This Bill will allow for a complete register of all financial service providers to be developed and will enable
negative assurance criteria to be placed on the controlling owners, directors, and senior mangers of financial service
providers.
All financial service providers and financial advisers who provide a service to the public will be required to be a
member of an approved dispute resolution scheme, which will provide investors with a simple low-cost avenue to seek
redress.
The Reserve Bank of New Zealand Amendment Bill (No. 3), which has been reported back to the House, creates a new
framework for non-bank deposit takers, which includes finance companies, to be administered by the Reserve Bank. The
Bill establishes minimum prudential standards on NBDTs, including capital adequacy requirements and a credit rating from
an approved credit rating agency.
We are also working on a reform of securities law more generally. The RFPP included a discussion document on Collective
Investment Schemes, Supervision of Issuers and Securities Offerings. In light of the recent events in the sector, the
Ministry is undertaking further policy work on the review of these three areas.
In conclusion, can I say that at the same time as undertaking this work we are looking forward with the establishment of
the Capital Market Development Taskforce and pressing on with the Single Economic Market agenda to strengthen the
processes for doing business on both sides of the Tasman.
This is the right time to be doing these things and we cannot take our eye off the ball because of the global financial
environment. KiwiSaver, now with over 750,000 members, is proving a runaway success in encouraging savings. The
Portfolio Investment Entity Regime is stimulating savings in financial assets and the Limited Partnership regime has
already proved a successful vehicle for fundraising. Together with other aspects of the business tax package that have
recently come into force, these changes significantly improve New Zealand’s outlook.
However as I have said, recent events have highlighted the complexity of financial products and services that are
offered in the market today. The reform in the financial sector will increase transparency and ensure that providers are
held accountable. But I want to reiterate how important it is that we address the levels of financial literacy in this
country.
As I said at the outset, from your perspective, it may look as if we are proceeding at pace, but for others it isn't
fast enough. I have always said that I believe that our response in any area of regulation must be proportionate - both
in the policy and in the enforcement. The risk with not proceeding with financial sector reform is that we wait longer
to rebuild the confidence we need to achieve our ambitions for New Zealand.
Thank you and I hope you enjoy your conference.
ENDS